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 payment 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 in H116, broadly in line with their stated timeline. However, given the splintered nature of the left-wing insurgent group, such a deal will only slowly improve the security environment.
Major Forecast Changes:
Greater than expected weakness in oil prices has prompted us to revise down our 2016 exchange rate forecast. We now forecast the unit to average COP3,287/USD in 2016, from COP3,050/USD previously, and considerably weaker than the 2015 average of COP2,749/USD.
Signs that inflation will remain well above the central bank's target band in 2016, combined with the bank's stated willingness to tighten monetary policy, we have revised up our policy rate forecast for 2016. We expect the bank to raise the benchmark rate by 75 basis points to 6.50% by end-2016.
A sharper decline in oil prices than we currently expect in 2016, likely on the back of increasingly poor macroeconomic data from the US or China, could significantly undermine Colombia's growth, fiscal and balance of payments outlooks over the coming 12 months. A further, extended decline in crude prices would depress export growth, as well as stymieing investment into the oil sector, likely resulting in a drop in production. Further deterioration in the country's balance of payments dynamics will likely precipitate additional currency weakness, stoking inflation and undermining consumers' purchasing power.
|e/f = BMI estimate/forecast; Source: National Sources, BMI|
|Nominal GDP, USDbn||377.6||296.5||267.3||292.1|
|Real GDP growth, % y-o-y||4.6||2.9||2.9||3.3|
|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||3,400.00||3,050.00|
|Budget balance, % of GDP||-2.6||-3.1||-3.6||-3.4|
|Current account balance, % of GDP||-5.2||-6.7||-6.4||-6.2|
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