Roberto Steiner - Colombia under the new global economic conditions FGV’s Brazilian Institute of Economics (IBRE) held, on 19 September 2014, the international seminar “Latin America and new global economic conditions”. The event addressed the issue of Latin American perspectives given imposed change, among other factors, caused by the slowdown in China and the gradual normalization of US monetary policy. The meeting was organized in three panels, which included national case studies from Argentina, Brazil, Chile, Colombia and Mexico. Visit FGV/IBRE's website at: http://www.fgv.br/ibre

1. América Latina
Colombia under the new global
economic conditions
Roberto Steiner | 2014
A AMÉRICA LATINA
E AS NOVAS CONDIÇÕES
ECONÔMICAS MUNDIAIS
seminário

2. Roberto Steiner
Fedesarrollo
Rio de Janeiro
September 19, 2014
Colombia under the new global
economic conditions

3. Colombia: For now, not much has
changed
o Stability in the prices of its most relevant commodities:
The price of oil has been stable; the price of coffee has gone up
o Favorable financial conditions:
Capital inflows have remained buoyant and a strong peso
continues to be a matter of concern
o Inflation remains on target, growth is robust and
unemployment, though high, has declined continuously
since December 2012
o Of concern, a weakening fiscal and current account
outlook in the context of tightening financial conditions

4. o Stability in the prices of the most relevant commodities:
The price of oil has been stable; the price of coffee has gone up
o Favorable financial conditions:
Capital inflows have remained strong and a strong peso continues
to be a matter of concern
o Inflation continues to be on target, growth remains
robust and unemployment, though high, has declined
continuously since December 2012
o Of concern, a weakening fiscal and current account
outlook

5. In a context of declining commodities prices…
Source: World Bank, Valores Bancolombia.
80
120
160
200
240
ago-11
feb-12
ago-12
feb-13
ago-13
feb-14
Index(Jan2,2008=100)
Gold
0
40
80
120
160
200
240
280
320
360
ago-11
feb-12
ago-12
feb-13
ago-13
feb-14
ago-14
Index(Jan2,2008=100)
Iron ore
40
50
60
70
80
90
100
110
120
130
ago-11
nov-11
feb-12
may-12
ago-12
nov-12
feb-13
may-13
ago-13
nov-13
feb-14
may-14
ago-14
Index(Jan2011=100)
Soybeans
60
80
100
120
140
160
sep-11
dic-11
mar-12
jun-12
sep-12
dic-12
mar-13
jun-13
sep-13
dic-13
mar-14
jun-14
sep-14
Index(Jan2,2008=100)
Copper

6. …the most relevant for Colombia are doing OK
20
40
60
80
100
120
140
sep-11
ene-12
may-12
sep-12
ene-13
may-13
sep-13
ene-14
may-14
sep-14
Brent Oil
Index(Jan2,2008=100)
0
50
100
150
200
250
sep-11
ene-12
may-12
sep-12
ene-13
may-13
sep-13
ene-14
may-14
sep-14
Index(Jan2,2008=100)
Coffee
Source: Valores Bancolombia – Federación Nacional de Cafeteros.

7. o Stability in the prices of its most relevant commodities:
The price of oil and coal has been quite stable and the price of
coffee has one up
o Favorable financial conditions:
Capital inflows have remained buoyant and a strong peso
continues to be a matter of concern
o Inflation continues to be on target, growth remains
robust and unemployment, though high, has declined
continuously since December 2012
o Of concern, a weakening fiscal and current account
outlook

8. FDI remains very strong
16.772
10.573
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
Left axis, USDMM % GDP
* Data until August 2014.
Source: Balanza cambiaria – Banco de la República.

9. Portfolio capital inflows, higher than ever
Monthly averages of Foreign Portfolio
Investment
Period USD Millions
2007-2010 49
2011 219
2012 273
2013 391
2014 (Jan-Aug) 1.216
117
535
1.999
914
1.020
1.680
2.273
1.194
(500)
0
500
1.000
1.500
2.000
2.500
ene-14
feb-14
mar-14
abr-14
may-14
jun-14
jul-14
ago-14
Foreign Portfolio Investment
2014
USDMillions
Note: Data for the latest month are preliminary (to August 29).
Source: Balanza cambiaria – Banco de la República.

