Country Report Colombia June 2009

Outlook for 2009-10

• Regardless of whether Mr Uribe is able to stand for re-election, we expect that a centre-right candidate will win the May 2010 presidential election, providing policy continuity, although the downturn could make for a close contest.
• Fiscal and current-account deficits leave Colombia's economy exposed to the global economic downturn, but a US$10.5bn precautionary IMF credit line and a sound policy framework are supportive.
• The impact of the economic slowdown on revenue and spending pressures will contribute to a deterioration of the NFPS results from a virtual balance in 2008 to a deficit of 3.4% in 2009, narrowing to 2.7% of GDP in 2010.
• Real GDP will contract by 1.2% in 2009, the first contraction since 1999 (when it fell by 4.2%). A mild global recovery and Colombian monetary easing will help to lift GDP to growth of 2.5% in 2010.
• After rallying in recent weeks, the peso will weaken amid lower foreign exchange inflows and global risk aversion, to Ps2,357:US$1 by end-2009.
• The current-account deficit will widen to 3.3% of GDP in 2009 owing to falling export earnings, narrowing in 2010 as terms of trade improve.

Monthly review

• The political scene continues to be dominated by uncertainty over whether the president, Alvaro Uribe, will run for a third consecutive term in May 2010. It now appears he intends to do so, but he has not yet announced this.
• Legislation to amend the constitution to allow his re-election has stalled pending the appointment of a bicameral committee to reconcile differences between upper and lower-house versions of the re-election legislation.
• The government is under pressure to speed up execution of public works in order to mitigate the downturn. Investment in transport and mining infrastructure has progressed, but execution in other sectors lags.
• The interest rate easing cycle is drawing close to an end after a sixth successive monthly cut on May 29th took the policy rate to 5%.
• Official data suggest first-quarter GDP fell by 0-0.5%, less than expected, but still pointing to a recession after a fall in the fourth-quarter 2008. Investment, exports and imports fell, but private and public consumption grew slightly.
• Leading indicators point to continued weakness in the second quarter, although mining continues to expand strongly.
• Monthly consumer price inflation in May was unexpectedly low at 0.01%, lowering the annual rate to 4.77% from 7.67% in December 2008.