On the Brink of a New Era
Since the government struck a provisional peace deal with the FARC on August 24th, Colombians have talked of little else. The deal is to be submitted to a public referendum in October 2nd. Most of Colombia’s political parties are backing the “YES” campaign -- though former president Andres Pastrana, a conservative, has joined former president Alvaro Uribe and his Centro Democrático party to campaign against it (they argue that a better, tougher deal can be achieved, without agreeing to waive prisons terms, and with other more substantive concessions from the FARC).
But the latest polls show the agreement is likely to be ratified, with almost 60% of Colombians stating that they favor the deal. Most supporters consider the details of the agreement irrelevant: it’s rather seen as the only opportunity to make the FARC surrender its weapons, and to end a conflict that has lasted for more than 50 years, and cost more than 70,000 lives. This is seen as the price of peace – for which no price can be too high.
We’ve lowered our 2016 GDP forecast, to 2.2% from 2.4%, as the slowdown is proving more enduring than expected. The government has also lowered its projection, to 2.5% from 3%. Mining slowdown is a main culprit, shrinking for four quarters in a row, driven mostly by the oil crisis (lower prices and production), and pipeline bombings by guerrillas. We now expect mining to shrink by -5.6% in 2016. By contrast, manufacturing expanded by 6%, its highest rate since 2011, and has now experienced positive growth for four consecutive quarters, recovering from five quarters of negative performance. The main driver continues to be the Cartagena Refinery (Reficar), which reinitiated its operations in October 2015.
We are indeed confronting a weaker economy, with past drivers like mining and construction in weaker shape. We expect mining to continue to underperform while oil prices remain subdued. Construction is also being held back by low oil prices, due to both less mining-related construction, and to reduced income from both royalties and central government investment. These phenomena are a drag on the economy. Even the surge in manufacturing is likely to be transitory, while no new drivers have arisen. The so-called “new economy” has yet to materialize, that is. So we expect growth to be mediocre both this year and next.
In August 2016 inflation started to normalize, mainly because food prices moderated their growth. The decrease in food prices is almost entirely the result of the effects of El Niño finally unwinding, combined with the solution to the truckers’ strike, which had severely reduced the availability of fresh foods in many regions of the country, almost for two entire months. Nevertheless, we forecast that inflation will end the year around 6.3-6.5%, well above the Central bank’s target, and no interest rate movements before the end of the year.
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