Colombia: Year in Review 2012
While 2012 was marked by strong economic growth and macroeconomic stability in Colombia, the country’s central bank has now embarked on a course of decisive action aimed at keeping expansion on track in the new year.
On a recent trip to Colombia, IMF director Christine Lagarde praised the country for enforcing macroeconomic policies that she said had earned it a greater degree of economic stability. Lagarde concluded that Colombia had reached a point in its development where it was now capable of lending to the IMF rather than relying on it for support.
However, the global economic slowdown has weighed down more heavily on Colombia in the past few months, leading to a drop in export levels and lower industrial output. Several months of slow growth prompted the central bank in late November to narrow growth predictions slightly for 2012 to 3.7%-4.9% from 3%-5%. In the same month, the central bank also cut the benchmark interest rate, in a move that took many in the investment community by surprise.
The world’s economic woes led to Colombia’s industrial production falling 1.3% year-on-year (y-o-y) in September, with output of non-metal minerals dropping 4.7%. A decline in production has been attributed in part to a drop in global demand for coal, which, together with lower prices, prompted suggestions in the local press that the country’s mining industry would miss production targets in 2012. Colombia is one of the world’s largest coal exporters.
Colombia is also looking to increase exports of its growing oil output, particularly to India and China. Oil production in Colombia climbed from 595,000 barrels per day (bpd) in 2008 to 923,000 bpd in 2011. According to the Ministry of Mines and Energy, in September 2012 production levels stood at 956,000 bpd, and were expected to reach 1m bpd by the end of last year and 1.5m bpd by the end of the decade.
But a strong Colombian peso, which has risen 6.5% since January 2012, continues to exacerbate the economic slowdown, leading to increased production costs for both industrial firms and others. The strength of the local currency and resulting higher prices are also making Colombian exports a harder sell on international markets. Producers are likely to welcome the central bank’s recent moves to cut the benchmark interest rate as this may help to slow foreign capital inflows and the peso’s appreciation, at least in the short term.
Internal demand in Colombia is also beginning to ease. In September, retail sales were up just 2.3% y-o-y compared to a 9.4% y-o-y increase in March. The slowdown is believed to be down in part to explicit government policies that triggered the introduction of higher reserve requirements in a move aimed at reining in consumer credit.
The increased reserve requirements were announced in May following concerns expressed among banking sector regulators about the potential “over indebtedness” of Colombian consumers. Consumer credit was growing rapidly prior to the implementation of the reserve measures, with figures showing it was up 43% y-o-y in May.
While consumer credit and industrial output are likely to rebound in the medium to long term, Colombia’s ailing transportation infrastructure could continue to have a negative impact on growth rates, preventing the country from realising its full potential for some years to come.
The recent Colombia Urbanisation Review published by the World Bank, highlighted the fact that 40% of Bogotá’s road network had been classified as in “bad condition” in 2007, saying the situation signalled a $3.5bn shortage in much-needed maintenance investment. The report also calculated that logistics costs for Colombian companies were on average 18.6% of company sales, which it said was well above the US and Central American average.
A highway building initiative, which includes plans to develop 8000 km of new roads over the next six years, has been put together by the National Infrastructure Agency in a bid to address some of these concerns and improve connectivity between Colombia’s cities and the coastline. If it goes to plan, the $20bn in road building projects could also significantly reduce transportation costs and improve the overall ability to compete in the global marketplace.
While the industrial and retail sectors have both experienced slower growth over the last few months, Colombia’s GDP growth predictions for 2013 remain wholly optimistic. The IMF expects the Colombian economy to grow by around 4.5% in 2013, higher than its estimated regional average for Latin America of 3.9%.
A recovery in demand for Colombian exports, including industrial outputs and natural resources, will play a crucial role in supporting growth. However, improved transportation infrastructure, which would facilitate the shipping of goods worldwide, is likely to have the biggest long-term impact on Colombia’s economic expansion.