Colombia Economic Outlook 4th Quarter 2017 Colombia Unit October 2017
Main messages 1. Global growth remains robust and includes more regions. Financial markets still favour emerging economies. +However, global downside risks remain 2. The economic slowdown seems to have ended in the second quarter. In the third quarter, there are signs of recovery to be seen in several sectoral indicators, although growth will remain low for the full year. 3. Better external conditions and the ending of internal shocks will allow a more dynamic 2018. The majority of economic sectors will show higher growth in 2018 than in 2017, however, their aggregate growth rate will still be low, with GDP growth of 2.0%. On the demand side, private domestic spending is recovering 4. Inflation showed a significant correction in the course of the year, it is expected that in 2018 it will consolidate around the Central Bank s target. Food and tradables have contributed to the slowdown observed, it is expected that by 2018 non-tradables will be supporting the reduction in inflation 5. In this context, the Banco de la República will be able to provide greater support to the economy with additional rate cuts. Once inflationary fears have been overcome, the central bank would have room to reduce its policy rate by at least 75 bps, placing it at a level of 4.5% which, given inflationary expectations, would be considered expansive
Contents 01 Global context 02 03 04 2017: breakeven point Drivers of growth in 2018 Balance of risks
01 GLOBAL The positive global environment is consolidating, but with downside risks
The positive global environment is consolidating Growth Robust and stable But with some decoupling between confidence and activity data More synchronised recovery 2 Due to improvement in emerging economies Weak Core inflation Indications of an upturn in wages, but doubts about sustainability Central banks moving towards normalisation High degree of uncertainty and different pace between the US and the euro zone Low financial volatility Tailwinds will gradually disappear Downside risks reducing in China and increasing in the US in the shortterm 5
dic-12 jun-13 dic-13 jun-14 dic-14 jun-15 dic-15 jun-16 dic-16 jun-17 dic-17 Global growth: robust and stable in 2H17 Growth of world GDP (Forecasts based on BBVA-GAIN (% QoQ) 1,2 1,0 0,8 Confidence indicators significantly improve and anticipate a more positive outlook than activity indicators Strong growth in world trade and a recovery in the industrial sector that continues Signs of strength in private consumption despite weaker tail winds 0,6 0,4 IC 20% IC 40% IC 60% Period Media Average periodo Growth Estimacion forecast de crecimiento Source: BBVA Research 6
2T10 4T10 2T11 4T11 2T12 4T12 2T13 4T13 2T14 4T14 2T15 4T15 2T16 4T16 2T17 More synchronised recovery between the different areas Growth synchronisation index between developed and emerging economies 70 60 50 40 30 20 10 Stable growth in EM / decelerating in DM Accelerating growth in DM / moderating in EM Accelerating growth in DM and EM Developed: - Strong rebound in the US - Positive surprise in Europe Emerging: Mild slowdown in China, although less than expected. Continues to support the rest of Asia Recovery in Russia and Brazil, which are no longer holding back world growth Growth is gaining traction in the countries of Latin America Increased support for growth from economic policies 0 The synchronisation index is the product of inverting the standard deviation of quarterly growth observed in countries. The index therefore associates less growth volatility among countries with a higher degree of synchronisation at global level. Source: National sources, Markit Economics and BBVA Research 7
4T09 1T10 2T10 3T10 4T10 1T11 2T11 3T11 4T11 1T12 2T12 3T12 4T12 1T13 2T13 3T13 4T13 1T14 2T14 3T14 4T14 1T15 2T15 3T15 4T15 1T16 2T16 3T16 4T16 1T17 2T17 Core inflation shows no warning signs The US and euro zone: wages (%, YoY) 3,5 Despite economic growth and the improvement in the labour market, core inflation remains at low levels 3,0 2,5 2,0 1,5 1,0 0,5 US average 1993-2017 Euro zone average 1996-2017 Doubts about the consolidation of incipient upticks in wages. Inflationary pressures contained Uncertainty about the determinants of inflation: are changes transitory or permanent? Caution of central banks, especially in developed countries. More monetary policy margin in emerging economies 0,0 Eurozona Zone USA EE.UU. Source: BBVA Research 8
