Focus: Economy

On the Cusp

On the Cusp

Jun. 10, 2013

In 2012, Colombia posted GDP growth of 4%, down from 6.6% the year before. BBVA research predicts growth of 4.1% in 2013, with slowed growth in 1Q2013 to be offset by economic stimuli including interest rate cuts and job creation measures. Expected to inject vitality into household spending, the strategy could also result in increased car sales, which decreased by 18.5% in the first three months of 2013. Slow growth in 1Q2013 is a continuation of a slowdown experienced in 2H2012, with year-on-year increases in investment and exports falling from 9.7% and 6.6% in 1H2012 to 2.5% and 4.1% in 2H2012, respectively. This also resulted in a GDP growth drop from 5.1% to 2.9% in the same period.

Growth was led by the service sector in 2012, although manufacturing, which recorded 0% growth over the year, is expected to stage a recovery in 2013 and grow at 3% as the external environment recovers and the peso weakens. The agriculture sector, growing 2.6% in 2012, is also continuing its recovery, yet is still far behind the hydrocarbon, finance, transport, and retail sectors in terms of growth.


GDP growth is expected to hover around the 4% mark until significant improvement is seen in the US and EU markets, both key markets for Colombian products. Colombia's exporters have also struggled to adapt to recently enacted FTAs, with a 13% year-on-year drop in trade with the US between June 2012 and March 2013, despite early increases, indicative of the manufacturing sector's woes.

The average Colombian, however, continued to spend over 2012. Private consumption growth increased from 1.2% in 3Q2012 to 1.4% in 4Q2012, with cuts in the interest rate and increasing employment—unemployment dropped to 10.21% in March 2013 from 11.79% in February 2013—set to speed up growth over the coming two years. GDP growth is now predicted at an average of 2.7% in 1H2013 and 5.4% in 2H2013, helped along by private consumption growth that could reach 4.3% on average over the year (3.3% in 1H2013 and 8.6% in 2H2013). The same factors should also result in an increased amount of public works, a positive consequence of the improving security situation that will see the country's transport infrastructure receive much-needed investment in order to boost the activity of exporters. Public works could increase by as much as 9% in 2013, although this depends on both the public and private sectors.

Until exports recover, the current account deficit will remain at around 3% of GDP over the coming years, although it will be offset by a moderation in imports as the country's productive sectors work to counter the inflow of cheaper products resulting from the FTAs—in this regard, GM's announcement that it is working on a new press shop to produce body parts is key news if the automotive sector is to move from assembly to production.

Inflation stood at 2.43% at end-2012, with only a slight increase expected over 2013. The country will also remain comfortable when it comes to monetary policy, thanks to a low national debt of just under 5% of GDP.


Exports grew 5.7% over 2012, much lower than the 44.4% growth tallied in 2011. Imports increased 8.3% in the first 11 months of the same year, resulting in a trade deficit of $434 million in November. The country's trade environment has changed dramatically in recent years, with Colombia celebrating the one-year anniversary of its FTA with the US in May 2013 and the enactment of the EU-Colombia FTA in the same year. Colombia's trade with the EU grew 4.1% in the first nine months of 2012, “yielding a trade balance of over $1.19 billion," said Sergio Díaz-Granados Guida, Minister of Trade, Industry and Tourism. The government plans to increase the number of FTAs to 18 by 2014, with negotiations concluded with South Korea and continuing with Israel, Turkey, Costa Rica, and Panama. The Minister understands the need for improved infrastructure, however, if the country is to improve its export performance. “We are also making great efforts to improve competitiveness… in road infrastructure and the renovation of seaports and airports, among others," he commented. Sufficient transport infrastructure would allow the country to take advantage of the world's ongoing commodity boom, which it is currently missing in some key areas. One such area is coal, the production of which is down due to supply bottlenecks. In that respect, increasing access the coasts would be a serious boon to commodity exporters.

The current account deficit isn't a cause for concern, however, as external capital flows remain high. According to BBVA estimates, international reserves will increase by $12.1 billion between 2013 and 2014, due in part to FDI of $33 billion and high rates of monetary expansion in developed countries.


Colombia has improved its FDI environment in recent years in an initiative spearheaded by Proexport, under the Ministry of Trade, Industry and Tourism. According to Banco de la República data, $14.16 billion in FDI entered the country between January and November 2012, up from 12.9% compared to the same period in the previous year. In 1H2012, the most attractive sectors were commerce, restaurants, and hotels, which pulled in $811 million in FDI, $202 million more than in the same period in 2011. Other attractive sectors include oil, mining, agriculture, electricity, gas, water, and financial and business services. Over 1H2012, the top investors, excluding the oil sector, were Chile ($386.9 million), Anguilla ($315.6 million), the US ($268 million), Panama ($233.9 million), Bermuda ($212.3 million), the UK ($171.9 million), Canada ($115.8 million), Brazil ($92.8 million), Peru ($83.9 million), and the Netherlands ($82.8 million).

A large part of the country's FDI pull is its free trade zones (FTZs). The country boasts 3.9 million sqm of land across 36 permanent FTZs that offer benefits including 15% income tax, VAT exemption, and domestic market participation rights. Through expansion and the creation of new FTZs, total land within such zones is also set to increase to 9.3 million sqm by 2014.


Significant investment can be expected in the transport infrastructure sector in 2013. The Agencia Nacional de Infraestructura (ANI) is planning investments of $20 billion over the next two years, boosting investment in transport to 3% of GDP, 2% of which will be covered by PPPs by the end of the government's term. Manufacturing will likely return to growth in 2013, boosted by increased household spending and exports, and the productive sector will also continue to rally as agriculture production gains steam. Incoming tourist numbers are also on the up as security concerns abate, increasing by 3% in 2012 to reach 2.42 million. Following 11% growth in real estate in 2012, the sector can look forward to a more modest expansion of around 4% per year in 2013 and 2014 as high-value housing projects conclude and the commercial sector begins to dominate the industry. President Santos has also announced $3 billion worth of investment in ICT, in efforts to bridge the prosperity gap. Having reached the 1 million barrels per day (bbl/d) production milestone, the oil sector will also benefit from improved security as exploration moves into previously inaccessible areas. Oil export prospects are also looking good, as pipeline infrastructure is set to open up the Pacific coast, offering access to lucrative Asian markets.

More modest growth will underline the upcoming years, although BBVA research predicts 5% GDP growth in 2014 following 4.1% in 2013 as exports pick up, industrial production consolidates its recovery, and commercial and private investment support infrastructure development. An improved global economy is vital to Colombia, however, if it is to begin seeing the true benefits of its FTAs and ramp up exports.