For LatAm, QE3 Impact on Financial Risk Is Key

The Fed’s QE3 will have varying effects by country in LatAm; however, there are a few broad strokes that color the region. QE3 comes at a moment when growth is weak across the board and policy action is widely needed. What QE3 signifies for LatAm, in this context, is not only related to the added […]

Colombia: Central Bank Surprises Markets by Hiking Rates

Colombia’s central bank (Banrep) increased the benchmark rate by 25 basis points to 3.25% at its February 25 meeting, the first hike after maintaining the rate at 3% for nine consecutive months. The decision surprised the markets and RGE as expectations were tilted toward an unaltered monetary policy rate. In its communiqué, Banrep said that the conditions keeping the rate at a low level had changed as domestic demand and credit dynamics had improved, economic growth is approaching its long-term trend, inflation projections are close to the middle of the target range and inflation expectations have deteriorated. Still, Banrep maintains that the new rate level is supportive of economic and employment growth and helps to keep inflation within the target range.

Colombian Growth Holds Steady in Q4

Banrep, the Colombian central bank, said that for Q4 2010 it expects similar growth to the 3.6% registered during Q3, driven mainly by external demand. Adverse weather conditions during late 2010 affected the agriculture sector, as well as construction, gross fixed capital formation and mining exports, which were reduced due to problems with extraction and transport. Borrowing, corporate debt and investment in machinery and equipment expanded at high rates as nominal and real interest rates are at historical lows. Household consumption continued to develop positively, reflected by improved consumer confidence and benefiting from a rise in formal employment for skilled workers. Foreign trade dynamics showed exports growing 19.5% annually by November, driven by mining, energy and coffee exports, while imports rose 34.5% during the same period.

Colombia’s Leading Economic Indicators Still Diverge

Colombia’s industrial production and retail sales likely continued to show divergent paths in November. RGE expects industrial production to grow by 2.4% y/y (3.5% y/y three-month moving average (3MMA) through September), constrained by external demand, especially from Venezuela; an overvalued currency; low industrial confidence (5.2% y/y) and still-weak energy demand (1.2% y/y). Meanwhile, retail sales likely expanded robustly by 17.7% y/y (15.2% y/y 3MMA through September), driven by the still-high but falling consumer confidence (25.9% y/y), strong car sales (80% y/y) and improving consumer credit conditions (11.8% y/y). This has certainly contained Colombia’s economic growth in H2 2010.

Colombia’s GDP Expected to Grow 4.1% in 2010

RGE expects Colombia’s GDP to expand by 4.3% y/y in Q3 2010 after growing 4.3% y/y in H1 2010, driven by strong private consumption rather than investment. In fact, retail sales (15.2% y/y) and consumer confidence posted solid gains in Q3 2010 while consumer credit recovered strongly (10.6% y/y). Investment is expected to remain limited due to poor industrial production (2.7% y/y) and energy demand (1.1% y/y). On the external front, exports likely profited from favorable oil prices—although limited by Venezuela’s ban—while imports followed gains in domestic consumption and low base (capital imports). On the supply side, commerce and mining should lead the growth, while manufacturing and construction will likely continue to disappoint. We expect Colombia to expand by 4.1% in 2010 and 4.3% in 2011.

Colombia’s Central Bank Stays on Hold

The Colombia’s central bank (Banrep) left its benchmark interest rate unaltered at 3% at its September 24, 2010, meeting, along with the market and RGE’s expectations. Although the latest inflation data was above Banrep’s expectations, inflation remains in line with Banrep’s technical studies, which show that inflation will probably rest within the target range in 2010 and 2011. According to the Banrep’s press release, core inflation remains stable and inflation expectations rest at low levels. The economic recovery is evolving as expected, and is not generating inflationary pressures. Recovering growth is witnessed through consumer confidence, private investment and the recovery of the financial system. With respect to the global economy, the press release mentioned that growth in Europe and in the U.S. will be less than previously forecast, while Asia and Latin America show better dynamics. Conditions are favorable for the sustainability of Colombia’s growth.

Colombia’s Central Bank to Stay on Hold

Colombia’s central bank (Banrep) will likely stay on hold at 3% at its September 24 monetary policy meeting, as current inflation, although rising, is still below the central bank’s target of 3% and inflation expectations remain well anchored. Moreover, the economic outlook points to a below potential recovery path. An overvalued currency and heightened global jitters call for a steady monetary policy rate. Needless to say, given the government’s increasing anxiety about the overvalued Colombian peso (COP), attention will be placed on the board discussion about this matter.

Urban Unemployment Increases in Colombia

The urban unemployment rate in Colombia increased to 13% in the May-July period. Last year’s value of 12.8% indicates that unemployment in Colombia remains at a crisis level and highlights the inability of the economy to boost job creation. Along with unemployment, the global participation rate (65.6% from 64.8% last year) and the occupation rate (57.1% from 56.6%) also increased. The biggest contributor to job creation was the retail, restaurants and hotels sector, totaling 30.5% of the occupied workforce. Compared with a year ago, the sector grew 4% y/y. Communal services increased 3.6% y/y and accounted for 22.7% of the total workforce. Manufacturing, which accounts for 17% of the total workforce, failed to grow, while real estate, with 9.6% of the total workforce, contracted 2.8% y/y.

Latin America: A Closer Look at Inflation and Growth Dynamics in Brazil, Mexico, Argentina and Colombia

Brazil:

The Central Bank Weekly Focus Survey released on February 19 showed that inflation expectations for year end 2010 continued to move away from the mid-point of the central bank target range of 4.5% (+ -2%), while the monetary policy rate (SELIC) stayed unchanged.  Moreover, GDP growth expectations for 2010 were revised marginally up and the real (BRL) for year-end 2010 stayed unchanged.

Latin America: Positive Growth Dynamics but Deteriorating Inflation Expectations

Mexico’s industrial production in December surprised to the upside indicating that positive momentum is likely to remain strong at the beginning of this year.  Central bank consensus reports from Colombia, Chile and Peru showed that inflation expectations for 2010 deteriorated but they remain within the central banks’ target ranges.  Chile and Peru’s central bank surveys showed upward revisions in growth forecasts.