Colombia - Economic Briefing December 2004

Economy Experiences Abrupt Slowdown (continued)

Growth outlook revised downward
Even though growth is anticipated to accelerate in the final quarter of the year, the poor third quarter performance of the economy has prompted Consensus Forecast participants to revise their annual GDP figure for this year downward by 0.1 percentage point from last month to 3.9%.  The Consensus Forecast figure is now below the government’s 4% growth estimate for this year’s GDP.   Nevertheless, growth is not expected to moderate significantly next year, as GDP is anticipated by Consensus Forecast participants to expand by 3.7%.  This month’s figure is unchanged from last month’s forecast and remains below the government’s 4.0% estimate for 2005.

Inflation continues on downward trend
In November, consumer prices rose 0.28%, which was in line with Consensus Forecast expectations but well ahead of unchanged prices observed the prior month.  Pronounced increases in housing and transport costs provided the lion share of the November spike, as increases in most other prices categories remained subdued.  Despite the November increase, annual inflation dropped from 5.9% to 5.8%, which is within the Central Bank’s annual inflation target range of 5% to 6% for this year.  Consensus Forecast participants expect the annual inflation rate to remain at its current level of 5.8% through the end of the year.  Next year, Consensus Forecast panellists see inflation moderating further to 5.5%, which is in line with the Central Bank’s target range of 3.5% to 5.5% for 2005.

Currency strengthening persists despite Central Bank and government measures
The trend of persistent currency strengthening has continued without respite throughout this year.  In November, the exchange rate appreciated 3.7% in nominal terms to reach 2,484 pesos to the US$.   The November strengthening followed a more moderate 0.8% appreciation the prior month but continued a trend of virtually unabated monthly currency appreciation initiated a year ago.  At its current level, the exchange rate is now 11.8% stronger than at the end of last year.  So far this year, government officials have implemented a plan to purchase US$ in the spot market for future debt servicing needs and the Central Bank has intervened directly in the foreign exchange market by auctioning US$ put options to weaken the peso.  Nevertheless, the strengthening trend has persisted.  In addition to a generalized rise in investor appetite for emerging market assets and rising remittances from Colombians living abroad, the weakening of the US$ in international markets has served to bolster the Colombian currency.  Consensus Forecast participants anticipate the currency to depreciate moderately in December with the exchange rate closing at 2,642 pesos to the US$ - a 5.2% annual nominal appreciation.  Next year, Consensus Forecast panellists expect the currency to resume a depreciation trend with the peso anticipated to weaken by 5.5% to reach 2,795 pesos to the US$.