Colombia Dealt Another Blow With IMF Cutting Growth Forecast

  • Economy would grow faster with FARC deal, government estimated
  • IMF revises up Argentina’s 2016 inflation forecast to 39.4%

The International Monetary Fund cut its growth outlook for Colombia to reflect tighter monetary conditions, marking another setback for an economy poised to suffer from the collapse of a peace deal with FARC guerrillas.

The Washington-based lender forecast in its World Economic Outlook that Colombia will grow 2.2 percent this year and 2.7 percent in 2017, down from 2.5 percent and 3 percent, respectively, in its January report. That brings the IMF’s forecast virtually in line with that of economists surveyed by Bloomberg before Colombians rejected, by a razor-thin margin, an accord the government spent years negotiating with the FARC.

The IMF didn’t mention the collapse of the peace deal in its report. Yet Alejandro Werner, the fund’s Western Hemisphere director, wrote in an April note that prospects had increased for a final agreement, which in turn would boost market confidence and spur growth. Colombia’s Finance Ministry estimated the economy could grow an additional 1 percentage point per year if the FARC weren’t scaring investors away and diverting government spending from more productive uses.

The unexpected rejection of the deal prompted a sell-off in Colombian bonds and the peso, leaving President Juan Manuel Santos scrambling to salvage the peace process.

Inflation Outlooks

The IMF also increased its call for Colombian inflation to 6 percent and 3.7 percent this year and next, from 5.3 percent and 3.3 percent. That leaves this year’s forecast still 1.6 percentage points below the estimates of economists Bloomberg surveyed.

The upward revision to Colombian inflation pales in comparison to that for Argentina. The IMF boosted its call to 39.4 percent at year-end, even higher than the 38.6 percent median forecast from economists surveyed by Bloomberg, saying faster inflation is “a byproduct of an ongoing and necessary liberalization process.” In April, the IMF had forecast inflation would slow to the 25 percent ceiling of the government’s target range.

As for Latin America’s largest nation, the IMF said Brazil inflation will decline gradually as the effects of past exchange rate depreciation dissipates. It forecasts consumer prices will increase 5 percent next year, down from a prior 6 percent forecast and versus a 5.5 percent median forecast from economists.

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