Colombia Outlook 2Q17
Latam Economic Outlook 2Q17 Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall. global risk remains a concern. 2. The Colombian economy will grow slightly faster than it did in 2016. Growth is expected to increase from 2% in 2016 to 2.1% in 2017 and 2.7% in 2018. 3. 2016 saw a healthy and significant adjustment to the current account. The current account deficit as a percentage of 2016 GDP stood at 4.4%, around 2% less than in 2015. We expect it will close around 3.3% on average in the next two years. 4. Inflation shakes off supply-side shocks and ratifies its sharp fall. After two years of exchange rate pressure and twelve months of the worst of El Niño phenomena on record, inflation consolidated its downward trend to stand at 4.7% at the close of the first quarter of 2017. 5. The Banco de la República has embarked on a downward rate cycle. With the drop in inflation and the external balance, the Bank will be able to reduce interest rates to 5.5% in 2017.
Latam Economic Outlook 2Q17 GLOBAL Stronger growth, but still with significant risks
Colombia Latam Economic Outlook 2Q17 Positive global momentum Main trends continue and central scenarios become more likely Recovery of industrial production and trade still underway A strong stimulus to US economy looks less likely Low volatility in financial markets but so does scenarios with strong protectionism Headline inflation continues to rise in advanced economies, but core inflation remains stable Central banks in developed countries lean towards policy normalization 4
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Colombia Latam Economic Outlook 2Q17 Global growth continues to increase at the beginning of 2017 Global GDP growth Forecasts based on BBVA-GAIN model (%, qoq) 1,2 Confidence indicators remain very high, although hard data still do not capture all the improvement in sentiment 1,0 0,8 0,6 China and developed economies show signs of strong growth. However, other emerging economies show mixed signals 0,4 GDP Growth Average IC 20% IC 40% IC 60% Source: BBVA Research 5
Colombia Latam Economic Outlook 2Q17 Financial stress remains low BBVA Financial Stress Index (normalized) 2,0 1,0 0,0-1,0 Volatility has decreased despite uncertainty about economic policies Monetary and fiscal stimulus mask some underlying weakness Europe has been the exception, with some increase in sovereign spreads, linked to elections in France and the political outlook for the region as a whole -2,0 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Latam Asia Developed Source: BBVA Research 6
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Colombia Latam Economic Outlook 2Q17 Central banks on the way to policy normalization Official interest rates in the US (Fed) and Eurozone (ECB) (pp) 2,5 2,0 1,5 1,0 0,5 ECB QE tapering ECB End of QE 0,0 Source: BBVA Research, FED and ECB FED ECB 7 Fed continues to increase interest rates, though is still cautious about the economic outlook. The ECB is to start discussing its exit strategy, but very cautiously.
Colombia Latam Economic Outlook 2Q17 Global growth revised up US EURO AREA 2017 2.3 2018 2.4 2017 1.7 2018 1.7 2017 6.3 2018 5.8 CHINA Increased Unchanged Revised down LATIN AMERICA 2017 1.1 2018 1.8 WORLD 2017 3.3 2018 3.4 Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 8
Colombia Latam Economic Outlook 2Q17 China: renewed recovery with old engines China: GDP growth (%) 8 7,3 We revised up our growth forecasts for 2017-18, due to incoming data and a fiscal impulse. Gradual deceleration underway 7 6 6,9 6,7 6,3 5,8 But medium-term risks are still significant: Rebalancing of growth towards services and consumption has stalled 5 Policy missteps could lead to a disorderly deleveraging 4 3 2014 2015 2016 2017 2018 Forecast April 2017 Forecast February 2017 Source: BBVA Research and CEIC 9
Colombia Latam Economic Outlook 2Q17 US: diminished prospects of a pro-growth fiscal impulse US: GDP growth (%) 3,0 2,6 Growth increases in 2017 given pick up in investment. However, private consumption is expected to slow down 2,5 2,0 2,4 1,6 2,3 2,4 Risks stemming from economic policy continue despite a softer tone in the last months 1,5 1,0 0,5 0,0 2014 2015 2016 2017 2018 Forecast April 2017 Forecast February 2017 Source: BBVA Research and BEA 10
