January 14, 2009
1. This statement reports on developments since the issuance of the staff report for the 2008 Article IV Consultation. It does not change the thrust of the staff appraisal.
2. Recent data releases point to a continued economic slowdown, consistent with staff projections.
Real GDP growth declined to 3.1 percent (y/y) in the third quarter, driven mainly by weaker domestic demand. Recent figures on industrial production and retail sales are also consistent with the further slowdown envisaged by staff for the fourth quarter. We are keeping our GDP growth estimates unchanged, both for 2008 and 2009.
Headline inflation was 7.7 percent (y/y) in December, slightly above the staff forecast, owing largely to higher food prices.
3. Declining oil prices are leading to a widening of the external current account deficit. The current account deficit is now expected to be 3½ percent of GDP in 2008 and 3½-4 percent of GDP in 2009. Additional public sector external borrowing is expected to help finance the larger deficit in 2009.
4. The authorities eased monetary policy in late December. The Banco de la República reduced its policy rate by 50 basis points (to 9.5 percent), citing the continued weakening of economic activity and improved inflation expectations.
5. The authorities have recently indicated that they will allow some further easing of fiscal policy in 2009. The target for the overall deficit of the combined public sector will now be about ½ percent of GDP higher than envisaged in the budget. The authorities have reiterated their commitment to their medium-term fiscal targets, and staff continues to project that public debt will decline steadily as a ratio of GDP.
6. Colombia has taken advantage of improved global financial conditions to tap international capital markets. Following the recent decline in sovereign bond spreads, in early January the government placed US$1 billion (½ percent of GDP) in 10-year bonds, at a yield of 7½ percent. Financial conditions have also improved in the domestic markets, with long-term government bond rates having declined by about 250 basis points between early November 2008 and early January.