A Bulletproof Deal
The Colombian economy is undoubtedly slowing. Given current macro imbalances, this is a good thing, and actually what the Central Bank is hoping for, as it continues to hike interest rates. The question is: how much will growth slow?
The mining sector continues to disappoint. Coal production fell 7% in February, and oil production fell by 7.4% in Q1. Though oil prices have strengthened recently, we expect production to remain subdued relative to 2015, and mining to fall by 2.1% in 2016.
We expect GDP to expand by 2.5% in Q1, and 2.5% in 2016, vs. the government’s 3.2% growth forecast for the year. We also expect inflation to top the government’s projected 4.5% annual figure. Both factors are negative for the fiscal deficit. According to the Ministry of Finance, every additional percentage point of inflation results in additional spending of COP 1.4 trillion, so inflation alone could raise spending by COP 2.5 trillion.
The 2016 fiscal deficit seems closer to 4% of GDP, or twice the structural deficit target originally included in the fiscal rule. How will government make ends meet? A serious tax reform raising revenue by at least 1.5% of GDP, and real expenditure cuts of at least 0.5% of GDP, will be required to avoid further disappointment in 2017.
Oil reserve figures for 2015 are, unsurprisingly, disappointing. With the fall in oil prices, so-called proven reserves also fall, as their feasibility is reduced under a bleaker oil price scenario. Colombia’s proven reserves reached 2.002 billion barrels in 2015, down by 13% from 2014.Production has continued to plunge, to its lowest level since 2012. Yet things are worse in Brazil and Mexico, where reserves contracted by more than 20%. This indicates the sector is doing a reasonable job in adjusting to the new oil price scenario.
New stats on regional poverty bring mixed news. First, poverty has dipped, from 28.5% to 27.8% of the population, despite the 2015 economic slowdown, though extreme income poverty remained almost constant. One the other hand, the rate of poverty decline has stagnated, and the very poorest regions continue to lag.
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