10. Main reasons for robust K inflows:
1) A tax benefit in the 2012 tax reform and simplifications in
the taxation of foreign investors
• Tax reform (Law 1607, 2012): Reduction of the tax on foreign portfolio
investments from 33% to 14% --or 25% if coming from tax havens
• Decree 2218 of October 2013 simplified the withholding tax, to be made
only when investors receive coupon payments or sell the financial
instrument --before, there were monthly withholdings

11. 2) The rebalancing of the JP Morgan Index
• Increased weight of Colombian local public debt:
The GBI-EM Global Diversified (from 3.2% to 8%), the GBI-EM Global
(1.81 % to 5.6%) and the Global Diversified Index 15% (from 3.07% to
8.26%). The latter is the most important reference; 90% of the amount
indexed to JP Morgan indexes belong to this specific reference.
• The transition to the new weights is gradual, between May and
September
• An initial estimate is that around USD 196 billion were indexed to the
GBI-EM Global Diversified; this could imply additional K inflows to
Colombia of around USD 9 billion

12. Increased (observed & expected) K inflows have led to
a strong appreciation of the peso, only partially
reversed in the past two months
Source: Banco de la República.
1.750
1.800
1.850
1.900
1.950
2.000
2.050
2.100
0
10
20
30
40
50
60
28-feb-13
14-mar-13
28-mar-13
11-abr-13
25-abr-13
09-may-13
23-may-13
06-jun-13
20-jun-13
04-jul-13
18-jul-13
01-ago-13
15-ago-13
29-ago-13
12-sep-13
26-sep-13
10-oct-13
24-oct-13
07-nov-13
21-nov-13
05-dic-13
19-dic-13
02-ene-14
16-ene-14
30-ene-14
13-feb-14
27-feb-14
13-mar-14
27-mar-14
10-abr-14
24-abr-14
08-may-14
22-may-14
05-jun-14
19-jun-14
03-jul-14
17-jul-14
31-jul-14
14-ago-14
28-ago-14
$/USD
USDMillions
Dialy Exchange Intervention Representative Market Rate (Right Axis)

13. o Stability in the prices of its most relevant commodities:
The price of oil and coal has been quite stable and the price of
coffee has one up
o Favorable financial conditions:
Capital inflows have remained strong and a strong peso continues
to be a matter of concern
o Inflation remains on target, growth is robust and
unemployment, though high, has declined continuously
since December 2012
o Of concern, a weakening fiscal and current account
outlook

14. Source: Banco de la República.
Inflation has accelerated slightly but remains near the
mid-point of the target range
0
1
2
3
4
5
6
7
8
may-09
jul-09
sep-09
nov-09
ene-10
mar-10
may-10
jul-10
sep-10
nov-10
ene-11
mar-11
may-11
jul-11
sep-11
nov-11
ene-12
mar-12
may-12
jul-12
sep-12
nov-12
ene-13
mar-13
may-13
jul-13
sep-13
nov-13
ene-14
mar-14
may-14
jul-14
sep-14
%
Annual Inflation Core Inflation One year expectations

15. Growth has been strong
(close to 5.8% on average since mid-2013)
Source: FMI-WEO actualización Julio de 2014. Official statistics of the Central Banks and Statistical
Institutes of each country.
Country
Annual Growth, %
2013-I 2013-IV 2014- I 2014-II
Colombia 2,9 5,3 6,5 4,3
Brasil 1,9 2,2 1,9 1,4
México 0,6 0,7 1,8 1,6
Perú 4,6 6,9 5,1 1,7
Venezuela 0,8 1 -4,5 -4,0
Chile 4,9 2,7 2,4 1,9
Ecuador 3,6 5,2 4,9 _
6,5
4,3
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
mar-10
jun-10
sep-10
dic-10
mar-11
jun-11
sep-11
dic-11
mar-12
jun-12
sep-12
dic-12
mar-13
jun-13
sep-13
dic-13
mar-14
jun-14
%
Colombia: Annual GDP Growth

16. Growth and a reduction in non-wage labor costs have
led to a decline in unemployment & labor informality
Source: DANE.
12,6 12,7
11,5
10,9
9,9
9,3
6
7
8
9
10
11
12
13
14
15
jul-09
nov-09
mar-10
jul-10
nov-10
mar-11
jul-11
nov-11
mar-12
jul-12
nov-12
mar-13
jul-13
nov-13
mar-14
jul-14
%
Unemployment Rate
52,6
51,9
51,4
51,8
49,2
48,1
46
48
50
52
54
jun-09
oct-09
feb-10
jun-10
oct-10
feb-11
jun-11
oct-11
feb-12
jun-12
oct-12
feb-13
jun-13
oct-13
feb-14
jun-14
Proportion of the population in informal
employment
(13 cities, moving quarters)
%
Tax Reform

17. Together with robust economic activity, the rise in inflation has
brought about a 125 bp increase in the central bank policy rate
of interest since May
3,25
4,5
0,0
2,0
4,0
6,0
8,0
10,0
12,0
sep-08
ene-09
may-09
sep-09
ene-10
may-10
sep-10
ene-11
may-11
sep-11
ene-12
may-12
sep-12
ene-13
may-13
sep-13
ene-14
may-14
sep-14
%
Source: Banco de la República.

