Colombia - Economic Briefing March 2004

Economy on Healthy Expansion Path

Economic growth is currently undergoing a healthy rebound.  The favourable economic setting appears set to remain in place for the time being, as the pick up in international demand, particularly in key export destinations, promises to foment the export sector further.  The favourable developments in the external sector will be complemented by continued expansion in domestic demand, as interest rate levels remain low and unemployment declines.

Government confirms healthy growth last year
In the fourth quarter gross domestic product (GDP) grew 4.3% over the same quarter in the prior year.  The fourth quarter figure was above the 4.1% growth observed in the third quarter and exceeded market expectations.  The recovery continued to be broad-based, as all economic sectors registered positive growth in the fourth quarter.  The key drivers behind the strong fourth quarter performance were construction (Q4: +14.5% year-on-year; Q3: +10.4% yoy); transport, storage and communications (+5.5% yoy; Q3: +4.7% yoy) and mining (Q4: +5.5% yoy; Q3: +21.2% yoy).  The only sectors to experience a more moderate pick up in economic activity were financial and public services with growth rates of 2.6% yoy (Q3: +6.0% yoy) and 2.7% (Q3: +0.2% yoy) respectively.

Domestic demand bolstered by lower rates and improved credit conditions
Data for aggregate demand have not yet been published.  However, trade data suggest that investment remained strong through the final quarter of the year, as capital goods imports were up 11.2% in the fourth quarter over the same quarter the previous year (Q3: +17.0% yoy).  Similarly, private consumption also appears to have remained resilient through the end of the year.  According to DANE, retail sales rose an annual 4.0% in the final quarter of last year, which was up from the 0.7% figure observed in the third quarter.

As a result of the strong fourth quarter GDP figure, economic growth for the full year was boosted to 3.6%, which was above the preliminary figure of 3.5% from the National Planning Department (DNP) reported in January.  Consensus participants see economic growth slowing very moderately this year, as export growth accelerates amid growing international demand and the pick-up in key export destinations such as the United States and Venezuela.  Furthermore, even though interest rates will rise, levels will remain historically low, which in combination with declining unemployment is likely to keep domestic demand growth healthy.  As a result, Consensus Forecast panellists expect the economy to grow 3.5% this year, which is still below the government’s 3.8% projection but is up 0.1 percentage points from last month’s Consensus Forecast figure.  The government is more optimistic that the U.S. economic recovery and strong investment will help lift economic activity further this year.  The favourable growth trajectory is expected to be sustained into next year, when growth is expected to reach 3.5%.

Exchange rate strengthens further despite counter-measures
In February, the currency appreciated 1.3% over the prior month, closing at 2,687 pesos to the US$.  The February strengthening in the exchange rate was the fifth consecutive monthly appreciation and had the currency trading 3.4% stronger than at the end of last year.  The current appreciation is the result of a combination of factors such as increased investor appetite for emerging market debt, higher remittances from Colombians living abroad, rising confidence in healthy growth prospects and improved sentiment about security within Colombia.  Nevertheless, concerns about the adverse effect of a stronger exchange rate on the export sector have prompted authorities to adopt several measures to stem the currency appreciation, including direct intervention in the foreign exchange market by the Central Bank, tighter guidelines for financial institution’s US$ positions, Finance Ministry purchases in the spot market to cover future debt servicing and a government commitment not to convert proceeds from international debt issuances to pesos.  Consensus Forecast participants expect the current appreciation trend to reverse by the end of the first quarter with the currency weakening gradually throughout the year to close at 2,934 pesos to the US$ - a 5.3% nominal annual depreciation.  In 2005, the currency is anticipated to follow a similar weakening trend depreciating 5.8% to reach 3,115 pesos to the US$ by year-end.