Central Banker Says Colombia Slowdown Needed to Fix Trade Gap

A Colombian central banker welcomed the recent slowdown in economic growth, saying it would narrow the current account gap and reduce vulnerability to shocks as the U.S. starts to raise interest rates.

Growth will slow to between 3 percent and 3.5 percent in 2015, from 4.6 percent the year before, after prices fell for the nation’s oil and mining exports, bank co-director Ana Fernanda Maiguashca said. Colombia’s current account deficit is “not comfortable” after widening to the most in more than a decade last year, she said.

“We’re decelerating not only because we received a structural shock, but because we need to,” Maiguashca said in an interview Wednesday in Bogota. “It’s not compatible to think that we will grow at the same rates as in 2014 and be able to close the current account deficit. If we need to reduce that external vulnerability, that comes at the cost of lower growth.”

The central bank, the Finance Ministry and private sector economists have all slashed their growth forecasts over the past six months as prices fell for Colombia’s oil, coal, coffee and gold. In the minutes to its March policy meeting, the central bank said it may cut its official 2015 growth forecast even further “if recent trends continue.” The estimate is currently 3.6 percent.

With lower commodities prices Colombia’s economy may find a new “cruising velocity” of between 4 percent and 4.5 percent annual growth, down from 4.5 percent to 5 percent, Maiguashca said.

Inflation

Annual inflation accelerated to 4.56 percent in March, its fastest pace since 2009, led by a surge in food and import costs. Maiguashca said she hasn’t seen any increase in inflation expectations that would “ring an alarm,” but said the central bank will act to defend its inflation target if necessary.

“We think it’s transitory. But if we think it’s not transitory, if we think there’s some demand behind it, and if we see inflation expectations de-anchoring themselves, we will react with policy,” Maiguashca said. “That’s our major priority, and it comes above everything else.”

Colombia targets inflation of 3 percent, plus or minus one percentage point.

The peso has weakened 23 percent over the past 12 months, the biggest drop among major emerging market currencies after the Russian ruble and the Brazilian real. Finance Minister Mauricio Cardenas said last month that the weaker currency will help narrow the current account deficit, which last year widened to 5.2 percent of gross domestic product, from 3.2 percent in 2013.

There is some risk of a “disorderly market adjustment” in world markets when the U.S. Federal Reserve starts to raise borrowing costs for the first time since the 2008 financial crisis, Maiguashca said. The chance of this happening is low, though the impact would be so large that policy makers need to think about it, she added.

Colombia’s economy will expand 3.5 percent this year, according to analysts surveyed by Bloomberg, compared with 4.1 percent in Peru and 2.8 percent in Chile.

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