BALANCE THE CYCLE

Colombia 2013 | FINANCE | INTERVIEW

TBY talks to José Darío Uribe E., Governor of Colombia's Banco de la República, on milestones of 2012, the trade balance, and monetary policy objectives.

José Darío Uribe
BIOGRAPHY
José Darío Uribe has a PhD in Economics and has been in his current position since 2005. Prior to becoming Governor, he was Deputy Governor from 1998 until 2005. Previous positions include Head of Research at Banco de la República and Economic Adviser at the National Coffee Federation. He also spent a year at the National Department of Planning and was a Professor at Pontificia Universidad Javeriana from 1993 until 2007.

What were the milestones for Banco de la República over 2012?

The primary objective of monetary policy in Colombia is to maintain price stability. The operational target of monetary policy is an annual consumer price inflation of 3%. At the same time, monetary policy is intended to keep economic growth on a sustainable path. In order to achieve these objectives, Colombia applies a countercyclical monetary policy, whereby the interest rate is raised whenever economic growth exceeds its potential or either the inflation forecast or expectations for it surpass the target. Interest rate reductions are made when the opposite conditions prevail. This helps to prevent inflationary pressures at the peak of the cycle and to avoid an excessive redundancy of resources at the bottom of it.

By the beginning of 2012, a positive output gap had been identified. Moreover, different types of credit—particularly consumer credit—were growing at a high rate. There was a risk that this situation would intensify if left unchecked and pose a risk to the achievement of the inflation target. Accordingly, during the first two months of this year, the Board of Directors of the Banco de la República continued raising the policy interest rate until it attained a peak of 5.25%. This tightening started in February 2011 when the projections for both inflation and GDP growth as well as the behavior of domestic demand and consumer credit led the Board to conclude that the Colombian economy no longer needed the support of a 3% interest rate, which had been provided in the context of the international crisis of 2008-09. During the second half of 2012, economic activity started to show clear symptoms of deceleration.

The latest information shows that GDP growth in the third quarter (on an annual basis) was 2.1%, well below the economic performance observed during the first six months. Although some slowing down of the economy was expected given the previous tightening of monetary policy and the effects of the European crisis, this weakening turned out to be worse than expected. To some extent, external factors, such as weaker demand and lower prices for our commodities exports, explain this result. However, domestic factors also played an important role, with the shrinkage of public investment and private construction. Following its inherent countercyclical role, monetary policy reacted by reducing the policy interest rate to a level of 4.25% by year-end. This lower rate is expected to eventually provide a renewed stimulus to economic activity during 2013.

What are your expectations in terms of the trade balance?

We are expecting a current account deficit of around 3% of GDP in both 2012 and 2013. This is mostly explained by the moderate dynamics of Colombian exports as a result of decreasing prices and quantities due to the weak growth of the US economy—our main trading partner—and the contraction in the eurozone. Since 2004, the Colombian economy has received a substantial amount of FDI, which has increased at an average annual rate of 22% over the last six years and nowadays represents more than 4% of GDP. As a matter of fact, the strong increase in FDI is one of the main reasons behind the current account deficit in Colombia.

What are your plans for monetary and financial policies in 2013?

In the context of the flexible inflation targeting framework that Colombia has followed since 1999, the guidelines for monetary policy are well established and publicly known. As stated above, the Banco de la República is committed to price stability and, more precisely, to an inflation target of 3%, which the monetary authorities publicly reaffirmed for 2013. Monetary policy also seeks to maintain sustainable economic growth that is close to the potential productive capacity of the economy, which is estimated to be in a range of 4% to 5%. Accordingly, monetary policy will continue playing its key countercyclical role of avoiding situations of excess demand and providing timely support if the economy weakens. In a broader context, the recent experience of developed countries has shown that price stability is not a guarantee of financial stability. Therefore, in addition to its countercyclical role, the Banco de la República should emphasize macro-prudential issues aimed at preventing excessive risk taking by financial institutions. That is the reason the Banco de la República tries to prevent the interest rate from deviating from its “normal" level over significant and prolonged periods of time, so that it does not stimulate excessive risk taking or unsustainable increases in asset prices and in leverage.