Colombia still recovering from the oil shock
In 2016, real GDP registered its lowest growth in 8 years (+2%) as a result of the severe oil price shock experienced since 2014 and weakening demand from regional partners.
The economy is expected to decelerate further in 2017 despite higher oil prices and an ambitious infrastructure program (4G). While crude oil accounts for 40% of total exports, oil revenues will remain capped as production continues to fall (120bbl/day in May, from a peak of 130bb/day in early-2016).
Moreover, the rise in VAT from 16% to 19% will weigh on private consumption and tourism-related activities. All in all, we expect economic growth to be below 2% in 2017. A modest rise to +2.9% in 2018, will still place it well below the 2010-2015 average of +4.5%.
Moderating inflation allowed for a supportive monetary policy. To sustain the recovery the central bank cut the key rate by 325bps since September 2016 (125bps cut since the beginning of the year) to 6.25% in May 2017, its lowest level in 13 months. After a peak of +9% y/y in June 2016, consumer prices have moderated to +4.7% y/y in April, still above the 3% ±1pp inflation target range. Monetary authorities expect inflation will converge to the central target by 2018.