Analysts anticipate an improved investment climate and accelerating growth
A week after Colombia’s presidential runoff, BNP Paribas Latin America analyst Luis Eduardo Peixoto raised his 2018 GDP growth forecast: to 3.0% year-over-year from 2.5%, while “reiterating our above-consensus call for 2019 of 3.5% y/y,” said a June 25 note to clients.
That was an indicative reaction to the election victory of Ivan Duque as the next president. The 41-year old former senator served in the administration of former president Álvaro Uribe, who was popular for taking action against guerrilla groups and threw his support to Duque.
Duque, who has earned master’s degrees in law and public policy from American University and Georgetown University, respectively, is seen as a conservative ready to revisit the peace deal that was brokered with the FARC guerrillas. This, coupled with free-market and anti-regulation leanings, propelled him to 54% of the June 17 vote after leading in the first round at the end of May.
Already surprising on the upside this year, Colombia’s growth is expected to gain more traction in the second half, mainly driven by investments. Meanwhile, the country’s external vulnerabilities are reduced, thanks to a surge in exports and a drop in the current account deficit.
The election outcome provides a boost to investor confidence and less perceived market risk. Duque backs supply-side growth policies, favoring less red tape, lower taxes and deregulation.
As businesses’ sentiment improves, Peixoto said, “we expect them to defrost investment. The energy sector, which has slashed investments in recent years, should be a particular bright spot” in view of “more market-friendly initiatives.”
The new president, who takes office in August, has a real opportunity to focus beyond the short-term agenda on structural barriers to growth. Analysts say that diversifying the economy away from oil, advancing the infrastructure agenda, and reducing labor informality are among the most pressing issues, along with a need to maintain and even strengthen the macro-prudential regulatory framework.
Infrastructure investment, according to Moody’s Investors Service, is critical to moving the country towards a lower-risk environment. With this will come domestic jobs growth and renewed plans to build and develop areas of the country, while underscoring the lower domestic investment risk.
“While the priorities of the top two presidential candidates for election differ[ed], both have expressed plans to foster infrastructure investment, providing continuity to Colombia’s agenda despite the country’s limited domestic capital markets and fiscal constraints,” said Adrian Garza, a Moody’s vice president.
The relatively small domestic capital market is now one of the structural challenges facing Colombian policymakers. In addition, the government’s fiscal consolidation efforts limit public spending, which evokes a need for international private investment and involvement of multilateral institutions and public-private partnerships.
Stronger growth could allow the central bank to slow or even halt its easing of monetary policy. Emerging-market jitters tied to U.S. Federal Reserve tightening might encourage caution, with the central bank remaining wary of inflation risk for the remainder of this year.
“Next year, we believe, activity will continue to gather pace, finishing at 3.5% by year-end,” Peixoto said. “Household consumption should be the main driver, as unemployment falls more assuredly and investments kick in.”
Photo Credit: Reuters/Carlos Julio Martinez