1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Colombia Latam Economic Outlook 2Q17 We maintain our view of gradual convergence of commodity prices to their long-run equilibrium levels BRENT OIL (USD/B) 120 100 80 60 40 20 0 SOYBEANS (USD/mT) 600 550 500 450 400 350 300 COPPER (USD/lb) 3,3 3,1 2,9 2,7 2,5 2,3 2,1 1,9 1,7 1,5 Forecast February 2017 Forecast April 2017 Source: BBVA Research and Bloomberg Forecast February 2017 Forecast April 2017 Forecast February 2017 Forecast April 2017 Oil prices will continue to get support from OPEC production agreement, as well as increase in demand. Copper prices will benefit from stronger demand and also supply disruptions. No significant changes in our view for long-term commodity prices. Forecasts mostly unchanged for oil and soybeans relative to February. 11
Colombia Latam Economic Outlook 2Q17 Global risks most relevant for Latin America are related to US policies and rebalancing in China 1 Lingering uncertainty about economic policies to be implemented in US, especially trade policies 2 Policy stimulus in China to support investment could delay and slow down reforms to reduce structural imbalances 3 Elections in France and Italy in (the unlikely) case that Eurosceptic platforms prevail 4 Risks stemming from monetary policy normalization, especially in the US 12
Situación Colombia 2T17 Colombia Sowing the future
mar-15 jun-15 sep-15 dic-15 mar-16 jun-16 sep-16 dic-16 mar-17 jun-17 sep-17 dic-17 Colombia Situación Economic Colombia Outlook 2Q17 2T17 2017 growth will be slightly higher than that seen in 2016 GDP growth Colombia (% variation YoY) 4 3 3.1 (f) We expect improved investment performance in 2017, due to public works and private industry, agriculture and mining investment programmes. 2 1 2.0 2.1 Available leading indicators show a weak start to the year. However, we expect to see recovery in the second half of this year 0 Source: DANE and BBVA Research 14
Colombia Situación Economic Colombia Outlook 2Q17 2T17 Investment in 2017 will cease to shrink, while consumer spending maintains its pace GDP, investment and consumer spending (% variation YoY) 5 4 3 2 1 0-1 2,0 2,1 2,1 2,0 2,4 2,7 2,6 3,8 Lower inflation and interest rates and greater relative confidence will see higher consumer spending from the second half of 2017 and especially in 2018. The investment rate will rise again between 2017 and 2018, as a result of adjusting at a faster rate than aggregate GDP. -2-3 -4-3,6 2016 2017(p) 2018(p) GDP Private Consumption Investment Source: DANE and BBVA Research 15
Colombia Situación Economic Colombia Outlook 2Q17 2T17 The economic slowdown is affecting the labour market with a lag 12 Unemployment rate in 13 cities (%, end of period) 11 10 9 9.3 9.8 9.8 10.5 10.8 Higher unemployment rate is expected going forward on the prolonged deceleration. Though not at the levels of previous deceleration cycles as 2009 of 13% 8 7 6 5 2014 2015 2016 2017(f) 2018(f) The consumer spending dynamic will be affected by the deterioration in the labour market, especially in 2017. Source: DANE and BBVA Research 16
Colombia Situación Economic Colombia Outlook 2Q17 2T17 Agriculture and construction will lead growth in 2017 Agriculture will benefit from better weather in 2017 Mid-level housing, 4G and improved local governments budget execution will continue to bolster the construction sector. Industry will have a regular year due to weak demand Mining will continue its weak growth GDP growth by sector (% variation YoY) Sector 2016 2017(f) 2018(f) Agriculture 0.5 3.5 2.7 Construction 4.1 3.4 4.4 Financial and Corporate Services 5.0 3.2 4.1 Government and Social Services 2.2 1.9 2.6 Utilities 0.1 1.7 2.6 Industry 3.0 1.6 2.3 Oil and Mining -6.5 1.6-2.2 Retail, Restaurants and Hotel Industry 1.8 1.5 3.2 Transportation -0.1 1.4 2.9 Total 2.0 2.1 2.7 Source: DANE and BBVA Research 17
Colombia Situación Economic Colombia Outlook 2Q17 2T17 Economic risk in Colombia has fallen The 2% adjustment in 2016 of the current account will favour long term growth. The considerable current account deficit caused pressure to maintain monetary policy rates high, limited the government's room for manoeuvre and created a sensation of vulnerability in the private sector. Tax reform will improve the sustainability of public finances. Between 2014 and 2016, the government made an important adjustment in expenditure. Fiscal and current account deficit (% of GDP) 0-1 -2-3 -4-5 -6-7 -5.1-2.4-6.4-3.0-4.0-4.4-3.6-3.6-2.9-3.2 2014 2015 2016 2017(f) 2018(f) Current Account Deficit Central Government Deficit Source: Banco de la República, DANE, the Ministry of Finance and BBVA Research 18
