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The external sector is unlikely to provide
substantial support to the economy this year, as economic uncertainty in
Colombia’s two principal export markets, the United States and Venezuela,
forestalls a more robust contribution from exports. Meanwhile, the Central
Bank has voiced concerns about rising inflationary expectations and is
likely to tighten monetary policy, further threatening to stave off the
fledgling economic recovery. |
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Central Bank voices concern over
rising inflationary expectations
In January consumer prices rose 1.17%. The January figure brought the
annual rate to 7.4%, which is up from 7.0% in December. At current levels,
inflation still remains well above the 5% to 6% target range for this
year. The Central Bank has expressed its concerns that the failure to meet
the 6% inflation target last year – the annual rate hit 7.0% - has raised
inflationary expectations. While monetary authorities believe that the
currency-induced spike in consumer prices is likely to have been temporary
pressures will remain this year. The Central Bank is still uncertain about
the impact that higher managed energy prices, the elimination of
government gasoline price subsidies and the increase in the value-added
tax (for details see the January 2003 edition) will have on prices. In
addition, the Central Bank believes that progress with the constitutional
reform will be essential in containing fiscally-induced inflationary
expectations. The constitutional reform would freeze the government’s
operational spending, social security and regional outlays as well as
public enterprises for the next two years (details January 2003 edition).
Consensus Forecast participants anticipate inflation to come in at 6.1%,
which is just above the upper end of the Central Bank target for this
year.
Despite concerns about inflation, the Central Bank further eased its
monetary stance in January, again lowering the benchmark DTF interest
rate, albeit by a very moderate 5 basis points. The January adjustment
brought the DTF rate to 7.65%. The Central Bank has now lowered interest
rates an accumulated 350 basis points over the past 12 months, which puts
the DTF at its lowest level in nominal terms observed since inception in
1982. However, rising inflationary expectations are likely to force
monetary authorities to reverse the easing. In fact, on 17 January, the
Central Bank raised its monetary intervention rate by 100 basis points,
which is anticipated to result in a gradual increase of the DTF.
Participants see the Central Bank raising interest rates throughout the
year, with the DTF rate rising to 9.8% by end of 2003, down 0.2 percentage
points from last month’s forecast.
Currency trajectory remains
uncertain amid Venezuelan volatility
Heightened currency stability observed in October and November of last
year, following a strong deterioration in the currency earlier in 2001,
has now clearly been left behind. In January, the peso depreciated 2.1%,
which was down only moderately from the 3.7% weakening observed in
December and brought the currency to 2,926 pesos to the US$. The principal
reason for the recent resumption of acceleration in currency depreciation
has been the two-month nationwide strike in neighbouring Venezuela, one of
Colombia’s principal export destinations. The Finance Ministry estimates
that the strong decline in Venezuelan economic activity will negatively
affect Colombian exports and the currency trajectory. Officials have
released a scenario-based analysis, which envisions a nominal depreciation
in the currency between 15.1% and 21.2% for this year, depending on the
scale of the downturn in Venezuelan demand for Colombian exports, which
are seen as potentially declining between 30% and 100%, after already
having dropped an estimated 30.8% in 2002. The nominal depreciation in the
currency resulting from either would be well in excess of the official
forecast of 3.3% and the Consensus of 2.9%. Thus, instead of finishing
this year at 2,950 pesos to the US$, the currency could end 2003 in the
range of 3,297 to 3,472 pesos to the US$. |
