Colombia: Arrangement Under the Flexible Credit Line
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
10 Jul 2013
eISBN:
9781484339992
ISBN:
9781484339992
Language:
English
Keywords:
ISCR; CR; FCL arrangement; Colombia; deficit; GDP deflator; stabilization fund; sustainability analysis; debt ratio; debt trajectory; Current account deficits; Global; nominal interest rate
Download PDF (1.5 MB)

This staff report on Colombia’s arrangement under the Flexible Credit Line highlights economic policies and development. Colombia’s economic performance in recent years has been very strong, underpinned by a very strong institutional framework and prudent macroeconomic management. Following a sharp slowdown in 2008–2009, output growth rebounded vigorously, and inflation stayed within the official target range. A very strong policy framework—comprising an inflation-targeting regime, a flexible exchange rate, effective financial sector supervisionand regulation, and a medium-term fiscal framework—provided policy space to undertake timely and effective countercyclical measures to mitigate the effects of the global financial crisis, and skillful policy management helped maintain strong growth with low inflation.

Abstract

This staff report on Colombia’s arrangement under the Flexible Credit Line highlights economic policies and development. Colombia’s economic performance in recent years has been very strong, underpinned by a very strong institutional framework and prudent macroeconomic management. Following a sharp slowdown in 2008–2009, output growth rebounded vigorously, and inflation stayed within the official target range. A very strong policy framework—comprising an inflation-targeting regime, a flexible exchange rate, effective financial sector supervisionand regulation, and a medium-term fiscal framework—provided policy space to undertake timely and effective countercyclical measures to mitigate the effects of the global financial crisis, and skillful policy management helped maintain strong growth with low inflation.

Background

1. Colombia’s economic performance in recent years has been very strong, underpinned by a very strong institutional framework and prudent macroeconomic management. Following a sharp slowdown in 2008–09, output growth rebounded vigorously and inflation stayed within the official target range. A very strong policy framework—comprising an inflation-targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a medium-term fiscal framework—provided policy space to undertake timely and effective countercyclical measures to mitigate the effects of the global financial crisis, and skillful policy management helped maintain strong growth with low inflation thereafter. Three successive FCL arrangements have supported the authorities’ policies by providing a significant buffer against global risks (access under the three arrangements varied in line with the outlook for global risks at the time of the authorities’ request).

2. Adverse risks to the global outlook continue to loom large. While global financing conditions have improved since 2012, significant risks to the global economic outlook persist. Key short-term risks include a standstill or incomplete delivery of policy commitments at the Euro area level or its individual members, a contractionary fiscal policy shock in the United States, a deeper than expected slowdown in emerging market economies, and a sudden increase in global risk aversion. Key medium-term risks include a protracted period of slow growth in Europe and distortions arising from the exit from unconventional monetary policies in advanced economies. The materialization of these shocks could significantly alter global growth prospects and financial conditions, and affect Colombia’s economy and external accounts. In particular, a slowdown in global growth would reduce the demand for Colombian exports, while a steep drop in oil prices would adversely affect its export revenues (commodity exports account for 70 percent of total exports) and inflows of foreign direct investment (mainly destined to oil and metals). A prolonged rise in global risk aversion would increase Colombia’s risk premium, dent investors’ confidence, and reduce financing to both the private and public sectors.

uA01fig01

Global Financial Stability Map

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Source: GFSR.

3. Since the approval of the last FCL arrangement (in May 2011), some global risks have intensified. According to the global financial stability map presented in the Global Financial Stability Report (GFSR), macroeconomic and emerging market risks have risen since 2011 and other risks remain elevated. Moreover, the current global growth outlook (for 2013–14, as reflected in the April 2013 World Economic Outlook) is more pessimistic than the global outlook in April 2011 (for 2011–12). In addition, policy actions in advanced economies have further eased monetary and financial conditions, increasing global liquidity and capital flows to emerging markets. Global liquidity conditions and external financing flows to emerging economies may tighten in coming years (for example, if potential bond market stress in advanced economies increases global risk aversion).

4. The authorities are of the view that the FCL has provided them space to further strengthen their policy framework and policy buffers. The fiscal policy followed in recent years has further strengthened the fiscal position, and resulted in a gradual decline of the structural fiscal deficit and the public debt-to-GDP ratio. In addition, since the last FCL arrangement was approved (in May 2011), the authorities adopted reforms to improve the management and distribution of oil and mining royalties, and sanctioned and began implementation of a structural fiscal rule at the central government level. With inflation firmly anchored within the official target range, they also have had ample policy space on the monetary front, which they have used judiciously. The flexible exchange rate has remained a key shock absorber amidst strong capital inflows, and international reserves have increased considerably. Moreover, in the context of the 2012 FSAP update, the authorities have set out an ambitious reform agenda to further strengthen the resilience of the financial system.