Central banks are moving towards a very gradual normalisation process FED Balance sheet normalisation from October and next rate hike in December, with two more in 2018 Scaling back of bond purchasing in 2018, but no rate hikes are expected until mid 2019 ECB High degree of uncertainty: In the United States due to slowing inflation and the expected change to the FOMC in 2018 In the euro zone, bias towards more gradual tapering (euro strength) and a delay to the rate hike cycle (low inflation) 9
mar-15 jun-15 sep-15 dic-15 mar-16 jun-16 sep-16 dic-16 mar-17 jun-17 sep-17 Preference for emerging markets Preference for developed markets Financial markets still favour emerging economies Indicator of regional relocation of assets (standard deviation from the historical mean) 1,25 1,00 Weakness of dollar and low US bond yield boost the quest for profitability, which backs assets of emerging economies 0,75 0,50 0,25 0,00 Global liquidity will remain high, given the gradual process of normalisation of the Fed and the ECB, although these tailwinds will disappear -0,25-0,50-0,75-1,00-1,25 Source: BBVA Research and Bloomberg 10
Upward revisions of growth for Europe and China. Positive bias in South America USA EURO ZONE 2017 2.1 2018 2.2 2017 2.2 2018 1.8 CHINA MEXICO 2017 2.2 2018 2.0 2017 6.7 2018 6.0 SOUTH AMERICA WORLD 2017 0.6 2018 1.5 2017 3.4 2018 3.4 Up Unchanged Down Source: BBVA Research 11
The United States: sustained growth in spite of political uncertainty and natural disasters USA: GDP growth (YoY, %) 3,5 Hurricanes will have a moderate impact on activity, so we maintain growth forecasts for 2017-2018 3,0 2,5 2,0 1,5 2,6 2,9 1,5 2,1 2,2 Among the outstanding issues: - A tax reform yet to be clarified - Uncertainties about economic policy - Certain signs of financial vulnerability - And greater geopolitical risks 1,0 0,5 0,0 2014 2015 2016 2017 2018 Actual Prior Source: BBVA Research and the BEA 12
China: a more promising panorama in the short term China: GDP growth (YoY, %) 8,0 Slight upward revision of growth in 2017 due to better performance in 1H17 7,5 7,0 6,5 6,0 5,5 5,0 7,3 6,9 6,7 6,7 6,0 Slowdown in 2018 due to less supportive economic policies and currency appreciation. Uncertainty about the decisions to be taken at the Communist Party Congress In the long term, risks remain, although financial vulnerabilities have improved somewhat thanks to regulatory measures 4,5 4,0 2014 2015 2016 2017 2018 Actual Prior Source: BBVA Research and CEIC 13
Euro zone: increased growth due to strong domestic demand Euro zone: GDP growth (YoY, %) 2,5 Better consumption and investment behaviour, with a limited impact of the appreciation of the euro. 2,0 1,5 1,4 1,9 1,8 2,2 1,8 Very gradual increase in inflation towards the ECB target The normalisation of monetary policy will allow it to continue to support growth 1,0 0,5 Political and banking risks continue (Spain, Italy, support for the European project, Brexit, although they are more contained 0,0 2014 2015 2016 2017 2018 Actual Prior Source: BBVA Research and Eurostat 14
Global Risks: rebalancing from China to the US in the short term - Probability in the short term + Jun Current US EZ CHN Risk of deleveraging very high, but more contained in the short term (more gradual economic slowdown and strategy of the authorities) Need for reform of state companies Management of soft landing Political controversy and risks of cyclical slowdown Risk of financial instability: signs of overvaluation in some assets Fed exit risk: low, but high degree of uncertainty regarding strategy of increases. Political and banking concerns: More contained except in Spain ECB exit risk: low; very gradual beginning with tapering in 2018. - Severity + Upward bias Downward bias **Other risks: Geopolitical (North Korea); Protectionism (China, US) 15
02 2017: breakeven point There is evidence that the lowest point of activity may have been left behind in the second quarter of 2017
