Colombia - Economic Briefing June 2003

Low Interest Rates Bolster Domestic Demand and Oil Boosts Export Sector

The historically low interest rate setting observed since the end of last year, has fostered a notable rebound in the economy, as companies step up their investment activities. Furthermore, the external sector is receiving a strong boost by robust traditional exports, particularly oil, as Colombia is taking advantage of the Venezuelan production shortfall to sell its oil to the United States. However, the economic depression in Venezuela and uncertainty over the US economy continue to cast a shadow over growth prospects for this year.

Economic activity accelerates in the first quarter amid robust industry and construction
In the first quarter, gross domestic product (GDP) grew 3.8% over the same quarter last year. The actual reading was well ahead of market expectations and represented the highest quarterly growth rate observed in five years. Furthermore, the first quarter figure represented the third consecutive quarter of accelerated growth and was up from 2.1% growth in the final quarter of last year. As a result of the strong first quarter performance, the government has announced that it may revise the current 2% growth estimate for this year upwards.

The strongest first quarter growth rates were observed in the construction and manufacturing industries, where activity shot up by 15.8% (Q4 02: +9.0% year-on-year) and 8.3% (Q4 02: +3.7% yoy) respectively. The improvement in the credit environment and historically low interest rates have been key factors behind the robust rebound. On the downside, the only sector to experience a decline was mining where activity dropped 2.1% in the first quarter over the same quarter last year (Q4 02: +6.1% year-on-year).

Aggregate demand and supply data is scheduled for release at the end of June. However, recent statistics from DANE indicate that private consumption is likely to have remained subdued in the first quarter. In March, real retail sales, excluding fuels, declined 3.0% over the same month last year, which was down from the 0.3% increase observed in February. As a result, real retail sales for the first quarter were down 1.0% over the same period in 2002. Trade data indicate that investment is likely to have experienced healthy growth in the first quarter. In February, capital goods imports were up 32.2% over the same month last year.

Similarly, more recent trade statistics show that exports grew 6.5% in the first quarter of the year over the same quarter last year, despite the economic slowdown in key export destinations. Traditional exports rose 12.8% year-on-year compared to 1.4% for non-traditional exports. The strong traditional export growth pace is explained by a robust oil and derivatives export expansion, which reached 21.7% in the first quarter. The dramatic slowdown in oil production in neighbouring Venezuela is likely to have benefited Colombian oil shipments to the United States. While import data is not yet available, Consensus figures show that imports are likely to have expanded at a much more moderate 2.4%.

Lingering doubts about the robustness of the U.S. economy and economic depression in Venezuela continue to cast a shadow over the prospects for a more pronounced economic recovery this year, since both markets represent key export destinations. Nevertheless, the recent strengthening of the exchange rate may serve to ease inflationary pressures and enable the Central Bank to maintain the current favourable interest rate setting, which in turn could further spur domestic demand. Participants remain optimistic about growth prospects for this year. Furthermore, growth should proceed along a favourable trajectory next year.