Alphacast Highlight - Colombia October 2022 Macro Brief
The Colombian economy is still adapting to the political swing of the Petro Administration, the first left-wing president ever! The macro flashes multiple warnings, and consensus for 2023 points to deceleration to 2.3%. 75% of Colombia's global demand is explained by private consumption, the highest figure in the region, and consumption is posed to decelerate in the context of high inflation (11% Yoy Headline but 25% food) and real wage contraction. The country faces a large and risky twin deficit of the current (-6.2%) and Fiscal (-5.9%) accounts and the Gov. Interest payments account for as much as 3.9% of GDP. On the onset of a major political swing, the balance of risk for Colombia is looking negative.
Activity
Colombia is the fastest-growing economy in the region. It is expected to grow 6.0% in 2022, fueled by the growth of exports, remittances, and a positive fiscal shock pushed by the electoral cycle. Colombian Monthly GDP Estimate grew 1.4% MoM in August (vs. -0.3% in July) and is 8.6% above the previous year's level, mainly boosted by secondary sector activities, such as manufacturing and construction, with a 3.4% MoM rise.
Inflation
Moreover, Colombia is suffering from an elevated inflation rate, given the government's expansionary policies and similar pressures from the supply side; however, 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 September, headline inflation reached 11.4% YoY, fueled by food prices which reached an annual increase of 26.6%. Also, inflation expectations remain high, with 7% 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 11% 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 825 in 9 consecutive hikes, standing at 10% in October 2022. This seems not to be enough as the country's inflation continued climbing and real interest rates remain negative.
FX & Markets
Colombian Peso fell 21% 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 +92 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. Fully in line with global and regional bond markets, the Colombian index trades -23.2% 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 31.8 since (GXG, -27.3% YTD). As of October 28, the GXG was trading at USD 19.4 (+34% 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 (57.8% GDP in Q1-22, -4.4pp vs. Q1-21). 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, accumulating almost a 90% increase. Also, the multilateral real exchange rate of the Colombian Peso is in the region's first place of bad performance with a depreciation of 19% 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 6.2% GDP) which is unsustainable in the long term.
