colombia: potential and challenges for future growth · colombia: potential and challenges for...

Colombia:Potential and Challenges forFuture Growth

OECD Seminar Beyond the Crisis - Returning to Sustainable Growth in Latin America

Paris, November 2010

María Paola Figueroa│Economist BBVA Research Colombia│

Global Outlook

Global OutlookEconomic growth in 2010 across key geographical areas will be above expected one year ago. Significantly higher in Emerging Markets.

2011 GDP growth revision Source: BBVA Research Forecasts. *Latin America: Arg, Bra, Chi, Col, Mex, Per and Ven.

Latin America Economic Growth:

• Breaks with the past

• Passes the “stress test”

• A bright future:

– Capital inflows

– Commodity Prices

– Asian Dynamism

– Potential Growth0

1

2

3

4

5

6

7

8

9

10

USA EMU Spain China Latin America

Advanced Economies Emerging Economies

Index

Colombia:Potential andChallenges forFuture Growth

Section I

Colombia breaks with the pastSection II

Colombia passes the “stress test”

Section III

Colombia: An “EAGLEs Nest”

Section IV

A bright future, if the right road is taken…

Section I

Colombia breaks with the past

Colombia made substantial economic and institutional reforms. There have been important improvements in economic fundamentals. Proof of this is the relatively mild impact of the recent economic crisis.

Positive performance in the last 10 years

• Colombia exhibited relatively high growth ratesover the last ten years.

• This process has been characterized by a strong increase in the investment rate.

• Colombia exhibits strong macroeconomicstability; fundamentals have improved.

• Both domestic and external factors havecontributed to the recovery of investment.

Progress on macroeconomic fundamentals

• Low and stable inflation

• Exchange rate flexibility

• Current account financed mainly by long-termflows

• Improvements in financial regulation andsupervision

• Progress on fiscal institutions with positive, albeit insufficient, results

Section I


Diversity in the region (GDP and CPI forecast)Source: BBVA Research. *Price Stability: CPI 2010-2012 (spread % y/y average latam vs. average country). **Economic Growth: GDP 2010-2012 (spread % y/y average country vs. average latam) Bubble size: Total GDP based on purchasing-power-parity (PPP).

• The “two giants” (BRA, MEX)

• Medium Size Emerging South America: medium size countries combine good performance both in inflation and growth (CHL, COL, PER)

• The “heterodox”countries: most countries have achieved low inflation, but it remains a problem in ARG and VEN

Macroeconomic stability

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0

Economic Growth**

Pri

ce

sta

bilit

y*

CHL PERMEX

BRA

ARG

VEN

COL PAN

URU PAR

Ma

jor

pri

ce's

sta

bili

ty

Major economic growth's stability

Index

Colombia: Potential andChallenges forFuture Growth

Sectón I


Section II

Colombia passes the “stress test”Section III


Section IV

A bright future if the right road is taken

Colombian performance during past crises

Strength of the recoveryIn the past, recessions meant long periods of divergence

Secction II


Source: DANE and BBVA Research.

60

80

100

120

140

-2 -1 0 1 2 3 4

Years since the Crisis

60

80

100

120

140

1982 1999 Current 2008

• Countercyclical monetaryand fiscal policies

• Availability of funds in the financial system was not interrupted

• Government maintained access to international capital markets

• Healthy financial system indicators

Resilience during the crisis

Section II


Interest Rate changes during crises (2002 compared to 2009)

In this cycle fiscal and monetary policies were expansionary, marking a major break with previous cycles when financial constraints did not allow them.

LatAm, Fiscal Stimulus as % of the GDP

-800

-600

-400

-200

0

200

400

600

800

Brazil Chile Colombia Mexico PeruMay02-Apr03 Jan09-current

Source: BBVA Research, central banks Source: BBVA Research based on official data

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

Brasil Chile Colombia México Perú

Tranistorio Permanente

Index

Section I


Section II


Section III


Section IV



Based on absolute sizeBased on absolute size Based on absolute growthBased on absolute growth

Allows no anticipation: too much inertia

Bigger does not necessarily determine market potential

Too long horizon: at least 20-25 years

Anticipation: dynamic concept

Large enough size plus…

Shorter horizon: next 10 years

BRICs (GS)BRICs (GS) BBVA EAGLEs definitionBBVA EAGLEs definition

Static conceptStatic concept Dynamic conceptDynamic concept

No clear cut-offNo clear cut-off Defined Cut-off: the G6Defined Cut-off: the G6

Why four countries? Subjective Flexible number of countries: “Club admission” depends on performance

BBVA EAGLEs is the set of countries whose contribution to World GDP growth is expected to be larger than that of the average G6 economy

BBVA EAGLEs is the set of countries whose contribution to World GDP growth is expected to be larger than that of the average G6 economy

Fast enough growth

Section III

The concept of BBVA EAGLES

Indifference Curve

Russia

Brazil

Mexico

Korea

Indonesia

Turkey

Australia

Taiw an

Poland

Argentina

Thailand

South Africa

Egypt

ColombiaMalaysia

Nigeria

Philippines

Vietnam

Peru

Bangladesh

0

1

2

3

4

5

6

7

8

9

10

100 600 1,100 1,600 2,100 2,600

GDP PPP (USD bn.)

