Colombia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	53
ISBN Number	1745-0516
Product Code	BMI01547

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Summary

Domestic Demand Buoyant

Despite a deterioration in the external environment, Colombia's economic performance continues to impress; with 2007 GDP growth in the region of 6.4%, only a slight moderation from 2006's 6.8%, as consumer demand remains buoyant. We envisage Colombian GDP growth easing further to .9% by 2012 as Banrep's aggressive tightening of the policy rate feeds into the economy, and the external economic context - notably the current negative outlook for the US, as well as a fall in exports to neighbouring Venezuela - deteriorates. While inflation has primarily been driven by external factors, strong domestic demand has also contributed to price growth in excess of the central bank's target. On the political side, while tensions have soothed since the initial diplomatic conflagration after Colombian forces crossed the border with Ecuador in pursuit of a senior paramilitary leader, the relationship between Colombia and its neighbours will remain very vulnerable to renewed diplomatic and economic clashes. Conversely, progress may yet be achieved on thefree trade agreement with the US.

Following a cross-border raid by Colombian forces into Ecuador - resulting in the assassination of a top leader of the paramilitary group Fuerzas Armadas Revolucionarias de Colombia (FARC) - Venezuelan President Hugo Chvez warned that any similar provocation on Venezuelan soil would be tantamount to an act of war and indeed moved armoured divisions to the border. Despite the period of elevated tension and rhetoric, we have maintained that a military conflict is unlikely.

That said, we are increasingly concerned about an alarming disintegration in intra-regional relations, even if tensions have cooled since the original incident.

Undeterred by BanRep's aggressive tightening policy of the past 20 months, domestic demand remains strong, helping Colombia post what we expect to be final GDP growth of above 6.4% in 2007, and potentially over 7.0%. That said, we envisage growth easing to a more sustainable .9% by 2012. We see private final consumption, which grew 12.0% y-o-y in Q307, continuing to be the key driver, accounting as it does for over 61% of GDP. Private credit growth, at 2 . % y-o-y in December has remained fairly constant since slowing from a high of .4% y-o-y in March 2007, but is very healthy and will continue to fund consumer spending.

With local drug companies hindered by law from filing regulatory submissions relying on confidential data from innovator companies, competition could weaken as many leading companies are forced out of the market. This shift could see prices rise markedly, and local manufacturers could be forced to rely on the over-the-counter (OTC) trade even more heavily. Still, the price rises expected by local players have disappointed. Also, local copy medicines can be significantly costlier than the higher ratio bioequivalent generics likely to enter the market as regulations improve.

Content

Executive Summary
- Domestic Demand Buoyant
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Foreign Policy
- Andean Conflict Fears Brewing
- Following a cross-border raid by Colombian forces into Ecuador - resulting in the assassination of a top leader
- of the paramilitary group Fuerzas Armadas Revolucionarias de Colombia (FARC) - Venezuelan President Hugo
- Chvez has warned that any similar provocation on Venezuelan soil would be tantamount to an act of war.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Slower, But Still Impressive, Growth Ahead
- While full annual data have not yet been released, we are confident that Colombia will meet - if not exceed -
- our estimate of 6.4% real GDP growth in 2007 on the back of buoyant consumer demand.
- Balance Of Payments
- Trading Insults, But Not Goods?
- While the slowdown in the US remains a key concern for Colombia's trade balance, potentially the greater shock
- could come from the continued deterioration of political relations between Colombia and its second biggest trading
- partner, Venezuela.
- Monetary Policy
- Holding On
- While we have highlighted for some time the growing problem of inflation in Colombia, we, along with consensus,
- were not expecting BanRep to raise the benchmark policy rate by 25 basis points (bps) to 9.75% at February's
- policy meeting, expecting a hike the following month.
- Investment Climate
- IGBC: Pitfalls And Prospects
- Colombia's benchmark IGBC stock index has underperformed in 2007 and 2008 so far, making it the laggard in
- Latin America.
Chapter 3: Special Report
- Looking Beyond 2008
- The Future Of The World, In Three Acts
- US: The Rebalancing Act
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- China: What If We're All Wrong?
- Our Core Scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with our
- expectations of the continued success of the urbanisation process and export-driven growth model underpinning
- our assumptions.
- Japan: Immigration Key To Long-Term Growth
- Demographic Woes Portend Long-Term Decline
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Colombia Business Environment - Q2 2008
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 5: Key Sectors
- Automotives
Executive Summary
- In BMI's view, car sales growth will cool from 2008 up to 2012 in line with a general slowdown in economic growth.
- Indeed, according to BMI research, there is evidence to suggest that growth rates relating to retail sales and
- private credit growth passed their peak in 2007.
- Freight Transport
Executive Summary
- For the 2008-2012 forecast period we expect the transport and communications sector to outpace the economy
- as a whole.
List of Tables
- Table: Cabinet, Republic of Colombia
- Table: Economic Activity
- Table: Balance Of Payments
- Table: Monetary Policy
- Table: BMI Business And Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Colombia Annual FDI Inflows
- Table: Top Export Destinations
- Table: BMI Trade Ratings
- Table: Autos Sector - Prod & Sales Historical Data & Forecasts
- Table: Autos Sector Exports & Imports
- Table: Colombia's Freight Carried, Domestic And International