Recent Developments

5. Output growth moderated in 2012, owing to earlier policy tightening and tepid external demand. As real GDP growth surged to nearly 6 percent in 2011 and the output gap closed, the authorities appropriately tightened policies (in line with Fund advice) to stave off potential overheating pressures. A 225-basis points rise in the monetary policy rate between February 2011 and February 2012, combined with some fiscal tightening and macro-prudential measures to stem high credit growth, brought about a welcome moderation in domestic demand growth. Ripple effects from a weak external environment and peso appreciation contributed to a rapid slowdown in the manufacturing and agricultural sectors in the second half of 2012, adding to the negative impact of unexpected supply shocks (e.g., disruptions in oil production) on economic activity. Overall, these factors lowered real GDP growth to 4 percent in 2012.

6. Strong capital inflows more than financed a broadly stable external current account deficit (in percent of GDP), resulted in a large balance of payments surplus and put upward pressure on the peso. Despite high export prices and the moderation of domestic demand growth, the external current account deficit in 2012 ended at broadly the same level as in 2011 (3 percent of GDP), reflecting a strong demand for investment-related imports, and large profit repatriations by multinationals. The financial account posted a sizable surplus (of about 4½ percent of GDP), driven by large net inflows of foreign direct investment. The strong balance of payments put upward pressure on the peso, which strengthened in nominal terms by about 9 percent during 2012. The real effective exchange rate appreciated by about 6 percent.

7. Inflation and unemployment declined, and credit growth started to ease. After peaking at 4 percent in late 2011, headline inflation fell to 2 percent (y/y) by April 2013, the bottom of the 2–4 percent official target range, reflecting the lagged effect of the 2011 tightening of policies and currency appreciation. Despite these changes, inflation expectations remained well anchored within the official target range. Unemployment fell to about 10 percent, continuing the declining trend experienced over the past decade. Credit growth to the private sector, which was above 20 percent (y/y) by late 2011, slowed to 15 percent (y/y) as of February 2013, while non-performing loans remained low at 2.9 percent.

8. The authorities have adjusted monetary policy stance in response to the changing conditions. As it became clear that the economic slowdown in 2012 would be somewhat more pronounced than originally envisaged, the central bank reassessed its policy stance and lowered the policy rate by 100 basis points between July and December of 2012. In addition, the central bank took advantage of the large capital inflows to allow some appreciation and increase international reserves by more than US$5 billion.

Outlook and Policies

9. Economic growth is expected to increase in 2013 and hover at around potential thereafter. Real GDP growth in 2013 is likely to exceed 4 percent and thereafter stabilize at about 4½ percent. Inflation is projected to remain subdued, with expectations well anchored at the midpoint of the 2–4 percent official target range. The external current account deficit is expected to remain at about 3 percent of GDP in 2013 and decline to about 2.7 percent of GDP in 2014, mainly as a result of higher commodity exports. Net private capital inflows are projected to remain strong, reflecting both solid domestic fundamentals and abundant global liquidity.

10. The medium-term policy stance strikes a reasonable balance between supporting activity and strengthening policy buffers.

  • Fiscal policy. The budget for 2013 envisages an increase in public investment on infrastructure, while adhering to the authorities’ medium-term fiscal consolidation target. The central government’s structural deficit is projected to decline to 2¼ percent of GDP by 2014 (3 percent of GDP in 2012). Under the structural balance rule for the central government (enacted in 2011), this deficit is envisaged to fall below 1 percent of GDP by 2022. For the public sector as a whole, the overall deficit is projected to fall below 1 percent much sooner.

  • Monetary policy. Monetary policy continues to be conducted in a manner consistent with an inflation targeting framework. A decline in expected inflation since mid-2012 allowed the central bank to lower the policy rate to 3¼ percent as of March 2013 to support activity amidst higher global uncertainty. With inflation expectations firmly anchored within the official target range (Figure 1), the central bank still has policy space to ease further if economic conditions warrant it.

  • Exchange rate and reserves. The flexible exchange rate has continued to help absorb external shocks. Also, as noted, the central bank is taking advantage of large capital inflows to rebuild further international reserve buffers (thus improving reserve coverage according to standard metrics, Figure 6 and Table 2). International reserves increased by US$2.6 billion in the first four months of 2013, on top of a US$5 billion increase in 2012. At US$39.6 billion, the level of international reserves as of end-April appears broadly adequate for “normal” times, but not yet large enough to offset the impact of large shocks.

Figure 1.
Figure 1.

Colombia: Recent Economic Developments

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Sources: Haver Analytics; and Fund staff estimates.Note: LA4 represents the simple average of Brazil, Chile, Mexico, and Peru.
Figure 2.
Figure 2.

