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Colombia: Construction Drives Growth

Latin America Advisor

Colombia's economy grew 6.8 percent last year, the Andean nation's biggest economic expansion in 29 years, the government reported last month. What is the outlook for Colombia's economy in 2007 and beyond? What do you expect to the main drivers of continued economic growth in Colombia? What are the main impediments?

Mauricio Cardenas, Executive Director of the Foundation for Higher Education and Development (Fedesarrollo) in Colombia: Our economic growth forecast at Fedesarrollo is for 5.5 percent this year. This means that the economy will maintain a good rhythm, which in some ways reflects a certain moderation compared to what we had last year, because we will have a year with somewhat lower oil production, interest rate increases—which will moderate investment and consumption growth—and perhaps lower prices for Colombian export products. On top of this, we must add slower growth in the Venezuelan economy, which also affects the dynamism of Colombia's export sector ... For all of these reasons, this year's economic growth will be 5.5 percent and not the 6.8 percent we achieved last year. What will drive [economic growth]? The economy will continue to be led by the construction (13 percent), commercial (8 percent), and industrial (7 percent) sectors ... Colombia, due to advances in security issues ... has recuperated a stable growth path with a firm foundation at 5 percent [growth].

Luis Oganes, Co-head of Latin America Research at J.P.Morgan Chase & Co: Colombia's real GDP rose 8.0 percent in the fourth quarter of 2006 over a year ago (oya) and 6.8 percent for full-year 2006. Looking ahead, output should continue to be propelled mainly by domestic demand, as a limited expansion in export volumes and rising imports will keep the net contribution of external demand in the red. Given the healthy macro picture, rising business confidence, and improving security conditions, investment will expand around 23 percent oya in real terms in 2007. The main beneficiaries will be construction and infrastructure projects, as well as new machinery and equipment purchases. Meanwhile, consumption will rise 4.9 percent this year, mostly explained by strong private consumption, which in turn is being underpinned by expanding credit conditions, declining unemployment, and, once again, improved domestic security. Accordingly, J.P. Morgan has lifted its GDP growth forecasts for 2007 to 6.0 percent oya (from the previous 5.0 percent) and for 2008 to 5.5 percent (from 4.7 percent). Meanwhile, headline CPI inflation reached 5.78 percent oya in March, up from the already high 5.25 percent reported in February and well above the central bank's 3.5-4.5 percent inflation target range for 2007. Although the sharp increase is mostly explained by weather-related supply shocks, the strong acceleration of domestic demand is also adding inflation pressures. Given the economy's robust expansion and the unmistakable pressure on prices, the central bank will likely maintain its tightening bias at least through the second quarter of the year, which could eventually moderate the fast pace of growth.

Sergio Clavijo & Carlos Rojas, president and vice president of the National Association of Financial Institutions (ANIF) in Colombia: ANIF expects the Colombian economy to grow 5.3 percent during 2007, based on continued internal demand growth (currently at 10 percent annually), and supported by the 27 percent real growth in fixed investment during 2006. Steady increases in capital expenditures over 2003-2006 have raised the capital-output ratio to 25 percent, setting sustainable growth levels above 5 percent for the period 2007-2010. An improved sense of local security and investor-friendly legislation have raised FDI to historic records (close to $5 billion, equivalent to 4.5 percent of GDP) in recent years. The Colombian central bank has been able to reduce inflation to 4-5 percent per year, completing seven years of single-digit inflation rates. Long-term inflation is expected to converge to a 2-4 percent range before 2010. However, structural fiscal deficits (close to 4 percent of GDP on behalf of the central government) currently threatens monetary policy. Despite improved tax receipts (growing at 10 percent in real terms annually in recent years), public expenditure pressures remain, especially those stemming from the social security and armed forces areas. Structural constraints to the budgeting process limit the space for fiscal maneuvering. For instance, a constitutional reform (currently being discussed at Congress) is likely to end up increasing net transfers to territorial entities (above 45 percent of tax-revenues), further deteriorating the fiscal stance. Another area of concern has to do with executive pressures on the central bank to intervene in the foreign exchange market to fight an appreciation of the currency, all of which might [put at risk] the inflation target of 4 percent for 2007.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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