Colombia Business Forecast Report Q4 2008

Beyond 2008/09: Short-term Problems To Improve
Recent events support our view that Colombia will experience some political and economic turmoil in the short term, although our medium- to long-term outlook remains generally positive for both. Colombian President lvaro Uribe is facing an uphill battle to pass his reforms through congress, despite near-record popularity ratings among the electorate, as allegations of allies links to parapolitical groups refuse to die down. On the other hand, the battle against the left-wing Fuerzas Armadas Revolucionarias de Colombia (FARC) continues to bear fruit, helping the longer-term outlook for the countrys political and business environment. The economic picture has also taken a turn for the worse, with the first real signs of contagion to a US economic downturn being witnessed in the latter stages of Q208, which we believe will continue into 2009, improving thereafter.

Tensions have cooled significantly between Colombia and neighbours Ecuador and Venezuela since the cross-border raid by Colombian forces into Ecuador - resulting in the assassination of a leader of the paramilitary group FARC. Indeed, Venezuelan President Hugo Chvez, once the key international champion of the FARC, has called for the group to end its armed fight.

In light of poor retail sales and industrial production data for Q208, combined with the rapid decline in global commodity prices and the lagged impact of 400bps in monetary tightening since May 2006, BMI is adopting a softer stance towards Colombian economic growth. Given that domestic demand - the main engine of growth during the countrys recent expansionary cycle - has started to weaken as inflationary pressures and a lending rate of 10.00% are hitting consumers hard, we have downgraded our full-year real GDP growth forecast for 2008 from 5.0% to 4.2%. Nevertheless, we believe that private consumption will pick up in 2009, and, combined with a steadily improving security situation, will maintain sustainable levels of economic growth over the period 2008-17, averaging 4.3% year-on-year (y-o-y). Over-dependence on oil exports and a lack of diversity in export markets is a risk to export growth over the forecast period, although greater inward investment should support our positive growth outlook.

A gradually improving security environment combined with liberal-economic policies, highlighted by the recent loosening of capital controls on equity investments and opening of the local derivatives market, point to a steadily improving business environment, which in turn will help attract increasingly large Foreign Direct Investment (FDI) inflows. Particular sectors which we see benefitting from inward investment in the medium term are infrastructure, agriculture and manufacturing; although we also see service-orientated industries such as financial services benefitting from improved efficiency practices, development of skills and economies of scale that larger multinational companies can offer.