2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2011-2015 2017S1 2011-2015 2017S1 2011-2015 2017S1 2017S1 In the first half-year, the economy did not present a good picture GDP growth in 2017H1 compared with average growth in 2011-2015 GDP supply-side (%) 10 8 6 4 2 0-2 -4 GDP demand-side (%) 10 8 6 4-6 -8 2-10 0 Mining Construction Retail, restaurants, hotels Transport y telecommunications Industry Utilities Social and communal services Financial and business services Agriculture Investment Private consumption Public consumption Source: BBVA Research with data from DANE and Bloomberg 17
Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Sep-17 sep-02 sep-03 sep-04 sep-05 sep-06 sep-07 sep-08 sep-09 sep-10 sep-11 sep-12 sep-13 sep-14 sep-15 sep-16 sep-17 Based on weakened confidence indicators Consumer Confidence (Balance) Industrial and Trader Confidence (Balance) 40 50 40 30 30 20 20 10 10 0-10 0-20 -30-10 -40-50 -60-20 -30 Consumer Confidence Household component Country Component Commercial Confidence Industrial Confidence Source: BBVA Research with data from DANE and Bloomberg While there has been some recent improvement in indicators, their levels for the first half are low relative to their historical records 18
To a large extent, this is the product of important forces that decimated activity The Colombian economy simultaneously faced five negative forces, apart from the drop in oil prices: Devaluation, which led to an increase in the structure of costs and in imported goods Devaluation Inflation Loss of purchasing power "El Niño" phenomenon, which produced food price increases and affected agricultural supplies Inflation: the sharp rise in inflation led to a fall in households' purchasing power Corruption scandals Price of oil El Niño phenomenon Interest rates: the rise in inflation led to a marked increase in the policy rate. Tax reform: the need to replace revenues prompted a tax reform which raised VAT, making consumption more expensive Loss of disposable income Tax Reform Interest rate 19
There are some signs that show a better dynamism in the third quarter compared with the first half of the year Leading indicators* (change in 3Q17 relative to each reference) Energy Demand With respect to 1H17 With respect to 3Q16 4.5 2.2 Concrete -1.8-10.7 Licences 6.8-3.0 Industrial confidence* Consumer confidence* Non-traditional exports With respect to 1H17 With respect to 3Q16 6.9 13.9 Cement 5.0 3.3 Vehicle Sales 1.0-4.1 Coffee 23.4 17.1 Industry 1.6 1.3 Oil 1.1 1.7 Retail trade 0.4 1.3 * Demand data for energy, coffee and oil correspond to the whole quarter, the rest of the variables correspond to the average for July and August. Source: BBVA Research with data from DANE, Fenalco, ANH, Federación Nacional de Cafeteros, XM and Fedesarrollo. 20
The second half of the year will see better GDP growth Growth of half-yearly GDP (% variation YoY) 8 7 (p) (p) 6 5 4 3 2 1 0 jun-11 dec-11 jun-12 dec-12 jun-13 dec-13 jun-14 dec-14 jun-15 dec-15 jun-16 dec-16 jun-17 dec-17 jun-18 dec-18 Source: BBVA Research based on DANE data A slow recovery of the economy is consolidated, this will continue in a similar fashion in 2018 21
Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 In this context, inflation eased off throughout the year and the Central Bank was able to reduce its reference rate Inflation, total, food and basic (YoY change, %) 16 14 12 10 Monetary policy rate (year-end) 8% 7% 6% 5% 8 6 4 2 0 Administered Tradables Foodstuffs Non Tradables 4% 3% 2% 1% 0% 7,50% 5,75% 5,25% 4,50% 3,25% 2013 2014 2015 2016 3Q17 Policy Rate Real Policy Rate Real Policy Rate LR (2,0% a 1,5%) * One-year inflation expectations are used to calculate the actual rate Source: BBVA Research based on data from DANE and Banco de la República de Colombia These lower figures have helped remove friction from the economy allowing a gradual recovery of confidence and spending 22
03 Drivers of growth in 2018 Domestic demand is accelerating thanks to lower inflation and interest rates, boosting various sectors
Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 After overcoming supply shocks and the adjustment to VAT, inflation will rapidly approach 3% Inflation (YoY change, %) 9 8 (f) 7 6 5 4 3 2 1 4,2 3,2 0 Total Core Source: BBVA Research with DANE data Taking into account that much of the inflation shock came from food, this downward adjustment helps to improve household purchasing power 24