18. o Stability in the prices of its most relevant commodities:
The price of oil and coal has been quite stable and the price of
coffee has one up
o Favorable financial conditions:
Capital inflows have remained strong and a strong peso continues
to be a matter of concern
o Inflation continues to be on target, growth remains
robust and unemployment, though high, has declined
continuously since December 2012
o Of concern, a weakening fiscal and current account
outlook in the context of tightening financial conditions

19. Foreign Trade Dynamics
13,2
15,6
6,2
4,5
0
2
4
6
8
10
12
14
16
18
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%GDP
Export growth
Total Non Traditionals
11,4
15,0
0
2
4
6
8
10
12
14
16
18
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%GDP
Import growth
Source: Banco de la República.

20. Nominal and real exchange rate
1550
1600
1650
1700
1750
1800
1850
1900
1950
2000
2050
2100
28-mar-13
28-jun-13
28-sep-13
28-dic-13
28-mar-14
28-jun-14
USDMillions
Nominal Exchange Rate
70
75
80
85
feb-13
abr-13
jun-13
ago-13
oct-13
dic-13
feb-14
abr-14
jun-14
ago-14
Index(Jan1994=100)
Real Exchange Rate
Source: Banco de la República.

21. Trade Balance and Current Account Deficit
(% of GDP)
2,2
0,3
0,1 0,1
1,0 0,9
-0,1
-0,4
0,2
0,7
0,5
1,6
1,1
0,6
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%GDP
Trade Balance
*Fedesarrollo forecast.
Source: Banco de la República.
4,7
3,7
-1,5
-0,5
0,5
1,5
2,5
3,5
4,5
5,5
6,5
7,5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014*
%ofGDP
Current Account - FDI
FDI Current Account Deficit

22. The fiscal deficit has stabilized
-3,9
-2,8
-2,3 -2,4 -2,4
-1,1
-0,1
0,2
0,0
-4,5
-4,0
-3,5
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
2010 2011 2012 2013 2014
%GDP
Central Government
Total Fiscal Balance Primary Fiscal Balance
Source: Ministry of Finance.

23. The Medium Term Fiscal Framework acknowledges a decline in the oil
sector´s contribution to the budget
Source: Ministerio de Hacienda.
2,5
1,8
2,0 2,0 2,0
1,8
1,7
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2014 2015 2016 2017 2018 2019 2020
%GDP
Oil Revenues

24. And there are additional expenditure needs, as
recently recognized by the government
Yearly expenditure above what is in the latest Medium Term Fiscal Framework:
1. Agricultural and Rural Development: Could be 1% of GDP higher if a
peace agreement is finalized
2. Health: Conservative estimates call for additional expenditure of 0.8% of GDP
3. Quality of education: A study by “Fundación Compartir” suggests additional
expenditures of 0.3% of GDP
4. Early Childhood: A “Fundación Éxito” report estimates additional expenditure
of 0.4% of GDP
5. Pensions: Fedesarrollo estimates additional outlays of 0.3% of GDP

25. -2,4 -2,4 -2,3 -2,2 -2,1 -2,0 -1,9 -1,6 -1,4 -1,2 -1,0 -0,8
-3
-2,5
-2
-1,5
-1
-0,5
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023%ofGDP
Structural Balance of CG
There is a strong commitment to fiscal discipline
(FISCAL RULE)
Structural Deficit Targets
2014: 2,3% of GDP
2018: 1,9% of GDP
2022: 1,0% of GDP
Source: Ministry of Finance.
“Article 5° Fiscal Rule. (…) the National Government will enforce an annual
decreasing path for the Structural fiscal balance” Law 1473 of 2011.

26. In short, the fiscal outlook raises important
concerns
• Overall, expenditure needs may be 2% of GDP higher
than what is in the MFMP
• Political economy considerations point towards the
increase in several business-unfriendly taxes (corporate
income tax, wealth tax, FTT)
• At this stage, FEDESARROLLO forecasts growth at
4.1-4.7% in 2014 and at 4.1-5.9% in 2015