dic-14 feb-15 abr-15 jun-15 ago-15 oct-15 dic-15 feb-16 abr-16 jun-16 ago-16 oct-16 dic-16 feb-17 abr-17 jun-17 ago-17 oct-17 dic-17 feb-18 abr-18 jun-18 ago-18 oct-18 dic-18 Colombia Situación Economic Colombia Outlook 2Q17 2T17 In this context, inflation has slowed down significantly. We expect that at the end of 2017 the annual rate will be 4.1% Headline, core and food inflation (% variation YoY) 16 14 (f) 12 10 8 6 4 2 0 Headline Core Food Source: DANE and BBVA Research Foodstuff prices will continue to fall in 2017 due to greater agricultural supply. Exchange rate stability will help to keep the price of imported goods down. We expect to see inflation end 2017 and 2018 at a annual rate of 4.1% and 3.4%, respectively. 19
Colombia Situación Economic Colombia Outlook 2Q17 2T17 The Banco de la República has the path clear to reduce rates End-of-period monetary policy rate (%) 8 7 6 5 4 4.50 5.75 7.50 5.50 5.00 The reduction of the external imbalance risk and inflation allow the Bank to begin a downward rate cycle. We estimate that in 2017 the policy rate will reach 5.5%, then take a brief break before starting 2018 with rate reductions to 5%. 3 2 1 0 2014 2015 2016 2017(p) 2018(p) In the decision balance of the Bank s Board, once inflation expectations approach the target of 3,0%, economic activity will play a more relevant role. Source: Banco de la República and BBVA Research 20
ene-16 abr-16 jul-16 oct-16 ene-17 abr-17 jul-17 oct-17 ene-18 abr-18 jul-18 oct-18 Colombia Situación Economic Colombia Outlook 2Q17 2T17 Given the Colombian economy's lower level of external vulnerability, the exchange rate will stay relatively stable Exchange rate (Pesos per dollar) 3400 3300 (f) With the correction of the current account deficit, external vulnerability will decrease, as will the economy's external financing needs. This suggests less pressure on the exchange rate. 3200 3100 3000 2900 2800 2700 2600 2016 average: 3054 (11.4%) 2017 average: 2972 (-2.7%) 2018 average: 2995 (0.8%) 2016 eop: 3010 (-4.7%) 2017 eop: 3015 (0.5%) 2018 eop: 2958 (-1.9%) Within a positive context for oil prices and external stability, the peso should appreciate in 2017 compared to 2016, stabilizing slightly below 3,000 pesos to the dollar. It should not be forgotten that the US Federal Reserve will make two adjustments to interest rates before year end, according to our forecasts. This will put upward pressure on the exchange rate in the second half of the year. Source: Banco de la República and BBVA Research 21
Colombia Situación Economic Colombia Outlook 2Q17 2T17 The main risk to economic growth comes from internal affairs 1 Additional delays to the public and private investment decisions which may have an impact on short- and medium-term growth 2 Imbalances in the Chinese economy may cause a hard landing to its growth with important repercussions to commodity prices 3 Risk associated with the normalisation of monetary policy, especially in the US, which may affect capital flows, and as a result, the exchange rate and the space that BanRep has to reduce rates 4 Uncertainties that are still associated with measures passed in the USA, especially in a commercial context, affecting export performance 22
Situación Colombia 2T17 Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall. global risk remains a concern. 2. The Colombian economy will grow slightly faster than it did in 2016. Growth is expected to increase from 2% in 2016 to 2.1% in 2017 and 2.7% in 2018. 3. 2016 saw a healthy and significant adjustment to the current account. The current account deficit as a percentage of 2016 GDP stood at 4.4%, around 2% less than in 2015. We expect it will close around 3.3% on average in the next two years. 4. Inflation shakes off supply-side shocks and ratifies its sharp fall. After two years of exchange rate pressure and twelve months of the worst of El Niño phenomena on record, inflation consolidated its downward trend to stand at 4.7% at the close of the first quarter of 2017. 5. The Banco de la República has embarked on a downward rate cycle. With the drop in inflation and the external balance, the Bank will be able to reduce interest rates to 5.5% in 2017.
