Morgan Stanley Sees Colombia Forfeiting Growth to Curb Inflation

  • Latin American nation should increase rates, cut spending
  • Central bank urged to hike rate to 6.5% by March meeting

Colombia needs to keep increasing interest rates and cut government spending, even if it means sacrificing economic growth, to cope with the drop in prices for its biggest export, oil, according to Morgan Stanley.

“Mounting signs of stress” are appearing in Colombia as the almost 70 percent drop in crude over the past two years swells the current-account deficit, fuels inflation by causing a tumble in the peso, and pressures fiscal accounts, the bank said in a report on Friday.

“Considering the somber outlook for oil prices and the prospects for lower than anticipated growth, the authorities will have to make tough choices to achieve their 2016 fiscal target,” Fernando Sedano and Luis Arcentales, analysts at Morgan Stanley, said in the report. “The need to prioritize concerns over external and fiscal sustainability should require both monetary and fiscal tightening, which should lead to a cooling off in domestic demand.”

Colombia’s current account deficit, the broadest measure of trade in goods and services, is forecast to widen to a three-decade high after the peso lost a quarter of its value last year. Inflation reached a seven-year high in December, and policy makers have raised the benchmark borrowing rate 1.5 percentage points since September to 6 percent, the highest since 2009. Policy makers should bring benchmark borrowing costs to 6.5 percent over the course of their next two meetings, Morgan Stanley said.

“Something’s got to give to rebalance Colombia’s economy, and we suspect that economic growth is the weakest link,” the report said.

The peso weakened 0.4 percent Friday to 3,333.49 per dollar as of 1 p.m. in New York, leaving it 1.5 percent lower this week.

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