1、Please refer to important information at the end of this report COLOMBIA:2019 OUTLOOK BUILDING MOMENTUM EMERGING MARKETS 23 January 2019 Luiz Eduardo Peixoto,Economist BNP Paribas do Brasil SA 2 02 INFLATION&MONETARY POLICY CORE INFLATION LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM 03 FISCAL POL
2、ICY RISKS FOR 2019 LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM 04 CHALLENGES OIL CRAVINGS LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM 05 RELEVANT INFO MAIN FORECASTS 01 CON
3、TEXT&OUTLOOK QUICK TAKE LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM OUR COLOMBIA GUIDE TO 2019 KEY RISKS LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM NEW CPI BASKET TAX REFORM PENSION REFORM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM
4、IPSUM OUR TEAM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM GDP GROWTH LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM MONETARY POLICY LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM 2020 AND BEYOND EXTERNAL ACCOUNTS STRATEGY LOREM IPSUM
5、 LOREM IPSUM LOREM IPSUM LOREM IPSUM CREDIT LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM RATING IMPLICATIONS LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM CONGRESS SUPPORT LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOREM IPSUM LOR
6、EM IPSUM LOREM IPSUM LOREM IPSUM KEY MESSAGES This is the BNP Paribas outlook on Colombia for 2019.We have analysed the broader context,the key risks and challenges,and the outlook for monetary and fiscal policy.We also examine the political support for reforms,the 2019 elections,and more.We remain
7、upbeat on Colombia.We expect 2019 to be a year of accelerating GDP growth to 3.5%y/y.End-year inflation was revised down to 3.3%,as inflationary risks abated and indexation pressures softened.We expect the central bank to start to normalise its rate policy in H2 2019,after its slightly expansionary
8、stance to date,and now forecast just two 25bp hikes in the year.In 2020,we expect BanRep to tighten policy,as the vulnerability in its external accounts become more apparent.Meeting medium-term fiscal targets remains a challenge.While we think the government will achieve a primary surplus of 0.5%of
9、GDP this year,2020 and beyond will likely require additional reforms,in our view.Domestic politics to play a key role.We explore the importance of the October local elections,and the strength of the presidents coalition in Congress.2019 ELECTIONS OIL SECTOR 3 Low inflation will allow an expansionary
10、 monetary policy .supporting economic activity,in a cyclical recovery Complying with the fiscal rule will require further reforms while risks from external accounts will rely on oil price COLOMBIA:QUICK TAKE All sources:DANE,BanRep,BNP Paribas.Dotted lines stand for BNPPs forecasts.40%33%25303540455
11、02000 2003 2006 2009 2012 2015 2018 2021 2024 2027Debt-to-GDPNo reforms scenarioReforms*scenarioBNPP(p)Output gapReal GDP growth,y/y-4-20246807 08 09 10 11 12 13 14 15 16 17 18 19Centre inflation targetHeadline CPICoreCPIOvernight policy rate1234567892010 2011 2012 2013 20142015 2016 2017 2018 2019B
12、rent:USD 50Brent:USD 70Brent:USD 60-4.2-4.0-3.8-3.6-3.4-3.2-3.0171819 KEY RISKS FOR 2019 4 TO THE DOWNSIDE GROWTH OUTLOOK Low dynamism and little diversification of the economy.Downtrend in consumer confidence.Conservative lending policy of retail banks.OIL Brent around USD50 per barrel could lead t
13、o an external shortfall closer to 4%of GDP and make it tough to meet fiscal targets.A wider current account deficit would raise expectation of a tightening cycle by the central bank.INFLATION&MONETARY CONDITIONS Severe El Nino event(H1 2019).Stickier than expected core inflation.FAILURE TO PASS REFO
14、RMS Tough political setting becomes norm for the Duque administration.Pension,oil/mining benchmark,fiscal and state reforms could fail.2020 budget to be discussed by Congress.TO THE UPSIDE GROWTH OUTLOOK Tax reform:capital goods rebates,reduction in corporate taxes.Job creation picks up.Sectoral and
15、 microeconomic reforms.LOWER INFLATION,EASIER MONETARY CONDITIONS Core inflation edges closer to 3.0%;indexed forces moderate.Oil prices allow a narrower current account deficit.Postponement of the normalisation cycle.TRADE DEALS Open economy could benefit from more integration.Pacific Alliance-Merc
16、osur deal.Possible adhesion to the Transpacific Partnership.TOURISM Tourist arrivals have soared since 2017,upward trend in place.Infrastructure improvements,better recognition abroad.5 GDP GROWTH:GAINING MOMENTUM Monetary policy sensitive activity subgroups(%y/y)We forecast GDP to grow by 3.5%this
17、year,accelerating from 3.0%projected for 2018.Economic activity gained some traction in H2 2018,and is expected to gain further,driven by domestic demand.The recovery is now broader-based and is now reaching subgroups that are sensitive to monetary policy.High unemployment,trade skirmishes,a soverei
