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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│
Page 2
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
Página 3
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…
Página 4
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
Page 5
Section I
Colombia breaks with the past
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
Página 6
Index
Colombia: Potential andChallenges forFuture Growth
Sectón I
Colombia breaks with the past
Section II
Colombia passes the “stress test”Section III
Colombia: An “EAGLEs Nest”
Section IV
A bright future if the right road is taken
Página 7
Colombian performance during past crises
Strength of the recoveryIn the past, recessions meant long periods of divergence
Secction II
Colombia passes the “stress test”
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
Página 8
Section II
Colombia passes the “stress test”
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
Página 9
Index
Section I
Colombia breaks with the past
Section II
Colombia passes the “stress test”
Section III
Colombia: An “EAGLEs Nest”
Section IV
A bright future, if the right road is taken…
Colombia: Potential andChallenges forFuture Growth
Page 10
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
Page 11
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
Page 12
Section III
Colombia: An “EAGLEs Nest”
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
1,7% of world growth
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
1,3% of world growth
Latam NEST+Chile
0.8% of world growth
NEST countries
Página 13
Index
Section I
Colombia breaks with the past
Section II
Colombia passes the “stress test”
Section III
Colombia: An “EAGLEs Nest”
Section IV
A bright future, if the right road is taken…
Colombia: Potential andChallenges forFuture Growth
Page 14
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
Page 15
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
A bright future, if the right road is taken
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*
Page 16
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
A bright future, if the right road is taken
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
Page 17
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
A bright future, if the right road is taken
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
Page 18
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
Page 19
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
A bright future, if 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
0%
2%
4%
6%
8%
10%
12%
1960-00 2008 1960-00 2008 1982-00 2008
China Latin America Colombia
Capital Employment TFP
Página 20
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
Página 21
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
Página 22
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.
Página 23
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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