Bancolombia: Colombian Economy Is Currently Bottoming and Set for a 2017 Turnaround

After years of being one of the best economic success stories in Latin America, 2016 has proved to be a rough one for Colombia. While it still is expected to finish the year with the highest growth among large economies in the region, outside of Peru, the forecasted GDP uptick or around 2% to 2.5% pales in comparison to better times.

Moreover, this year has been marked by the inflation in more than a decade and a half, deteriorating macroeconomic fundamentals, and a rejected peace deal that has sent the nation into political chaos. But a new economic forecast from Bancolombia suggests that the worst will soon be over.

“We believe that in the second half of 2016 the Colombian economy is bottoming, and from 2017 a turnaround that will lead to a more constructive macroeconomic environment will consolidate,” wrote the nation’s largest bank this week. “The catalysts of this transformation will be the moderate increase in the terms of trade and growth of trading partners, falling inflation and the cycle of rate cuts to be started soon by the Central Bank, the faster pace of implementation of infrastructure projects, improving the confidence of agents and stabilization of the external imbalance and the exchange rate.”

The turnaround story will be similar throughout emerging markets while the United States and, especially, the Eurozone experience continued difficulties. For Colombia specifically, the better outlook is the result of improved expectations for trade partners in 2017 (with 1.6% growth as a baseline projection) compared to 2016 (1.1%), and “a floor for oil prices to consolidate around $45 USD, and prices to increase to $55 USD in 2017.”

Domestic economic activity will also jump. In the first half of 2016, the 2.3% growth was the worst seen since 2009, and leading indicators suggest the third quarter results will be even lower, partially as a result of the 45-day trucker strike earlier this summer. The recovery will still only be minimal in the fourth quarter before it begins in earnest next year.

“Although the process of adjustment to a new less favorable external reality is not over and significant risks remain, we believe that gradually several factors will gain traction which will help boost productive activity by stimulating aggregate demand,” wrote Bancolombia.

One of those risks is that tax reform, which President Juan Manuel Santos sent to Congress this week, will not pass — or go through in a watered-down form. But presuming the reform is finalized this year, 2017 will be the first year since oil prices tanked in 2014 that then government deficit decreases. These factors will drive the recovery, along with increased private investment, high expansion in the financial services sector, better growth in mining and agriculture, and improved exports (which fell 0.7% in 2015 and are forecasted to grow 3.0% in 2017).

If Bancolombia’s projections hold, the turnaround could extend well beyond 2017. “We estimate that the acceleration cycle starting in 2017 will extend over the next two years,” wrote the bank. “Indeed, our baseline scenario assumes that in 2018 the economy would grow 3.4% and in 2019 it’d reach 4.0%.”

This optimistic projection would be related to good returns from the much-hyped Fourth Generation — or 4G — infrastructure project that will overhaul Colombia’s disastrous road and transportation network. It also presumes that inflation returns to near the central bank’s target range of between 2% to 4% and that this fuels stronger household purchasing power.

But if this story plays out as expected, then Bancolombia believes that 2015 and 2016 will end up being bumps in the road during the ongoing growth trajectory that the Colombian economy had been on until the oil prices suddenly plummeted two years ago.

“We believe the growth potential will only rebound again at the end of the decade … From 2019 the country’s potential growth could start to accelerate on behalf of the boost to capital accumulation and the productivity that would bring the investment program in infrastructure and a more efficient and equitable tax system” wrote Bancolombia.