Strong Export Performance Driving Colombia's Economic Growth

CHICAGO--(BUSINESS WIRE)--

Driven by domestic demand and a strong commodity export performance in 2011, Colombia's economy has continued to grow solidly since Fitch Ratings upgraded the country's foreign currency rating to 'BBB-' on June 22. Fitch expects Colombia's growth rate to exceed 4% in 2012, despite risks that a global slowdown and comparatively lower commodity prices could trim GDP growth next year.

As commodities have increased their weight in the export mix, the October ratification of Colombia's free trade agreement (FTA) with the U.S. could provide support for nontraditional export growth and investment. A manageable current account deficit and a relatively low external debt burden in combination with an adequate international reserve position and access to the International Monetary Fund's Flexible Credit Facility (FCL) support Colombia's investment-grade profile.

A generally healthy financial sector and improvements in the labor market (unemployment is now under 10%) support continued growth in domestic spending and credit creation. In addition, prudent monetary policy has generally kept inflation in check, lowering the risk of overheating. After raising interest rates during the first half of the year, Colombia's central bank has remained vigilant in its anti-inflation efforts. While inflation has risen above 4% in October, inflation expectations are still anchored within the central bank's target range.

Colombia's GDP growth could top 5% this year, as the country had a relatively slow recovery from the financial crisis due to curtailed exports to Venezuela. Exports are likely to grow by more than 30% this year, but this performance is not likely to be repeated in 2012 as global growth slows.

In 2012, the biggest risks to growth are the effects of a broad global slowdown, linked to severe weakness in Europe, potentially driving prices for oil, coal, and other exported commodities lower. Although only about 12% of Colombia's exports go to the European Union, a sharp pull-back in overseas demand could erode export growth and drive domestic consumer confidence lower if a commodity shock occurs. Nevertheless, the flexibility and credibility of Colombia's policy framework could provide some counter-cyclical support while maintaining macroeconomic stability.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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