Colombia: Economic Outlook 2014; Strong, Sustainable Growth – January 2014
British Embassy Bogota
Colombia finished 2013 on an economic high: growth at 4%+, low inflation and unemployment falling. Entering 2014 the future looks bright, but not bubbly. The government’s ‘4G’ infrastructure investment and rural development programmes will address structural challenges. UK exports to Colombia are growing strongly (faster from 2009-12 than to any other emerging market). A free trade agreement and OECD are candidature driving further market opening and reform.
2013: Another good year after all
The end of 2013 saw a raft of positive economic news for the Colombian economy. Growth of 3.5% in the first half of the year was below expectations, but Colombia posted third quarter growth figures of 5.1% in a period when many Latin American emerging markets struggled. Sound macroeconomics means this is balanced and robust rather than bubbly growth: domestic consumption grew at 4.5% and investment at 10.8%. Construction was the fastest growing sector at around 20%, but agriculture, retail and mining also grew strongly. But there are challenges. Manufacturing (a key part of this diversified economy) contracted by nearly 6% and agriculture, despite positive figures last year, is struggling..
Final annual growth for 2013 should be around 4.25%, and the outlook for 2014 is stronger with government predicting 4.7%, the IMF 4.5% and think tanks a range between 3.8% and 5.3%. Unemployment, traditionally the amongst highest in the region , reached a historic low of 7.8% in October, with increased hiring from the public sector, shops, restaurants, hotels and construction driven by increased consumption and public spending. Inflation remains under control at just under 2%, and inward investment is forecast to rise above $16 billion in 2013 (a 1.3% increase on 2012’s record).
The Government was quick to claim the credit: drawing attention to the 2012 fiscal reform which cut additional costs paid by employers, its investment programmes in housing and infrastructure and the measures to strengthen competitiveness. President Santos tweeted that the figures confirmed the strength of the Colombian economy and that Colombia was ‘leading the Latin American pack on inflation, investment and growth.’
2014: Strong growth, despite the politics
In 2014 the government will continue its ‘fourth generation’ investment programme in roads, railways and fluvial transport improvements, with nearly £4 billion of projects to be awarded in the first quarter. The government has also increased the Agriculture Ministry’s budget by £1 billion to invest in productivity. The Minister of Finance estimates this investment programme will increase potential annual growth from 4.6% to 5.3% in the next 10 years. We would also expect to see positive effects from Colombia’s FTAs with the EU and US and the Pacific Alliance, increasing both imports and exports. The EU estimates that the EU-Andean FTA should increase Colombian GDP by 0.4% (or £413m), Colombian exports to the EU by 11% (£320m) and EU exports to Colombia by as much as 63%.
Despite falling nearly 6% against the dollar in 2013, most analysts believe the peso is still slightly overvalued. But together with Colombia’s record of borrowing primarily from internal markets and strong current account this means many analysts think Colombia is less vulnerable to changes in US monetary policy than most other emerging powers. While the financial sector will likely see some short-run effects including increased interest rates (potentially causing problems for some of the government’s investment plans) and increased debt volatility, low inflation means the central bank has room to lower interest rates if the effects were greater than expected. And the “real” economy should benefit from better economic conditions and improved demand outlook, especially from a stronger US, that will foster Colombian exports (33.5% of Colombia’s exports went to the US in 2012).
UK-Colombia commercial relationship
The UK’s commercial relationship with Colombia has boomed in recent years with exports growing 126% between 2009 and 2012: more than with any other emerging economy. UK services have driven this growth, and our market share has gone from 3% to over 6%, higher than any of our EU competitors. On the other hand market share in goods has remained relatively constant, and at 1% remains significantly below that of our competitors (the EU3 average is just over 2%). We have almost met our 2015 target to double two way trade and investment to £1.75 billion.
We will work with new trade entity UK-Colombia Trade to target exactly those areas where Colombia is prioritising investment and which are the best fit with the UK industrial strategy: led by UKTI we have identified High Value Opportunities in infrastructure and education. In total Colombia will invest £85 billion in oil and gas over the next five years, £100 billion in infrastructure over the next eight, an additional £9 billion per year in education and will devote 1% of GDP per year to science and innovation. We are also pursuing the significant opportunities presented by the fast growing business and financial services, agritech and retail sectors.
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