18、gn rating downgrade,and oil prices remain relevant downside risks.The 2018 tax reform is seen as growth-positive,with an exemption of capital goods imports and a 4pp cut to the corporate tax rate(CST)expected to fuel investment.Consumer confidence has bounced back after plummeting in November,hurt b
19、y discussions over more taxes on goods and services.The survey partly captured the conclusion of the tax reform bill,meaning January has room for further improvement.Orders inflows improved last year,with inventories adjusted,boosting manufacturing output.Business trackers also remain solid,with pro
20、duction expectations suggesting expansion will continue in 2019.Construction activity is likely to remain on an upward trend after cement output increased sharply in Q4.Cuts to public investment of at least 1pp of GDP are expected for 2019,limiting growth,but will be more than offset by private acti
21、vity.Construction was a key driver of growth in the early 2010s.Sources:BNP Paribas.For details on the model,click here.Impact of monetary policy on GDP growth(bp)Sources:DANE,BNP Paribas.Expected impact Where we are:Q12019 Gross fixed investmentsBNP ParibasDurable goods sales indexConstruction acti
22、vity%-7.5-2.52.57.512.517.51415161718 OIL SECTOR:IMPROVED PERSPECTIVES 6 Production is expected to rise only modestly this year,but there is a sizable pipeline of investments.Around half of Colombias output comes from private sources,and the country will need to reduce legal uncertainties to attract
23、 more FDI.Oil reserves could double if alternative means of exploration,such as fracking,were allowed.Resistance to fracking and new mines is high,but the government seems open to the idea.Courts have restricted the validity of locally held public consultations.The sale of 8.5%of state-owned Ecopetr
24、ol could bring USD10 bn in revenues for the government.The Colombian government still holds 88.5%of the national oil behemoth,known for its solid management.Sources:MinHacienda,BNP Paribas Oil production(in million barrels per day)PROGRAMMED INVESTMENT,OIL SECTOR(in USD bn)1.1 0.8 1.1 2.3 3.6 3.9 20
25、1720182019ExplorationProductionSource:BanRep,MinHacienda,BNP Paribas Investments programmed for production to increase almost two-fold in 2019 Source:,ANH,IEA,BNP Paribas.IEAestimates0.8250.8750.9250.9751.0251.0751213141516171819 7 STRATEGY:MORE SUPPORTIVE IN EM AS A WHOLE MARKET VIEWS Our Strategy
26、team is now more positive on emerging markets globally.This view is largely based on inflows to EM which,according to our model,will be around USD44bn in the first three months of the year(see EM Flows Projection-One of the drivers of our bullish EM view for more).It is also a result of the slowing
27、US economy as the fiscal stimulus fades,interest rates rise and the trade war with China rumbles on-all of which are reasons for a US weaker dollar this year,in our view.BNP Paribas EM Strategys short-term Latam model suggests there is around a 5.3%gap between USDCOP market value and the models esti
28、mate of fair value for the pair.Meanwhile our long-term model(BNP Paribas FEER)suggests USDCOP should be trading at around 2,946 in the long term.We see key risks in oil prices and BanReps reserve accumulation programme,both of which have been pressuring the currency(see LATAM FX Quarterly:FEER mode
29、l update-Q1 2019 for more).Andre Digiacomo,FX&IR Latam Strategist|Banco BNP Paribas Brasil S.A Sources:BNP Paribas.-10-505101520252000200220042006200820102012201420162018El Nio occurrencesLa Nia occurrencesFood(%y/y)PPI,food(%y/y)8 INFLATION:LOWER CORE INFLATION SEEN Risks concerning El Nino have ab
30、ated We reduce our inflation forecast for 2019 to 3.3%y/y,as risks to the upside abate and those to the downside seem more flagrant.1)Lower tariffs,service adjustments early in 2019:disinflationary legacy from last year.Some prices are regulated by inflation(mainly in transportation)and should decel
31、erate by some 0.5pp.Price increases of indexed items should moderate by about 0.8pp this year,in our estimates,with the bulk of it manifesting in Q1,helping to drag down the prices of other services.As a result,non-tradable inflation will continue to fall.2)Drop in gasoline benchmark prices yet to f
32、ully materialise.The lower gasoline benchmark has yet to be fully incorporated.We estimate a 21%difference between the international benchmark and Colombias domestic prices.3)El Nino:Nothing critical,amid healthy levels of supply.Since Q4,El Nino has adversely impacted rainfall in the main agricultu
33、ral regions.Yet,the impact has been moderate up until now,with drought limited to a few states.El Ninos impact to be felt the most in March/April.Food supplies suggest price rises are expected to remain moderate when El Nino peaks this year.The El Nino monitors released this year suggest that we are
34、 near the peak of its intensity and the event is expected to fade in Q2.Sources:DANE,BNP Paribas.Dotted lines stand for BNPP forecasts.Non-tradable CPI,breakdown(%y/y)3.93.33.02.95.34.72345678Jan-15Jan-16Jan-17Jan-18Jan-19Indexed to past inflation(8%)FX sensitive(27%)Leases(61%)Sources:DANE,BNP Pari
