Colombian central bank governor José Darío Uribe expects economic growth to continue at an average of 4.5%-5% in the coming years despite challenges to the crucial oil sector, he told Emerging Markets earlier this week.
The head of Banco de la República (BanRep) is betting on investment in infrastructure from 2016 onwards to drive the economy in the light of falling oil revenues.
Colombia has been an exception to the rule in Latin America with stellar growth so far in 2014. But a potential fall in the oil price and expected lower production could restrict this performance.
BCA Research provided one of the most pessimistic assessments of Colombia’s future in September when it said it believed declining oil revenues — caused by what the research firm expects to be a contraction in production and potentially lower oil prices — would “lead to a considerable deceleration in Colombia’s economy”.
Uribe, at least, is aware of the challenge. “In the medium term, Colombia must get used to a new reality in which the economy will not receive the same impulse as it has in previous years from improvements in the terms of trade and significant increases in the production of commodities,” he told Emerging Markets.
BanRep held interest rates at 4.5% at the end of September, bringing to an end a cycle of five consecutive monthly rate rises, citing as reasons a probable decline in the terms of trade due to lower international oil prices and greater uncertainty about the global recovery.
GROWTH COOLING
Moreover, production is falling below expectations. According to BCA, only 64 of the 233 planned exploratory wells in Colombia had been drilled this year by late August. A lack of big oil discoveries in recent years means Colombia’s reserves equate to just 6.5 years of current oil production — one of the lowest ratios in the world.
Capital Economics economists Edward Glossop and David Rees said in a report last week that they expected domestic demand in Colombia to cool due to the falling price of oil. Year-on-year GDP growth hit 6.5% in the first quarter but was down to 4.3% in the second quarter, and now the risks of Capital Economics’ 5.5% forecast for 2014 “are to the downside”, they said.
The oil sector was an important driver for the Colombian economy mainly between 2004 and 2011, said Uribe, thanks to increases in oil prices and increased production.
“Since 2012, we have seen (oil) prices stabilise and production levels fall below expectations,” said the governor. “The most direct implications of this are on public finances — both in terms of tax takings and Ecopetrol’s revenues.
“This implies that the country has to get comfortable with different conditions to those that were previously expected.”
Yet Uribe said infrastructure investment had the capacity to compensate for the lagging momentum in the oil sector.