Colombia: Financial Market Developments 1/

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Sources: IFS; Haver; Datastream; and Fund staff estimates.1/ LA4 represents the simple average of Chile, Brazil, Mexico, and Peru.
Figure 3.
Figure 3.

Financial Soundness Indicators: Colombia and Other Emerging Markets

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Source: April 2013 GFSR Statistical Appendix.
Figure 4.
Figure 4.

FCL Cases Compared with Distribution of Historical Shocks to Emerging Market Economies

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Source: Fund staff estimates.1/ X-axis for FDI is change relative to preceding 3-year average, for fuel price is growth rate, Y-axis is probability density.2/ X-axis is rollover rate, Y-axis is probability density.
Figure 5.
Figure 5.

Colombia: FCL Qualification Criteria

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Sources: Banco de la República; Ministerio de Hacienda y Crédito Público; Datastream; Haver; and Fund staff estimations.1/ Combined permanent ¼ standard deviation shocks applied to interest rate, growth, and non-interest current account balance.2/ Includes data through end 2012.3/ Combined permanent ¼ standard deviation shocks applied to real interest rate, growth, and primary balance.4/ One-time 10 percent of GDP increase in debt-creating liabilities.
Figure 6.
Figure 6.

Colombia: Reserve Coverage in an International Perspective 1/

Citation: IMF Staff Country Reports 2013, 201; 10.5089/9781484339992.002.A001

Sources: World Economic Outlook; IFS; and Fund staff estimates.1. The reserve metric proposed in “Assessing Reserve Adequacy” (See www.imf.org under “Publications”) stands at 155 percent for Colombia, compared to a suggested adequate range of 100-150 percent.2. GIR at the end of 2012 in percent of Short Term debt at remaining maturity and projected current account deficit for 2013. The current account is set to zero if it is in surplus.
Table 1.

Colombia: Selected Economic and Financial Indicators

article image
Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; and Fund staff estimates and projections.

Poverty and extreme poverty rates estimated by the World Bank as the percentage of the population living on less than US$2 and US$1.25 a day at 2005 puchasing power parity, respectively. Under the authorities’ poverty and extreme poverty line definitions, the poverty and extreme poverty rates stood at 32.7 and 10.4 percent of the population, respectively, in 2012.

Includes the quasi-fiscal balance of Banco de la República, Fogafin balance, net cost of financial system restructuring, and statistical discrepancy.

Includes Ecopetrol and Banco de la República’s outstanding external debt.

Includes external debt of remaining maturity of less than 1 year.

Table 2.

Colombia: Summary Balance of Payments

article image
Sources: Banco de la República; and Fund staff estimates and projections.

Mainly deposit flows of public sector entities abroad.

Includes net portfolio investment.

FLAR is Fondo Latinoamericano de Reservas.

IMF definition.

Figures for 2009 include SDR allocation to Colombia amounting to US$972 million.

Original maturity of less than 1 year. Stock at the end of the previous period.

11. Ambitious reforms to further strengthen Colombia’s policy framework and economic resilience are underway. In December 2012, Congress approved a comprehensive tax reform that will help reduce nonwage labor costs and inequality, facilitate tax administration and compliance, and promote job creation in the formal sector. The latter may also strengthen the competitiveness of the industrial sector and help reduce Colombia’s dependence on the oil and mining sectors. The authorities are also weighing options to increase coverage and fairness in the public pension system, which would further increase incentives for formal sector employment. In addition, as noted, the government is committed to address the FSAP recommendations (IMF Country Report 13/50) in order to further strengthen the financial system (e.g., including by improving the risk-based approach to supervision and further strengthening consolidated supervision of financial conglomerates). In turn, continued financial deepening would also contribute to reducing volatility stemming from the relatively small domestic financial market.

Role of the Flexible Credit Line Arrangement

12. The authorities are of the view that external downside risks remain elevated, and have expressed interest in a successor 2-year FCL arrangement, which they intend to treat as precautionary. They consider that global risks have lasted more than what they had anticipated in 2011 and that access to resources from the FCL would remain useful to provide the breathing space to further strengthen their policy framework and increase policy flexibility in the face of continued uncertainties. They further argue that notwithstanding their efforts to rebuild buffers, international reserves (relative to various metrics) remain below values prevailing before the global financial crisis (see Table 2).

13. Colombia would be particularly affected by a sharp decline in commodity prices. In 2012, commodity exports (mostly oil) accounted for about 70 percent of total export revenues. In addition, the bulk of foreign direct investment inflows are channeled to commodity-related projects (e.g., oil and mining). A sharp and prolonged fall in the prices of Colombia’s main commodity exports would weaken significantly its balance of payments and increase external financing needs.