With this, the Central Bank could reduce its policy rate and provide greater stimulus to the economy Monetary policy rate (e.a., %) 8,0 7,5 7,0 6,0 5,0 4,0 3,0 2,0 1,0 5,25 4,5 4,5 0,0 IV 2016 I 2017 II 2017 III 2017 IV 2017 f I 2018 f II 2018 f III 2018 f IV 2018 f Nominal policy rate Real policy rate Real policy rate LR (2,0% to 1,5%) Source: BBVA Research based on data from Banco de la República de Colombia The central bank does not yet have a rate that can be considered expansive, it has taken the handbrake off the economy, which allows a more comfortable reaction 25
For 2018, we expect slightly higher growth than that observed in 2017 GDP growth: demand (YoY change, %) Household spending will benefit from lower interest rates and lower inflation 5 4 3 2 1 0-1 -2 2,0 2,0 2,1 1,5 1,6 2,5 1,8 3,5 1,5 1,2 3,7 Investment is showing great advances thanks to the civil works and the miningenergy projects Public consumption will present a slowdown due to the law of guarantees, the beginning of a new government and the need for austerity measures to comply with the fiscal rule -3-4 -5-3,6 GDP Private Cons. Public Cons. Investment 2016 2017p 2018p Source: BBVA Research with DANE data 26
The deterioration in urban unemployment will limit the acceleration in household spending Unemployment rate in 13 cities (% of EAP) 15 14 13 12 11 10 9 8 2018f: 11,2 9,9 2017f: 10,6 2016: 9,8 7 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 2016 2017 2018f Source: BBVA Research with DANE data Unemployment usually lags behind the economic cycle, so some deterioration in the labour market can still be expected 27
2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f 2017f 2018f This improved aggregate dynamic will be reflected in a recovery in the dynamic of most sectors GDP growth: supply (YoY change, %) 6 4 2 0-2 -4-6 Mining Industry Construction Retail Sales, restaurants and hotels Utilities Transport and Telecoms Social and Communal Services Financial and Corporate Services Agriculture Source: BBVA Research with DANE data The acceleration is evident in construction and industry, while social and communal services show lower performance. The farming sector, despite its slowdown continues to grow at its historical average 28
04 Macroeconomic Balances Despite the progress that has been observed in the macroeconomic balances, there is still an important task to be done to reduce the vulnerability of the economy
The path of reducing government spending to comply with the fiscal rule is demanding Central National Government Expenditure (% of GDP) Fiscal Deficit (% of GDP) 24 22 Total Expenditure 0 (p) 20 18 16 19,2 19,1 19,2 18,9 19,0 0,7 1,0 1,4 1,3 1,5 18,5 1,5 17,8 1,3-1 -2-2,3-2,4-2,2 14 18,5 18,1 17,8 17,6 17,5 17,0 16,5-3 -3,0-3,1 12-3,6 10 2013 2014 2015 2016 2017f 2018f 2019f -4-4,0 ICBF, SENA, Health transfers Expenditures different to ICBF, SENA, Health transfers -5 2013 2014 2015 2016 2017 2018 2019 Source: BBVA Research with data from the Ministry of Finance and Government forecasts 30
Private adjustment has been more appropriate, evidenced by a moderation in the current account Current account % GDP (US$ billions) 24 20 16 12 8 4 0-4 -8 Current Account Deficit (% of GDP) 3,2 5,1 6,4 4,4 4,0 3,6 12,3 19,4 18,8 12,5 12,4 11,7 2013 2014 2015 2016 2017p 2018p The slowdown in domestic demand between 2015 and 2016 allowed a significant adjustment in the current account deficit However, its adjustment must continue to achieve a level that is sustainable in the medium term. We expect the adjustment in the future to be more moderate than that observed in 2016 as a result of the recovery in spending Commercial Balance Factor Rent Current account déficit Service Balance Transfers Source: BBVA Research based on data from Banco de la República de Colombia 31
