Colombia - Economic Briefing March 2003

Major Oil Find Bolsters Government Confidence in Recovery but Inflation Looming

The state-owned oil company announced one of its biggest finds ever. The government expects the likely increase in output to bolster the external sector. However, inflation remains well in excess of the Central Bank target. The Central Bank is concerned that a resumption of the currency depreciation observed last year could exert upward pressure on consumer prices. Therefore, monetary authorities have announced to intervene in the foreign exchange market.

Economy decelerates further in the last quarter of 2002
Preliminary data from the National Statistical Department (DANE) reveal that the gross domestic product (GDP) grew 2.0% in the final quarter of 2002 over the same quarter in 2001, marginally up from annual 1.9% growth in the third quarter. The fourth quarter growth figure lifted the annual expansion in economic activity to 1.7%, which is just above the 1.6% anticipated by the government and the Consensus Forecast from last month. The annual figure represented a very modest improvement compared to the 1.4% growth registered in 2001.

Agriculture leads growth last year as industry and services lag
Agriculture led growth, expanding at a 2.2% pace last year, which represents an improvement over the 0.7% growth, observed in 2001. The improvement in the performance of the agricultural sector was attributed to stronger growth in coffee and livestock output. Coffee production rose 6.2% in 2002, double the growth rate observed in 2001.

Within services, the transport, storage and communications sub-sector led growth. Nevertheless, the 3.5% annual growth constituted a slowdown compared to 2001, when output expanded at an even quicker 4.3% pace. The financial services sub-sector provided an additional boost to the services sector with annual growth of 2.6% (2001: -0.6% year-on-year). Finally, the commerce, restaurants and hotels sub-sector experienced the slowest growth, adding 1.1% (2001: 1.9% yoy).

Industry slumps amid slowdown in manufacturing and mining
Industrial output remained subdued in 2002 with growth reaching just 0.9%, only a modest rebound from the 0.1% contraction observed in 2001. The slowdown was most pronounced in mining, where activity dropped 5.1% - the third consecutive annual decline and double the contraction observed in 2001. Similarly, output in the manufacturing industry remained subdued with activity rising just 1.1%, an improvement from the 0.8% drop in 2001. On the upside, construction activity and electricity/gas/water output rose by 5.8% and 3.0% respectively. The pickup in the labour-intensive construction industry has begun to lower unemployment, which reached 16.1% in January – down from 17.9% for the same month last year.

Major oil find boosts government optimism about growth
On 3 March, the state-owned oil company, Empresa Colombiana de Petróleos (Ecopetrol) announced the discovery of approximately 200 million barrels of crude oil at the Gibraltar I exploration site, which is located between the departments of Boyocá and Northern Santander. The site was returned to the government in May 2002 by private-owned U.S. oil firm, Occidental Petroleum. Government officials claim that the find is one of the largest ever and is likely to delay the country’s impending reversion from a net exporter to a net oil importer, which had been previously estimated by the government to occur by 2005. Optimism about the new oil find prompted the National Planning Department (DNP, Departamento Nacional de Planeación) to announce in early March that it may consider revising upward its GDP growth forecast for this year from 2.0% to 2.5%. Nevertheless, officials remain hesitant to move too quickly, given concerns that a less favourable external environment could counteract the favourable domestic developments. Participants do not believe that growth will reach the levels anticipated by officials but still see GDP expanding at a 2.3% pace, which is unchanged from last month.