Gro

wth

(%

,avg

10 y

ears

)

Section III

EAGLEs “Nest”: other economies to watch

• Additional 11 economies are expected to add to global growth somewhere between the G6 average and Italy’s figure

• Some of the EAGLEs could fall from the list, some of these countries could make it into it

Indifference Curve: Growth and size in the watch list countriesSource: BBVA Research

The “EAGLEs nest”Source: BBVA Research

Note: Australia is included in the watch list, but it is not an emerging market.

Nigeria

Poland

South Africa

Thailand

Colombia

Vietnam

Bangladesh

Malaysia

Argentina

Peru

Philippines

G6 average

Italy

Section III


BBVA EAGLEs : Latin America compares with Asia in terms of its role for global growth in this decade1) Latin American EAGLEs similar to Asian (ex China-India)2) Latin American NEST countries close to Asian. Andinos region would make it into EAGLE status

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Indonesia Korea Taiwan Brazil Mexico

Contributions to World GDP growth: 2010-2020Source: BBVA Research

EAGLE countries

Asian EAGLES

2,2% of world growth

Latin America EAGLES


0.0

0.2

0.4

0.6

0.8

1.0

1.2

THAI MAL VIET BANG PHILL COL ARG PER Andinos

Asian NEST


Latam NEST+Chile

0.8% of world growth

NEST countries

Index

Section I


Section II


Section III


Section IV



Asian imports from Latin America (% over total Asian imports)Source: MF and BBVA Research

Concentration of the main product's exports to Asia from Latin America (% over total exports in each country). Source: BBVA Research.

The region has increased significantly its trade integration with Emerging Asia during the last decade, mainly at the expense of traditional trade partners (U.S.).

Section IV

A bright future, if the right road is taken

Initially Latam’s exports to Asia have been biased towards commodities and are benefiting from high prices

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002 2003 2004 2005 2006 2007 2008 2009

Brazil Chile Rest

0

10

20

30

40

50

60

70

Arg

entina

Bra

zil

Chile

Colo

mbia

Mexic

o

Peru

Venezuela

Minerals

Minerals

Agricultura

Copper

Crude

Petroleum

Crude

Petroleum

Crude

Petroleum

Real Commodities Price (Respect US CPI, base 2005=100)Source: IMF and BBVA Research.

Foreign Direct Investment to the region (US$ bn)Source: BBVA Research. *Forecast BBVA Research.

Section IV


Some new policy dilemmas: Stronger fundamentals means more appreciated currencies – in real terms – over the long – run

0

50

100

150

200

250

Soybean Brent Copper

Average 2000-2006 Average 2007-2012

0

10

20

30

40

50

60

70

80

90

100

Average 2000-2006 Average 2007-2012*

Monetary Policy Rates (%)Source: BBVA Research

0

2

4

6

8

10

12

Brazil Mexico Colombia Peru Chile

Monetary Policy Reference Rate Monetary Policy Neutral Rate

GDP and Domestic Demand Forecast(% y/y, average 2010-2011)Source: BBVA Research

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

GDP Forecast (% y/y, average 2010-2011)

Dom

estic D

em

and F

ore

cast

(% y

/y,

avera

ge 2

010-2

011)

Mexico

ChilePeru

Brazil

Colombia

Section IV


Short term dilemmas: Domestic demand growth is outperforming GDP growth in almost all countries (Mexico is the exception) with significant risks of overheating, while policy interest rates are well below neutral levels in most countries

Neutral Interest rates

Domestic Demand grow faster than GDP in 10-11

Exchange Rate: Appreciations and InterventionsSource: BBVA Research. *Exchange intervention: International Reserves: net purchase between Jan08-Sep10 (% GDP). **Exchange variation: Appreciation/Depreciation in Real Effective Exchange Rate between Jan08-Sep10

Inflation (% y/y)Source: BBVA Research

Section IV


Short term dilemmas: FX interventions have failed to prevent excessive appreciations in most countries, and policy makers are increasingly tilting towards capital controls. However, if these measures prove effective, there is a risk they will backfire through high inflation

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jan-0

9

Mar-

09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Jul-10

Sep-1

0

Brazil Mexico Colombia Peru Chile

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

0.0 2.0 4.0 6.0 8.0

Exchange Interventions*

Exchange V

ariation**

Mexico

Chile

Peru

Brazil

Colombia

Appre

cia

tion

Depre

cia

tion

Volatility of commodity prices(accumulated stock since 2005).Source: BBVA Research.

Section IV

A bright future if the right road is taken…

Perspectives of a positive oil and mining cycleSteps need to be taken to underpin the sustainability of public finances and macroeconomic stability, particularly in view of a potential boom in the mining-energy sector.