14. Lower global growth or a surge in global risk aversion also would affect Colombia. Colombia has strong trade links with the U.S. and Europe (accounting for over half of total exports), as well as with China and Venezuela (about 5½ and 4½ percent of total exports, respectively). Its current account balance, public finances and output are dependent on its trade with its main partners, and would thus be adversely affected by lower growth in any of them. On the financial side, a sudden increase in global risk aversion that lowers the inflows of private capital to emerging markets could create rollover difficulties, especially for the private sector.

15. In staff’s view, access under a two-year FCL arrangement in the order of about US$5.8 billion (SDR 3.87 billion or 500 percent of quota) would provide reasonable coverage against these global risks. Colombia’s trade and FDI linkages have increased in recent years, reflecting the country’s continued integration to the global economy and transformation into a more open, dynamic economy.1 As a result, Colombia’s balance of payments flows have increased in nominal terms, increasing their sensitivity to changes in commodity prices and rollover risks. In fact, applying the same set of shocks to the projected external financing requirements of Colombia for 2013–14 as those applied at the time of the request of the 2011 FCL arrangement (to the projected financing requirements for 2012–13) leads to sizable financing needs. As Table 3 shows, if all those shocks (which are mild compared to past crises and other FCL requests, Box and Figure 4) were to materialize over the same 12-month period, Colombia’s balance of payments inflows would be about US$9.5 billion lower than in the baseline projection for 2013 and 2014. The scenario further assumes that about 30 percent of that (notional) shortfall could be absorbed by foregoing the increase in international reserves projected for 2013–14 in the baseline balance of payments projection (Table 2). Accounting for this, the combination of shocks would give rise to net external financing needs of about US$6.9 billion, on average, compared to the baseline.

Table 3.

Colombia: External Financing Requirements and Sources

(In millions of U.S. dollars)

article image
Sources: Banco de la República; and Fund staff estimates.

Including financial public sector.

Original maturity of less than 1 year. Stock at the end of the previous period.

Estimate for 2009 includes the SDR allocation (US$972 million).

IMF definition that excludes Colombia’s contribution to Fondo Latinoamericano de Reservas (FLAR) and includes valuation changes of reserves denominated in other currencies than U.S. dollars.

Assumes build-up of Ecopetrol dividends as a safeguard against long-term fiscal liabilities.

Original maturity of less than 1 year. Stock at the end of the current period.

Includes all other net financial flows (i.e. pension funds, other portfolio flows), Colombia’s contribution to FLAR, and errors and omissions.

Table 4.

Colombia: Operations of the Central Government 1/

(In percent of GDP)

article image
Sources: Ministry of Finance; Banco de la República; and Fund staff estimates and projections.

Includes central administration only.

The increase in tax revenue in 2012 reflects the elimination of the fixed asset tax credit, which was part of the end-2010 tax reform.

Payments for fuel subsidies granted in 2007-08 were distributed across the 2007-2009 budgets. A fuel price stabilization fund was created at end-2008 to eliminate fuel subsidies.

Includes income tax payments and dividends from Ecopetrol corresponding to earnings from the previous year.

In percent of potential GDP. Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends.

Excludes private pension transfers from revenues.

Table 5.

Colombia: Operations of the Combined Public Sector 1/

(In percent of GDP)

article image
Sources: Ministry of Finance; Banco de la República; and Fund staff estimates and projections.

Combined public sector includes the central, regional and local governments, social security, and public sector enterprises. From 2008 onwards, including projections, figures exclude Ecopetrol operations and privatized health care.

Includes royalties, dividends and social security contributions.

Expenditure reported on commitments basis.

Payments for fuel subsidies granted in 2007-08 were distributed across the 2007-2009 budgets. At end-2008, a fuel price stabilization fund was created to eliminate fuel subsidies.

Includes adjustments to put spending on commitment basis and the change in unpaid bills of nonfinancial public enterprises.

Interest payments on public banks restructuring bonds and mortgage debt relief related costs.

Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends.

Excludes private pension transfers from revenues.

Includes statistical discrepancy.

Includes income tax payments and dividends from Ecopetrol that correspond to earnings from the previous year, and royalties to local governments.

Includes Ecopetrol and Banco de la República’s outstanding external debt.

Table 6.

Colombia: Monetary Survey

article image
Sources: Banco de la República; and Fund staff estimates.

Includes the Central Bank.

Table 7.

Colombia: Medium-Term Outlook

article image
Sources: Colombian authorities; and Fund staff estimates and projections.

The definition of public savings and investment changes starting in 2006 and includes only the general government.

Excludes ECOPETROL for 2008-12.

Includes statistical discrepancy.

Includes debt of the non-financial public sector, including Ecopetrol, plus FOGAFIN and FINAGRO.

Defined as gross debt minus financial assets (public sector deposits in domestic and foreign financial institutions).