In 2015, Colombia’s economic performance is expected to slow down somewhat (to 3.8%) due to lower commodity prices, while robust domestic demand should sustain growth.
Head of state/government: President Juan Manuel Santos (since August 2010; re-elected in 2014)
Government type: Republic
Population: 49.5 million (est.)
Improved, but still not stable security situation
For more than five decades Colombia’s state authority has been challenged by (drug-financed) guerrilla groups. In 2002 former President Uribe finally stepped up the fight against those forces, supported by the US. This more robust strategy was successful, as since then the guerrilla movement has lost territory and military strength, resulting in an improved security situation. That said, the guerrillas have not yet been completely defeated. Incumbent President Santos has started negotiations with the main guerrilla group FARC, but a final settlement has not been reached yet. Despite significant economic progress, Colombia still has high poverty and inequality rates, especially in rural areas. Public discontent about the slow pace of tackling long-lasting social issues has grown. Given the lack of a peace accord, a sudden deterioration of the security situation could have a marked effect on business, investor and consumer confidence.
Strong economic performance
Given its wide range of mineral and agricultural commodities, Colombia is one of South America´s most attractive investment locations. This, together with buoyant private consumption and exports (helped by the deliberate extension of bilateral and multilateral free trade agreements) has led to annual GDP growth rates of more than 4% since 2011. Structural GDP growth is underpinned by a good and further improving business climate and a growing middle class. However, poverty and unemployment remain high, and the poor infrastructure and high corruption remain issues that hamper the economy.
In 2015, growth is expected to slow down somewhat (to 3.8%) due to lower commodity prices, while robust domestic demand should sustain growth. A further decrease in commodity prices, however, remains a downside risk, given Colombia´s dependency on coal and energy exports. Inflation is also set to increase, but forecast to remain within the Central Bank´s target range of 2-4%. The banking sector is well managed, well capitalised and profitable.
Prudent economic policies – but structural reforms needed
Sound economic policies have contributed to a much improved earnings capacity and economic resilience. The fiscal policy is prudent, helped by a structural fiscal balance rule, with nominal budget deficits reduced to less than 2% of GDP and primary budget surpluses. Government debt is stable at around 40% of GDP. Monetary policy was tightened in 2014, with the interest rate currently at 4.5% (up from 3.25% in March 2014). The exchange rate is flexible and supervision is effective. However, in order to improve fiscal flexibility a reform of the complicated tax system would help to tackle the large informal economy and to improve local government finances. In order to promote sustainable long-term economic growth, job growth promotion, social reforms and infrastructure improvement would be necessary.
Solid external fundamentals
Colombia’s external economic position is solid. Foreign debt amounted to a manageable 26% of GDP in 2014. The international liquidity position is sound and supported by an excellent reputation in the financial markets and a precautionary IMF Flexible Credit Line of USD 5.8 billion. The Colombian peso came under depreciation pressure last year by financial market volatility (caused by an earlier expected monetary policy normalisation in the US). However, the effects remained manageable.
Despite diversification of Colombia’s exports (with respect to goods and markets), the trade position has deteriorated in 2014, caused by declining oil exports due to pipeline repairs and lower commodity prices. This has resulted in an increase in the current account deficit to 4.4% in 2014, which is forecast to widen further in 2015. However, those deficits remain manageable and can be easily financed by capital inflows, especially foreign direct investments. International reserves are expected to remain above 9 months of import cover in 2015.