Persistent weakness in benchmark crude prices will continue to undermine real export growth and fixed investment, helping to underpin our view for structurally slower growth over the next several years.
We also anticipate a slowdown in real private consumption growth as consumers are hit hard by high inflation, rising interest rates and a significant sell-off in the exchange rate.
Hydrocarbon sector weakness will also weigh on Colombia's balance of payments position. Faltering oil prices and production will temper investment into Colombia and cool export growth.
Meanwhile, slower oil production growth combined with increasing pressure to spend on social programmes will feed through to fiscal slippage in the years ahead. While the country is well positioned to withstand the storm, with a relatively low external debt burden and a sizeable stock of foreign reserves, the potential for deterioration in the country's macroeconomic buffers will temper investor perceptions of Colombia's sovereign creditworthiness.
The government and Fuerzas Armadas Revolucionarias de Colombia will reach a peace accord, likely in H116. However, given the splintered nature of the left-wing insurgent group, such a deal will only slowly improve the security environment.
Major Forecast Changes:
Given still accelerating headline price growth, we have revised up our 2016 average inflation forecast to 6.9%, from 5.8% previously. We maintain our end-2016 policy rate forecast at 6.50%, but now expect the bank to enact another 50 basis points of rate increases to 7.00% in the next few months, before easing monetary policy in the latter part of the year.
A failure to continue improving its business environment could prolong Colombia's growth slowdown, as investors look to more favourable destinations for investment in light of the country's high wage and non-wage costs and insufficient infrastructure. We believe this will be headwind to growth in the medium term, but it could become a more structural, long-term issue if not addressed in the next few years.
|e/f = BMI estimate/forecast; Source: National Sources/BMI|
|Nominal GDP, USDbn||378.3||291.7||280.7||323.0|
|Real GDP growth, % y-o-y||4.4||3.1||2.4||2.8|
|Consumer price inflation, % y-o-y, eop||3.7||6.8||4.6||3.5|
|Exchange rate COP/USD, eop||2,376.51||3,174.50||2,900.00||2,850.00|
|Budget balance, % of GDP||-2.6||-3.2||-3.8||-3.6|
|Current account balance, % of GDP||-5.2||-6.5||-6.0||-5.6|
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