Factors playing a significant role in reducing the expected volatility in the exchange rate Exchange Rate Pesos per dollar 3600 3400 3200 3000 2800 3267 3435 3093 3100 2834 2838 2900 The exchange rate responds mainly to the perception of risk in the Colombian economy, therefore, maintaining a moderate current account deficit reduces the volatility of the exchange rate We expect an average exchange rate in 2017 of 2,960 pesos and a slightly more depreciated one in 2018 of 3,000 on average 2600 2400 2200 2000 2361 2015 2016 2017* 2018** Max-Min Average End of year At the same time, we expect a lower exchange rate operating range in 2017 and 2018 than in 2015 and 2016 when the current account deficit was considerably high * With data to 11 October (BBVA forecasting) ** BBVA forecasting, simulations of ranges are not necessarily forecasts Source: BBVA Research with Bloomberg data 32
Main messages 1. Global growth remains robust and includes more regions. Financial markets still favour emerging economies. +However, global downside risks remain 2. The economic slowdown seems to have ended in the second quarter. In the third quarter, there are signs of recovery to be seen in several sectoral indicators, although growth will remain low for the full year. 3. Better external conditions and the ending of internal shocks will allow a more dynamic 2018. The majority of economic sectors will show higher growth in 2018 than in 2017, however, their aggregate growth rate will still be low, with GDP growth of 2.0%. On the demand side, private domestic spending is recovering 4. Inflation showed a significant correction in the course of the year, it is expected that in 2018 it will consolidate around the Central Bank s target. Food and tradables have contributed to the slowdown observed, it is expected that by 2018 non-tradables will be supporting the reduction in inflation 5. In this context, the Banco de la República will be able to provide greater support to the economy with additional rate cuts. On overcoming inflationary fears, the central bank will have space to reduce its policy rate by at least 75 bps, placing it at 4.5%, which given inflationary expectations would be considered expansive
Colombia Economic Outlook 2Q17 This report has been produced by the Colombia Unit Head Economist, Colombia 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 Diego Felipe Suarez diegofelipe.suarez@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 Long-Term Global Modelling and Analysis Julián Cubero juan.cubero@bbva.com Innovation and Processes Oscar de las Peñas oscar.delaspenas@bbva.com Financial Systems and Regulation Santiago Fernández de Lis sfernandezdelis@bbva.com International 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 and Portugal Miguel Cardoso miguel.cardoso@bbva.com United States Nathaniel Karp Nathaniel.karp@bbva.com Mexico Carlos Serrano carlos.serranoh@bbva.com Middle East, Asia and Geopolitical Álvaro Ortiz alvaro.ortiz@bbva.com Turkey 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
ANNEX:
Main macroeconomic variables Table A1 Macroeconomic Forecasts 2013 2014 2015 2016 2017 2018 GDP (YoY, %) 4,9 4,4 3,1 2,0 1,5 2,0 Private consumption (YoY, %) 3,4 4,3 3,2 2,1 1,6 2,5 Public consumption (YoY, %) 9,2 4,7 5,0 1,8 3,5 1,5 Fixed investment (YoY, %) 6,8 9,8 1,8-3,6 1,2 3,7 Inflation (% YoY, eop) 1,9 3,7 6,8 5,7 4,2 3,2 Inflation (% YoY, average) 2,0 2,9 5,0 7,5 4,3 3,2 Exchange rate (eop) 1.927 2.392 3.149 3.001 3.030 2.970 Devaluation (%, eop) 9,0 24,1 31,6-4,7 1,0-2,0 Exchange rate (average) 1.869 2.001 2.742 3.055 2.944 3.000 Devaluation (%, average) 3,9 7,1 37.0 11,4-3,6 1,9 BanRep interest rate (%, eop) 3,25 4,50 5,75 7,50 5,25 4,50 Deposit interest rate (%, eop) 4,1 4,3 5,2 6,9 5,5 4,8 Fiscal nalance (% GDP) -2,3-2,4-3,0-4,0-3,6-3,1 Current account balance (% GDP) -3,2-5,2-6,5-4,4-4,0-3,6 Unemployment rate (%, eop) 9,7 9,3 9,8 9,8 10,6 11,2 36
Main macroeconomic variables Table A.2 Quarterly Macroeconomic Forecasts GDP Inflation Exchange rate BanRep rate (%, YoY) (%YoY, eop) (vs. USD, eop) (%, eop) Q1 14 6,5 2,5 1.965 3,25 Q2 14 4,0 2,8 1.881 4,00 Q3 14 3,9 2,8 2.028 4,50 Q4 14 3,2 3,7 2.392 4,50 Q1 15 2,6 4,6 2.576 4,50 Q2 15 3,0 4,4 2.585 4,50 Q3 15 3,2 5,4 3.122 4,75 Q4 15 3,4 6,8 3.149 5,75 Q1 16 2,5 8,0 3.022 6,50 Q2 16 2,5 8,6 2.916 7,50 Q3 16 1,2 7,3 2.880 7,75 Q4 16 1,6 5,7 3.001 7,50 Q1 17 1,2 4,7 2.880 7,00 Q2 17 1,3 4,0 3.038 5,75 Q3 17 1,6 4,0 2.938 5,25 Q4 17 1,7 4,2 3.030 5,25 Q1 18 2,1 3,5 3.015 4,75 Q2 18 1,7 3,2 3.000 4,50 Q3 18 2,0 3,3 2.985 4,50 Q4 18 2,0 3,2 2.970 4,50 37
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