ANNEX Situación Colombia 2T17
Colombia Situación Economic Colombia Outlook 2Q17 2T17 Summary of Baseline Scenario 2013 2014 2015 2016 2017(f) 2018(f) GDP (YoY, %) 4.9 4.4 3.1 2.0 2.1 2.7 Private consumption (YoY, %) 3.4 4.3 3.2 2.1 2.0 2.6 Public consumption (YoY, %) 9.2 4.7 4.0 1.8 1.8 2.1 Fixed investment (YoY, %) 6.8 9.8 1.8-3.6 2.4 3.8 Inflation (% YoY, eop) 1.9 3.7 6.8 5.7 4.1 3.4 Inflation (% YoY, average) 2.0 2.9 5.0 7.5 4.3 3.3 Exchange rate (eop) 1.927 2.392 3.149 3.001 3.015 2.958 Devaluation (%, eop) 9.0 24.1 31.6-4.7 0.1-1.4 Exchange rate (average) 1.869 2.001 2.742 3.054 2.972 2.994 Devaluation (%, average) 3.9 7.1 37.0 11.4-2.7 0.8 BanRep interest rate (%, eop) 3.25 4.50 5.75 5.75 5.50 5.00 Deposit interest rate (%, eop) 4.1 4.3 5.2 6.9 5.7 5.3 Fiscal Balance (% GDP) -2.3-2.4-3.0-4.0-3.6-2.9 Current Account Balance (% GDP) -3.2-5.2-6.5-4.4-3.6-3.2 Unemployment rate (%, eop) 9.7 9.3 9.8 9.8 10.5 10.8 25
Colombia Situación Economic Colombia Outlook 2Q17 2T17 Chief Economist Juana Téllez juana.tellez@bbva.com +57 347 16 00 Fabián García fabianmauricio.garcia@bbva.com +57 347 16 00 Mauricio Hernández mauricio.hernandez@bbva.com +57 347 16 00 María Claudia Llanes maria.llanes@bbva.com +57 347 16 00 Alejandro Reyes alejandro.reyes.gonzalez@bbva.com +57 347 16 00 Natalia Roa angienatalia.roa@bbva.com +57 347 16 00 Intern BBVA-Research Jorge Sicilia Serrano Macroeconomic Analysis Rafael Doménech r.domenech@bbva.com Global Macroeconomic Scenarios Miguel Jiménez mjimenezg@bbva.com Global Financial Markets Sonsoles Castillo s.castillo@bbva.com Global Modelling & Long Term Analysisl Julián Cubero juan.cubero@bbva.com Innovation & Processes Oscar de las Peñas oscar.delaspenas@bbva.com Financial Systems & Regulation Santiago Fernández de Lis sfernandezdelis@bbva.com Countries Coordination Olga Cerqueira Olga.cerqueira@bbva.com Digital Regulation Álvaro Martín alvaro.martin@bbva.com Regulation María Abascal maria.abascal@bbva.com Financial Systems Ana Rubio arubiog@bbva.com Financial Inclusion David Tuesta David.tuesta@bbva.com Spain & Portugal Miguel Cardoso miguel.cardoso@bbva.com United States of America Nathaniel Karp Nathaniel.karp@bbva.com Mexico Carlos Serrano carlos.serranoh@bbva.com Turkey, China & Geopolitics Álvaro Ortiz alvaro.ortiz@bbva.com Turquía Álvaro Ortiz alvaro.ortiz@bbva.com Asia Le Xia Le.xia@bbva.com South America Juan Manuel Ruiz juan.ruiz@bbva.com Argentina Gloria Sorensen gsorensen@bbva.com Chile Jorge Selaive jselaive@bbva.com Colombia Juana Téllez juana.tellez@bbva.com Peru Hugo Perea hperea@bbva.com Venezuela Julio Pineda juliocesar.pineda@bbva.com 26
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