Country Report Colombia September 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 3.8% in 2009, when the impact of slower global growth will also be more fully felt.
• The current-account deficit is forecast to narrow below 3% of GDP in 2008, supported by commodity prices, before rising towards 4% 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

• Mr Uribe’s allies have submitted 5m signatures (more than the 1.4m needed) to the electoral authorities as a first step towards a national referendum for a constitutional amendment to allow the president to stand for re-election.
• The executive is drafting political bills to reform the judiciary and discipline political parties. Congress remains discredited by the ongoing Supreme Court investigations into links between pro-Uribe legislators and the demobilised paramilitaries.
• On July 21st the government announced a Ps1.5trn (0.4% of GDP) cut in the 2008 budget in order to ease demand-side inflationary pressures. But the budget proposal for 2009 (Ps140.5trn) is 13% higher in nominal terms than that approved for 2008.
• The Central Bank hiked its intervention interest rate to 10% in late July after inflation rose to 7.2% in June, but kept the rate on hold at its mid-August meeting.
• Household consumption has kept on weakening in recent months, as purchasing power is being sapped by a resurgence in inflation.
• Sectoral performance continues to be mixed, with manufacturing and construction performing poorly, while activity in mining and agriculture has expanded.

Source: Country Report