According to our forecasts, Colombia's economy will grow by 4.8% per year on average in 2014-2015. This is a high figure that will bring it close to the GDP growth figures achieved by the most dynamic emerging economies and distances it from a Latin America that has lost some of its shine, although still prospering. While Emerging Asia will grow by 6.5%, Latin America will advance by 2.4% in this same period. Colombia's brilliant prospects are nevertheless paradoxical if we take into account the fact that it is suffering from a significant negative shock: a 25% drop since July in the price of Brent quality oil, a product that accounts for approximately 70% of its exports.
This apparent contradiction can be explained by various factors. Although Colombia is among the 20 largest oil producers in the world, the importance of oil in growth terms is moderate as its economy is only relatively open.1 A recent report by the IMF analysing the impact in Latin America of different hypothetical drops in commodity prices concludes that Colombia belongs to the group of countries in the region whose growth would be least affected by a possible slump. If commodity prices fell by 10% in a given year, its GDP would shrink by 0.4 pps over the following three years while, in cases such as Peru, the same fall in commodity prices would lead to a reduction of 1.5 points.
Moreover, in the future Colombia will benefit from a reasonably prosperous international environment and especially from the good performance by its domestic demand to help it overcome the impact of falling oil prices. In this respect, it should be noted that, in the period 2012-2013 and the first half of 2014, the two fundamental components of domestic demand, public consumption and investment, grew by 4.5% and 7.3% annually on average, respectively.
In the domestic scenario, such robust growth reflects the positive effect of different factors of a structural nature. One initial element suggesting a bright future for Colombia's domestic demand is its demographics as the population is expected to grow by an annual average of 1.0% over the next decade. A second notable aspect is that Colombia continues to be one of the countries making the most progress with reforms in Latin America. For example, in certain aspects Colombia's oil reform in 2003 has been the model for Mexico's reform in 2013.2 But in addition to this emblematic reform, it is also worth noting the significant efforts being made to improve the legal framework for doing business (undergoing almost continuous reforms over the last decade), the fiscal reform of 2011 (reducing, precisely, the dependence of fiscal revenue on oil) and the tax reform of 2012. A third positive factor is the existence of few macroeconomic imbalances, placing the country in a comfortable fiscal position (in 2014 its public deficit will be around 1.5% of GDP and public debt around 34% of GDP, and the trend is for these figures to improve during the period 2014-2016) as well as with inflation under control, moving within the 3% zone between 2014 and 2016.
All this, together with the institutional reforms of previous decades (particularly the reform increasing the central bank's independence) has meant that Colombia has now a better economic framework in terms of institutional quality than many countries in Latin America. One last factor supporting the improved tone of domestic activity is the slow but appreciable progress in the country's peace process. In short, Colombia has one of the best short and long-term outlooks in Latin America.
1. Less than 20% of public revenue comes from oil and gas (compared with the average of 54% for the group of 16 main oil and gas exporters). Moreover, Colombia's net exports of oil and gas account for less than 10% of its GDP (the average for the 16 main oil and gas exporters as a whole is 26%).
2. The reform included the creation of a National Hydrocarbon Agency (independent and with broad regulatory powers), favourable treatment in terms of royalties and taxes, incentives and permits for international oil extraction companies and the modernisation of ECOPETROL, the state oil company.