Colombia: Recession Risk Rising

Colombia: External Factors Exposing Vulnerability

The Colombian economy weakened measurably in the final months of 2016, according to Moody’s Analytics. Pointing to the country’s somewhat tight economic policies, which the firm explains led to a decline in domestic demand, and ongoing external factors (low oil, for example).

Data shows that the seasonally adjusted economic activity index, a proxy for GDP, dropped 0.12% year over year in October, suggesting a contraction in GDP. The index also fell 0.9% month over month in October after a 0.98% decline in the previous month, according to provided data. A weaker performance now suggests the Colombian economy expanded at a “tepid pace” in the final quarter of 2016.

Low oil prices (globally) also slowed down investment and forced the government to implement severe budget cuts in 2015 and 2016. By mid-2016, the inflationary effects of El Niño pushed Colombia’s inflation to its highest rate in 15 years, according to Moody’s Analytics. This subsequently prompted the central bank to begin aggressively hike interest rates.

High inflation and low oil prices also prompted a sharp depreciation of the peso. “Consumer confidence plummeted, hurting private consumption, the main driver of growth in recent years,” Juan Pablo Fuentes, an economist with Moody’s Analytics wrote in a note to clients on January 5th.

The central bank’s official release after December’s meeting noted that the economy likely expanded by less than 2% in 2016. GDP expanded by what market observers see as a “disappointing” 1.2% y/y in the third quarter, during a noticeably sharp deceleration in domestic demand growth. The central bank estimates that GDP expanded at a similar pace in the final quarter. These figures suggest that GDP likely expanded by 1.7% in 2016, far below earlier expectations.

The downturn will be temporary, however. Inflation has decelerated faster than anticipated in recent months, allowing the monetary authority to start easing credit conditions in December.

This trend will continue in the first half of 2017. Oil prices have moved higher in recent months, providing some relief on the fiscal side.

“Consumer confidence has started to improve, which will stimulate consumption in coming months. GDP growth will accelerate in 2017 and reach 2.9%,” Fuentes said.

Photo/Graphic Credit: Moody’s Analytics