Bracing for Downturn
The economy has fared relatively well, given the bleak global economic outlook and oil price shock. Yet, everything that could go wrong did, and oil prices have now reached unimaginable lows. This, paired with weak external growth, has led us to revise our 2016 GDP growth forecast downward, to 2.5% from 2.9%.
GDP likely expanded by 3% in 2015. The government’s estimates are consistent with this result. Construction was one of the most dynamic sectors, and will also be a crucial factor in shoring up growth in 2016.
This year will be generally challenging for economic activity. Local demand will recede, and private demand will grow more slowly, due to increased unemployment and reduced credit access, as monetary conditions tighten. Public demand will also grow more slowly, in the face of expected spending cuts.We expect manufacturing to recover, but to still grow quite modestly. And mining will remain subdued by the bleak oil outlook.
The economy is entering an adjustment phase, which will be costly in terms of short-term economic activity, and require a transformation of its productive apparatus. The fiscal deficit is soaring, and will reach 3.6% of GDP this year with difficulty; the wide current account deficit, after reaching 7% of GDP last year, will take longer to close.The consumer confidence index reached its lowest level since 2002.
Key to adjustment are both the tax reform and government spending cuts. Both need to occur this year, as 2017 will be a pre-electoral year, and interest in fiscal reform will be lower. Yet fiscal adjustment will be crucial for cutting the CAD, and reducing demand. The Central Bank’s efforts in this direction through additional hikes will also be critical.
Politics in Bogotá have grown interesting. President Juan Manuel Santos is preparing a cabinet reshuffling, and the main coalition parties are demanding: 1) equitable shares 2) new blood for last two years of this government, and 3) a kind of war room for preparing the 2018 elections. Coalition parties think a peace agreement could be close, and that a plebiscite should be convoked for people to approve the end-of-conflict deal with the FARC. That could also be an opportunity for Colombians to express their level of (dis)satisfaction with the Santos administration. A defeat would be devastating for governability, as well as for a peace deal.
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