Drop in Oil Prices Poses Challenges for Colombia

SUMMARY

The sharp drop in oil prices poses significant challenges to Colombia’s near-term outlook, but strong economic policies are expected to moderate the growth slowdown in 2015, said the IMF in its annual assessment of the Colombian economy.

 
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  • Supportive policies cushion growth impact of oil price collapse
  • Medium-term rebound expected, despite external risks
  • Key challenges: raise non-commodity revenues, foster inclusive growth
  • A subdued outlook for investment, especially oil-related, and private consumption and a tightening of planned public spending will cause growth to slow to 3.4 percent in 2015, which would still compare favorably with most other countries in the region.

    However, the medium-term outlook is favorable, with growth projected to bounce back gradually to around 4¼ percent by 2018, the report said.

    “Colombia is now undergoing an adjustment to lower oil prices,” said Valerie Cerra, the IMF’s mission chief for Colombia. “But the authorities have built significant policy buffers, which will help moderate the impact of the oil shock on the economy.”

    “In addition, the authorities’ efforts to implement key economic and structural reforms will help maintain growth momentum over the coming years,” added Cerra.

    Healthy but slowing growth

    Last year, the economy grew by 4.6 percent, boosted by domestic demand. “Strong economic activity supported historically low unemployment rates and increased labor market formality,” noted Cerra.

    As inflation returned quickly to the midpoint of the 2-4 percent target band (from a low level in 2013), the IMF welcomed the central bank’s decision to increase interest rate to 4.5 percent. The central government fiscal balance was broadly unchanged from 2013, and met the structural balance target.

    In the second half of 2014, Colombia confronted a severe oil price shock—oil is Colombia’s top export. The IMF expects growth to slow to 3.4 percent in 2015, which is still high relative to many peer countries. Given their flexible exchange rate regime, the authorities have allowed the peso to depreciate, which will help cushion the impact of the shock. Over time, stronger growth in nontraditional exports will help support economic activity and reduce the trade deficit.

    The recent rise in inflation above the inflation target band is expected to be temporary and inflation expectations remain well-anchored, reflecting the strong credibility of the inflation targeting regime.

    Positive outlook

    Colombia’s prospects are favorable. Growth is projected to rise over the medium term to about 4-4½ percent. Inflation is expected to remain within the target band, as the authorities are committed to adjust the policy rate when needed to keep inflation...

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