Show of Promise

What are your priorities for the Central Bank and what legacy would you like to leave behind?

Priorities are the same at every central bank in the world: to keep inflation low, the economy close to its potential GDP, and to avoid crises. Financial and real shocks consistently affect our economies in Latin America. Additionally, and due to peculiar historical reasons, Colombia is the only country in the world where the central bank is in charge of many cultural activities like libraries and museums. Paradoxically this protects our monetary policy role since the country loves what the central bank does in this area. Cultural activities could play an important role in the development of the country after our peace agreement.

What is your strategy for reaching inflation targets whilst lowering interest rates to promote growth?

Colombia is again a special country in this area. We did not suffer from hyperinflationary periods during the 1980s, like Peru, Brazil or Bolivia, but inflation was close to 25% for more than 20 years during the 1970s and 1980s. This very likely means that the reduction of inflation to 3% (our long run goal) was very costly and that people still remembers. This produces inflation inertia, and changes long run expectations even when shocks are transitory. Our strategy, then, like in any other central bank targeting inflation, is to float the exchange rate, use short-term interest rates to keep the economy growing in a stable manner, and to avoid bubbles, which is not an easy task. Some temporary shocks (food price and the exchange rate devaluations) have hit the economy recently, expectations have increased much less than observed inflation, but improving communication will be essential to explain to Colombians that shocks are transitory with inflation returning to acceptable levels.

Is your macroeconomic outlook more positive for 2017?

2017 will be better than 2016 but we still have to make great efforts to reduce inflation and to improve economic growth. Every projection says that inflation will be within the 2-4% range at the end of the year or, if not, during the first half of 2018. This is important since inflation was higher than our 2-4% range during the last two years. Economic growth was close to 2% during 2016, and will probably be higher in 2017. Oil prices increased, and the uncertainty produced by the tax reform (already approved) and peace negotiations (already signed) will not hit the economy this year. We also think that a peace dividend will bring economic benefits during the following years, mainly in areas like tourism, trade, rural development, and foreign investment. Industry and agriculture will benefit from the recent devaluation of the exchange rate. But growth rates close to 2% are not enough, and Colombia has to regain the growth rates of 4-4.5% reached over the last 15 years. We have to save more, something related to fiscal surpluses and the pension system, and we have to open a very closed economy. Tariff reforms are also needed. We also need to modernize agriculture.

With changes in the US administration, what do you anticipate for the Colombia-US economic relationship going forward?

There is a lot of uncertainty at the international level, and the recent news produced by the US President seem to have increased volatility. On the other hand, there are serious doubts about the impact of Trump’s proposals. New roads will be built but government expenditure on roads will not increase GDP in an economy producing at its full potential. There are also doubts about the impact of trade restrictions. We all know that the impact of more protectionism is to reduce the exchange rate for imports and exports. On the other hand, there is this international debate about the causes of low manufacturing growth. If technology is the main reason then we will start to see some additional robots and engineers in Detroit. Results will also depend of the Fed’s reaction to Trump’s policies. I do not see a major impact on Colombia unless the world economy collapses.

If there are cash flow issues, how well protected is Colombia compared to other countries in the region?

Shocks are always an important reason to be worried in Colombia and Latin America, but I do not see significant imbalances at the moment. Colombia has always been ranked high when looking at our macroeconomic management. We have a flexible exchange rate and that eases the adjustment of the whole economy to shocks, and the deficit of the current account moved from 6.5% of GDP last year to less than 3.5%, which is still high. Foreigners own close to 35% of some parts of the domestic TES market, another reason to keep our economy in good shape, but I understand that the numbers are even higher in other neighboring countries. Many banks are involved in the construction of roads in the country and we just hope Odebrecht news does not affect road construction that much, though corrupt people should of course be punished. People tell you that banking standards are good, and we are trying to move slowly to Basel III. However, we have not yet reached that point.