Risks:

• Commodity international prices are volatile.

• Fluctuations in prices lead to volatility in revenues and Government rents.

• Also lead to fluctuations in the real exchange rate, which discourage diversification and lead to theconcentration of exports and production.

Opportunities:

• The trends in productivity are as positive for commodities as for other sectors of economic activity.

• The production of commodities provides positive “spillover effects“ and links to other sectors, similarly tomanufacturing.

• Importance of well designed funds, oriented towards stabilization and saving in the long run.

Source: World Bank (2010) and BBVA Research

Potential Output Growth (% yoy change)Source: BBVA Research. *Latin America: Arg, Bra, Chi, Col, Mex, Per and Ven.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1990-

2009

2011-

2015

1990-

2009

2011-

2015

1990-

2009

2011-

2015

1990-

2009

2011-

2015

USA EMU Latin America* China

Growth sources Source: BBVA Research. *Latin America: Arg, Bra, Chi, Col, Mex, Per and Ven.

Section IV


There is room for further increases in potential growth in the case extra microeconomic reforms and more investments in infra-structure and education materialize

0%

2%

4%

6%

8%

10%

12%

1960-00 2008 1960-00 2008 1982-00 2008

China Latin America Colombia

Capital Employment TFP

Section IV

A bright future is the right road is taken…

There is room for further increases in potential growth in the case extra microeconomic reforms and more investments in infra-structure and education materialize…

Measures to strengthen growth in Colombia

• Infrastructure

• Formalization and labor marketreforms

• Increased internationalization

� Education

� Bancarization and financialdeepening

Section IV

A bright future is the right road is taken

Promote innovation and training for work

• The progress in coverage has not beenproportional to improvements in quality

• Improve the adjustment between labor supply and demand to respondeffectively to the needs of expansion anddevelopment

Education is a challengeMore scarce labor requires better trained workers to interact with more capital and improve TFP. PISA results show a gap with the OECD

Results Test Pisa (% below Level 3)

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0

Matemáticas

Le

ctu

ra

BRA

OCDE

SPA

CHL

COL

Source: World Economic Forum 2007

Section IV

A bright future if the right road is taken…

Stengthen financial development

• The percentage of adults with access tofinancial services is lower than 60%; credit is only 31% of GDP.

• The lack of protection for the complianceof financial contracts is one of the mainbarriers for the extension of credit.

Bancarization and financial deepening

Colombia has made clear efforts over the last years to consolidate and strengthen the financialsystem. However, in comparison to Latin America, indicators remain relatively low.

Where do families keep their money?

Families ¿Where do they keep their money?

Home

54%

Bank

25%

Cooperativas

8%

Employee funds

or relatives

5%

Friends, social

network

8%

Source: Econometria.

Section IV

Ambitious set of economic reforms

July August September October

Government Budget 2011

- $52,6 billions, 2,5% growth rate.

- Implicit Central Government Deficit

3.9%

- Public investment will diminish as %

GDP (0.1 pp)

- Modified by increasing

investment into strategic growth

sectors

Fiscal Sustainability

- Constitutional Right and State duty.

- Fiscal criteria harmonization

through all public powers

- Coordination y coherence of economic and

budgeting process

Formalization and First Job Law

- Goal: To create 3 million formal jobs and reduce the unemployment rate to 9%

(aprox).

- It motivates entrepreneurial formalization, formal first

jobs, red carpet simplification and control

mechanisms

- Incentives based on tax exemptions

Fiscal Rule

- Target on Structural Fiscal Balance: 1.5% of

GDP

- Transition period until 2015

- Long run goal for public debt of central

government below 20% of GDP

- Macroeconomic and fiscal Stabilization Fund

Royalties Reforms

- It creates a Royalties National System

- Competitive and fairness principles

- Resources for more underdeveloped

regions

- Investment in science, technology and

innovation

Coming:

National Development

Plan

Elimination of Financial

Transactions Tax (2011)

Health Reform

-Statutory Law: Criteria definition for a wide and

inclusive mandatory health plan

- General Law: Defines quality, promotion and prevention and primary

attention.

- Control of health cost for fiscal sustainability

Mini Tax Reform

- Unilateral tariff reduction for

inputs and capital goods (Average

tariff changed from 12% to 8%)

- Elimination of the energy over cost for

industry

- Adjustment of Financial

Transactions Tax’s coverage

November

Measures to contain currency appreciation

- Possible Forward operations until US$ 3.700

millions

- Less external debt issues for 2011.

- Abolish tax exemption for interest payment s over

external debt.

- Tariff reduction for some capital goods and inputs

(requires Congress Reform)

Colombia:Potential and Challenges forFuture Growth

OECD Seminar Beyond the Crisis - Returning to Sustainable Growth in Latin America

Paris, November 2010

María Paola Figueroa│Economist BBVA Research Colombia│

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