Country Report Colombia August 2008

Outlook for 2008-09

• The president, Alvaro Uribe, is popular because of security improvements, and is currently due to remain in power until 2010. He and his allies are considering amending the constitution to allow him to run for a third term.
• The Fuerzas Armadas Revolucionarias de Colombia (FARC) guerrillas are being weakened. An outright defeat is unlikely in the short term, but the military offensive could well eventually set the scene for a settlement.
• Economic policymaking will remain prudent, but underlying spending pressures will widen the public-sector deficit in 2008-09. Inflation will overshoot the 4.5% ceiling in 2008 by over 2 percentage points.
• GDP growth will slow from above-potential rates in 2006-07 to 4.5% in 2008 owing to monetary tightening and rising inflation, and to 4% in 2009, when the impact of slower global growth will be more fully felt.
• The current-account deficit is forecast to narrow below 3% of GDP in 2008, supported by commodity prices, before rising to 3.6% of GDP in 2009.
• Barring a seizure in capital markets, Colombia will meet its external financing needs adequately, owing to foreign direct investment (FDI) inflows.

Monthly review

• The ramifications of the Colombian military rescue of 15 "political" hostages held by the FARC on July 2nd are still being felt. The rescue has boosted MrUribes popularity to 85% from 76%.
• The rescue has also reduced pressure on the president to hold talks with the FARC in a large demilitarised zone over an exchange of the remaining 25 political hostages for 500 FARC prisoners.
• The central government was virtually in balance in the first quarter, but this was flattered by exceptional revenue items and the fiscal balance is set to deteriorate in the remainder of 2008.
• The central bank is expected to introduce renewed tightening measures in response to an upsurge in inflation in June - an annual rate of 7.2%
• Leading indicators suggest the slowdown has continued in the second quarter.
• Soaring commodity prices have boosted export earnings. Even so, huge profit dividends from foreign investors in the mining sector contributed to a current-account deficit of US$1.1bn in the first quarter. But net FDI was US$2.8bn

Source: Country Report