Alphacast Highlight - Colombia December 2022 Macro Brief

All in all, the macro state of affairs shows several warning signs, which the consensus incorporates in its figures by pointing to a slowdown to 2.3% in 2023. Consumption is posed to decelerate in the context of high inflation (headline 12% YoY, food 27%) as real wage contracs. With the highest figure in the region, 75% out of Colombia's global demand is explained by private consumption. The country faces a large, risky twin deficit of the Current Account (-6.5%) and Fiscal Account (-5.9%). That said, the Governmet interest payments account for as much as 3.9% of GDP.

Activity

Colombia is the fastest-growing economy in the region. It is expected to grow 7.6% in 2022 fueled by the growth of exports, remittances and a positive fiscal shock pushed by the electoral cycle. Colombian Monthly GDP Estimate fell -0.6% MoM in October (vs. -0.03% in September) and it is 4.6% above the previous year's level. In addition, it was mainly boosted by tertiary sector activities, such as professional and business services, with a 0.1% MoM rise, while secondary and primary activities showed negative variations of -1.5% and -2.1% MoM, respectively.

Inflation

Given the government's expansionary policies and similar pressures from the supply side, Colombia is suffering from an elevated inflation rate. The election of a new government has also resulted in high uncertainty over the country's future monetary and fiscal policy - including concerns that the path to disinflation might be impeded. In November, headline inflation reached 12.5% YoY, the highest annual inflation rate in the last century, fueled by food prices which reached an annual increase of 27.1%. Also, inflation expectations moderated its growth but remain high, with 7.5% YoY expected for the next 12 months and 4.5% YoY for the next 24 months, both above the inflation target's superior limits.

Monetary Policy

Due to a rapid acceleration of inflation in 2021 and 2022, growing from below 2% YoY in 1Q-21 to above 12% YoY over the last two months, the Colombian central bank was the last country in the region to start the tightening cycle on October 2021, and since then the rate rose 1025 bp in 11 consecutive hikes, standing at 12% in December 2022. This seems not to be enough as the country's inflation continued climbing, but at least real interest rates reached positive levels in the last three months.

FX & Markets

Colombian Peso fell 20% in the year, ranking among the worst performers. A risky combo seems to be hitting the Colombian economy: the uncertainty around the political swing, with the first left-wing president ever, rising sovereign spreads (Embi +45 YoY), and collapsing business confidence. Colombia is a high beta FX, exposed to global risk aversion and, looking forward, its persistent twin deficit and political uncertainty puts the country in a risky position.

The EMBI Colombia JPM Total Return Index maintained a downtrend since Dec-20 and just broke this trend in October, rising two months in a row. Fully in line with global and regional bond markets, the Colombian index trades -18.8% YTD, impacted by the tightening of its MP rate and the FED's hawkish policy. Also, Colombia’s equity ETF plunged as the new left-wing president Gustavo Petro was elected in late June 2022, falling 37.7% since (GXG, -25% YTD). As of December 19, the GXG was trading at USD 19.9 (+1.3% from the Mar-20 low).

Fiscal

Colombia has high debt interest payments, which represents a serious fragility in the face of a hiking-rate environment that finds the Colombian economy with relatively high debt (67.9% GDP in Q2-22, -5.3pp vs. Q2-21). The pandemic ended with a decade of remarkable fiscal effort: compared to the worst primary deficit of the period (-1.8% GDP in Nov-16), Jun-22 closed at -2.1%, 0.4pp below the 5-year average. The overall deficit is the highest in the region (5.9% GDP vs. Argentina's 4.8% GDP and Brazil's 4.5%), +1.1pp with respect to the 5-year average. The recently elected Gustavo Petro assured in his campaign that he will seek to reduce these critical fiscal numbers with a tax reform that will increase the tax burden of large Colombian fortunes.

Trade & CA

Colombia's terms of trade had the highest increase of the region, boosted by energy prices, following an upward trend since March 2020 and moderating its growth after June 2022, accumulating a 78% increase up to September 2022. Also, the multilateral real exchange rate of the Colombian Peso is in the region's first place of bad performance with a depreciation of 31% since the beginning of 2020, worsening over the last months, related to the significant USD strengthening and the political uncertainty due to the elections. This should help to better the trade balance, which shows improvement since March 2022, and should help to decrease the current account deficit (of 6.5% GDP) which is unsustainable in the long term.