Country Report Colombia October 2008

Outlook for 2009-10

• Mr Uribe enjoys high popularity and a majority in Congress. We expect a referendum to be held in mid-2009, which he will win, allowing him to stand for a third term in May 2010 and win.
• Policymaking will become much more challenging in 2009-10, as fiscal and current-account deficits leave Colombia exposed to the global credit crisis.
• We expect policymakers to prioritise macroeconomic stability over growth, notwithstanding the 2010 elections.
• The impact of the economic slowdown on revenue and spending pressures will contribute to a widening of the NFPS deficit from an estimated 1% of GDP in 2008 to 2% in 2009 and 2.3% in 2010.
• After slowing in 2008 to 3.4% owing to monetary tightening and inflation, GDP growth will weaken further in 2009 to 2.8%. A mild global economic recovery and Colombian policy easing will help to lift GDP growth to 3.8% in 2010.
• Following the deepening of the global credit crisis in September, we expect the peso to be weaker than previously forecast, ending 2009 at Ps2,295:US$1 and 2010 at Ps2,350:US$1.

Monthly review

• Efforts to hold a referendum to change the constitution to allow Mr Uribe to stand for a third term continue. His popularity has slipped but remains high.
• The president has been trying to take the heat out of the re-election issue, by suggesting that he might not stand, though we consider this to be a tactic to preserve his strong position.
• The government has dismantled capital controls on foreign direct and equity portfolio investment as the peso, which appreciated sharply until mid-June, weakened. The peso was then buffeted by the September global credit crisis.
• Following a spending cut announced in July, the government has revised its financing plans for 2009, easing pressure on local interest rates.
• The central bank has kept its intervention rate unchanged at 10% in July-September in what appears to be a peak in the current tightening cycle. Inflation reached a new peak of 7.9% in August.
• GDP grew by 3.7% in the second quarter year on year, a sharper than expected deceleration (GDP grew by 8% a year earlier), reflecting aggressive monetary tightening and inflation headwinds faced by consumers.
• Export earnings soared by 43% in January-July, boosted by soaring commodity prices, outpacing the 24% rise in imports.

Source: Country Report