35、bas.Dotted lines stand for BNPP forecasts.9 INFLATION:(NEW)BASKET CASE Consumer price inflation(%y/y)The consumer inflation basket will be revised,with full information being released on 5 February.Leaked details point to the following:Less volatility can be expected from less weight of food items.H
36、ousing to gain importance:Its weight will rise by 1.9pp to 32%.Headline could be pushed slightly higher as a result.Dane said it will“correct”biases due to tariffs from leases(which have been one of the main drivers of price rigidities recently and correspond to six-tenths of non-tradable CPI see fi
37、gure).Bogot will lose weight in the geographical weighting,but will remain big:down to 40pp from 44pp,while Cali will be down by 2pp to 9pp,making room to accommodate the expanded CPI coverage from 24 to 38 cities.Typically smaller cities have lower price adjustments than capital Bogota,particularly
38、 in services,which could push overall core slightly lower.Four instead of three wage groups:DANE will now report“poor”,“vulnerable”,“middle”,and“higher”as income subgroups.One-person households,previously not included,will now be considered when conducting surveys;14%of Colombian households are made
39、 up of only one person,according to DANE.There will be 12 subgroups instead of the current nine,allowing for easier analysis between core and non-core inflation,separating food services from goods.Sources:DANE,BNP Paribas.Highlighted changes,new CPI basket(in%of basket)Sources:DANE,BNP Paribas.0%2%4
40、%6%8%10%Other 22+smaller citiesBogot D.C.CaliMedellnCPI subgroupsCurrently2019 onwardschangeFoodFood inside home20.115.1-5.0Beef,pork,and chicken4.33.6-0.7Rice1.70.9-0.8Potato0.40.3-0.1Housing30.132.01.9RegulatedElectricity and gas3.84.20.4Fuels2.92.90.0%y/yCentre targetUpper target bound4 BanRep co
41、re inflation subgroups(average)Non-tradable2345605 06 07 08 09 10 11 12 13 14 15 16 17 18 1910 MONETARY POLICY:NO RUSH TO HIKE We expect a smooth normalisation cycle in 2019 BanRep is unsatisfied with the pace of economic recovery,and we think the risks are skewed towards less rate hikes in 2019 tha
42、n seen.We expect two 25bp rate hikes this year,reducing our end-2019 benchmark forecast to 4.75%from 5.00%.With inflation likely to remain near the target centre of 3.0%in H1 2019,we expect the central bank to remain focused on bringing growth back to potential,keeping policy rate in expansionary te
43、rritory during the year.Central bank officials see potential growth rates between 3.5%and 4.0%y/y,all below the current pace of expansion.We expect GDP growth to hit 3.5%y/y this year,accelerating in H2.Activity is gaining traction only gradually:In monetary sensitive subgroups,recovery has been err
44、atic,albeit improving.The neutral real rate of interest in Colombia is seen around 1.4%by BanReps technical team.The board has been reinforcing a benign outlook for inflation,seeing little signs of inflationary pressure ahead.It is also important to note that central bank officials have potential gr
45、owth estimates above the current pace of GDP expansion.On the other hand,a deterioration in external accounts could accelerate a normalisation cycle and remain a relevant risk.Current account trends remain tightly knit to oil prices(see Colombia:External imbalances linger on).Based on such vulnerabi
46、lities,we still expect BanReps policy rate to finish 2020 at 5.50%.Sources:DANE,BNP Paribas.Dotted lines stand for BNPP forecasts.Inflation core subgroups(%y/y)Sources:DANE,BNP Paribas.The blue line stands for BNPP forecasts.Neutral rate territory range(BanRep)Real rates ex-ante0.00.51.01.52.02.53.0
47、3.54.0141516171819 11 Real credit growth(%y/y)Delinquency rate(%of total loans)Lending rates have come down,but is yet to catch up with an easing cycle Share of credit concessions over time CREDIT:LENDING POLICY TO BECOME LESS CONSERVATIVE Sources:DANE,BanRep,BNP Paribas.Dotted lines stand for BNPPs
48、 forecasts.4.8 2.9 5.5 7.0-505101520Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19Total(100%)To companies(31%)To consumers(51%)To mortgage(15%)810121416345678BanRep target rate(pa)Average lending rate(pa,RHS)1%3%5%7%9%Mar-08Mar-10Mar-12Mar-14Mar-16Mar-18CompaniesConsumersMortgages51%31%15%3
49、%0%20%40%60%80%100%Mar-04Nov-06 Jul-09 Mar-12Nov-14 Jul-17MicrocreditMortgageConsumerCommercial FISCAL POLICY:RISKS EXIST FOR THIS A 2pp increase to an already high minimum wage will be an additional hurdle to job formalisation,which has stalled in recent years.Assumptions on additional government r
50、evenue could be missed The government plans to reduce evasion by 13%in 2019(50%in four years),by modernising the tax collection agency(DIAN).Measures could take longer than expected to result in actual revenue gain.JOBS&EVASION In May,the independent committee which revises the fiscal rule could onc
