Colombia - Economic Briefing July 2003

Investment Drives Economic Rebound but Shadows over Export Sector  (continued)

Inflationary pressures likely to ease as peso strengthens
In June, the currency continued its strengthening trend amid the more favourable international investor sentiment. The peso appreciated 1.6% in nominal terms versus the US$ over the previous month, which was up from the 1.1% monthly appreciation observed in May. As a result, the currency closed the month at 2,182 pesos to the US$, which puts the current trading level 1.9% stronger than at the end of last year. The appreciating currency is beginning to lower inflationary pressures. In June, consumer prices dropped 0.05% - the lowest monthly rate observed since 1988. As a result, the annual inflation rate dropped from 7.7% in May to 7.2%. Monetary officials anticipate the current downward trend for inflation to continue and remain optimistic about meeting this year’s 5%-6% inflation target. Participants, however, are less enthusiastic and expect the year-end inflation rate to be higher.

Central Bank gradually tightening monetary policy
In June, the Central Bank raised the benchmark DTF interest rate by 5 basis points to 7.81%. Nevertheless, interest rates still remain at historical lows, with the Central Bank now set on using exchange rate policy via foreign exchange market intervention rather than monetary policy tools to keep inflation at bay. The Central Bank and government objectives appear to coincide in their intention to keep interest rates at low to encourage an economic recovery. Nevertheless, Consensus Forecast participants expect officials to tighten monetary reins throughout the year, with the DTF interest rate seen rising to 8.7%, which is down 0.2 percentage points from last month. As the pace of economic activity accelerates next year, rising inflationary expectations are anticipated to cause further Central Bank tightening, with the DTF rate seen to rise to 9.7%.

Export engine stalled by lower regional demand and slump in traditional exports products
Exports dropped 3.9% in April over the same month last year, which represented a deterioration compared to the 16.4% spike observed in March. Similarly, imports dropped by 5.1% in April over April 2002. As a result, the annual trade deficit narrowed modestly from US$ 1.23 billion in March to US$ 1.22 billion in April. The current export scenario is the result of the adverse economic conditions in key export markets, such as the United States and Venezuela. In 2002, Venezuelan exports accounted for 9.4% of total exports, second in rank of primary export destinations after the United States, which accounted for 43.3%. Nevertheless, participants expect exports to pick up, with growth seen at 6.0% this year. More subdued domestic demand is likely to force another decline in imports, which are seen dropping 0.5% this year. As a result, the trade balance will register a very moderate US$ 79 million deficit this year.

Current account surplus narrows as exports drop
The current account balance registered a US$ 725 million deficit in the first quarter. The first quarter figure was below market expectations, which had anticipated the deficit at US$ 333 million. Furthermore, the current account deficit widened compared to the US$ 532 million deficit observed in the fourth quarter last year and exceeded the US$ 310 million deficit registered in the same quarter last year. The current account deterioration was mainly attributable to a widening of the trade deficit, which rose from US$ 82 million in the final quarter of last year to US$ 218 million in the first quarter. The deterioration of the trade surplus reflected continued lackluster performance of the export sector, where sales dropped 4.2% over the previous quarter. The capital account surplus of US$ 236 million was not sufficient to cover the current account shortfall and as a result international reserves declined from US$ 10.8 billion in the final quarter of last year to US$ 10.6 billion. Consensus participants expect the annual current account deficit of US$ 2.1 billion in the first quarter to narrow only moderately by the end of this year this year, which is above last year’s US$ 1.6 billion figure.