The Country of Not Enough
The end of 2016 will be characterized by not enough growth, a tax reform likely to deliver less than what is needed, monetary policy that has yet to bring inflation down, and a peace deal that may not be enough to bring peace. That is why Colombia, yet making efforts in all these fronts, seems to be the country of not enough.
While it is no secret that the Colombian economy is slowing, Q3 economic activity results were surprisingly poor, with an expansion of just 1.2%. Part of the meager performance can be explained by the truckers’ strike, which hit agriculture, commerce and transportation. Yet manufacturing, except for refining, is also contracting. Private demand has started to falter, though public demand remains relatively strong. Mining also continues to contract.
A weak economy is probably not the best environment for tax reform, with members of Congress continuing to voice their concerns about the impact on the middle class. Congress might now have the ammunition it needs to fight (or limit) the government’s proposed VAT increase. While we are still optimistic that a reform will pass, this situation doesn’t help, especially since government spending adjustment has been minimal, and no cut in outlays is expected in 2017.
In the monetary arena, Colombia faces an unusual situation: nominal interest rates are 7.75%, or about 3.5% in real terms (considering that 12-month expected inflation is 4.2%). These high real rates seem inconsistent with an economy set to grow by approximately 2% this year, and facing a negative output gap for the next 12 months. We expect the Central Bank to ease, as early as January, in divergence from other economies that started to hike. A U.S hike paired with lower rates in Colombia would likely precipitate further peso depreciation. We also expect further rate cuts in 2017, to take the intervention rate to 5.50% by the end of that year, depending upon how quickly expected inflation falls.
In politics, the end of 2016 will be no easier: the likely tax reform will probably be one that doesn’t fully satisfy the government, the markets or the rating agencies, and that only partially solves the fiscal problem. We expect the second peace agreement to be signed, and the “No” camp to reject it; the Constitutional Court to rule on the peace process ratification; and the beginning of its process of passage through Congress, followed by implementation of peace with the FARC. It’s all very complicated, but this will be a peace agreement a – la - colombiana. Colombia is, has been and will always be the country of not-enough.
Now read on...
Register to sample a report