Colombia: A Macroeconomic Equilibrium · 1. A History of Macroeconomic Stability 2. Structural Reforms and Fiscal Sustainability 3. How is the economy today? 3.1 Colombia: Macroeconomic

Colombia: A Macroeconomic Equilibrium

Luis Fernando Mejía General Director of Macroeconomic Policy

Ministry of Finance and Public Credit February 2013

Source:

Agenda 1.  A History of Macroeconomic Stability 2.  Structural Reforms and Fiscal Sustainability 3.  How is the economy today?

Source:

A history of monetary stability: Colombian success in a turbulent neighborhood

Inflation rate (1904-2012)

-‐30

-‐20

-‐10

0

10

20

30

40

1904

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

(%)

1923: Crea.on of Central Bank

1991: Central Bank independence

1999: Infla.on targe.ng

Episodes of hiperinfla.on

in La.n America

Banco de la República, Dane.

Source:

A history of resilience and continuous growth

Banco de la República, OECD, Dane.

Economic Growth (World vs. Colombia, 1906-2012)

-‐10

-‐8

-‐6

-‐4

-‐2

0

2

4

6

8

10

1907

1910

1913

1916

1919

1922

1925

1928

1931

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

(%)

Colombia GDP Growth

World GDP Growth

Colombia Volatility: 0.51

World Volatility: 1.03

Source:

The trend of Colombian investment rate has changed in XXI century

27.7

10

12

14

16

18

20

22

24

26

28

30

1930

1932

1934

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

(%)

Investment rate (percentage of GDP 1930-2012)

Banco de la República, DANE.

Source:

Agenda 1.  A History of Macroeconomic Stability 2.  Structural Reforms and Fiscal Sustainability

2.1 Fiscal Sustainability Reform 2.2 Fiscal Rule 2.3 Royalty’s System Reform 2.4 Tax Reform

3.  How is the economy today?

Source:

Fiscal Sustainability Constitutional Reform

Ministry of Finance and Public Credit

Objectives of the Fiscal Sustainability Reform

The Fiscal Sustainability bill amends ArVcle 334 of the Colombian ConsVtuVon, adding the concept of Fiscal

Sustainability as a criterion that should guide the branches and ins1tu1ons of government.

• Guarantee the effecVve access to social, economic and cultural rights

1

• Promote producVvity and compeVVveness

2

• Support the development of all regions

3

Source:

Agenda 1.  A history of macroeconomic stability 2.  Structural Reforms and Fiscal Sustainability

2.1 Fiscal Sustainability 2.2 Fiscal Rule 2.3 Royalty’s System Reform 2.4 Tax Reform


Source:

Fiscal Rule: Fiscal discipline for the CG


-2.6 -2.4 -2.3 -2.2 -2.1 -2.0 -1.8 -1.6 -1.4 -1.2 -1.0 -0.8

-3.0

-2.4

-1.8

-1.2

-0.6

0.0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Structural Deficit Targets: 2014: 2.3% of GDP 2018: 1.9% of GDP 2022: 1.0% of GDP

Fiscal Rule: structural deficit limit, counter-cyclical policy and savings fund

Source:



3.  How is the economy today? 4.  Challenges of the Colombian Economy

Source:

Royalties reform: large impact on inequality

Before (2002-2011)*: Resources were concentrated

GDMP -‐ MFPC

GUAVIARE NARIÑO

ARAUCA

CASANARE

VICHADA

GUAINÍA

VAUPÉS

AMAZONAS

CAQUETÁ

META

PUTUMAYO

HUILA

TOLIMA

CUNDINAMARCA

BOYACÁ CALDAS

MAGDALENA GUAJIRA

CESAR

CÓRDOBA

SUCRE

SAN ANDRÉS, PROVIDENCIA Y STA. CATALINA

BOLÍVAR

ATLÁNTICO

NTE. DE SANTANDER

SANTANDER

CAUCA

CHOCÓ

QUINDÍO

RISARALDA

ANTIOQUIA

VALLE DEL

CAUCA

GUAVIARE NARIÑO

ARAUCA

CASANARE

VICHADA

GUAINÍA

VAUPÉS

AMAZONAS

CAQUETÁ

META

PUTUMAYO

HUILA

TOLIMA

CUNDINAMARCA

BOYACÁ CALDAS

MAGDALENA GUAJIRA

CESAR

CÓRDOBA

SUCRE

SAN ANDRÉS, PROVIDENCIA Y STA. CATALINA

BOLÍVAR

ATLÁNTICO

NTE. DE SANTANDER

SANTANDER

CAUCA

CHOCÓ

QUINDÍO

RISARALDA

ANTIOQUIA

VALLE DEL

CAUCA

From $2,4 to $3,2

From $1,6 to $2,4

From $0,8 to $1,6

From $0 to $0,8

From $3,2 to $4

Above $4

Total royal.es by department (figures in COP trillion)

* Annual average for the period

Today (2012 – 2020)*: Resources are distributed equitably

Source:

Extra budgetary funds: Royalties General System


Direct Royalties Aprox. 34.5%

FUNDS

Savings & Stabilization Aprox. 20%

Science I & T 10%

Social Security (FONPET)

Aprox. 10%

Development Aprox. 9%

Compensation Aprox. 16.5%

Source:




Source:

Tax Reform


Main Components of the Tax Reform

1. Modifica.on of Income Tax -‐ IMAN 2. Reduc.on in non-‐wage costs

3. Crea.on of CREE 4. Reduc.on of VAT rates and consump.on tax

•  VAT rates are reduced from 7 to 3 •  CreaVon of a consumpVon tax

Source:

Expected Effects on Inequality


Gini Index – Latin America

Gini with IMAN 1,9 Less inequality -‐ = Gini with current

tax system

Source:

Expected Effects on Informality


Reform: Reduc.on of 13.5 percentage points in non-‐wage costs (from 29.5% to 16%)

11%

Formal employment will increase

Source : Bernal y Cárdenas (2003), Kugler y Kugler (2009) y Mondragón, Peña y Wills (2010).

From 400.000 to 1 million new formal jobs

Source : Hamann & Mejía (2011)

Increase in the rela.ve size of the formal sector

10% -‐ 15%

Source:


3.1 Colombia: Macroeconomic and Fiscal Equilibrium 3.2 Macroeconomic Perspectives 3.3 Economic Policy

Source:

Balance of the Consolidated Public Sector (% of GDP)

2012 Deficit of the CPS 0,1% of GDP

2010 Deficit of the CPS 3,3% of GDP

Balance of the CPS = Macroeconomic stability

Colombia has experienced a quick convergence to fiscal equilibrium

Ministry of Finance and Public Credit.

-2.8 -2.7 -3.0

-2.3

-1.1

0.0

-0.7 -0.6

-0.1

-2.7

-3.3

-2.0

-0.1

-3.5

-2.5

-1.5

-0.5

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

Source:

Our fiscal responsibility has resulted in lower domestic borrowing costs…

TES (2020)

Historical minimum

Central Bank

4.5 5.5 6.5 7.5 8.5 9.5

10.5 11.5 12.5 13.5 14.5

8-08

2-09

8-09

2-10

8-10

2-11

8-11

2-12

8-12

2-13

Source:

…and lower external borrowing costs, even relative to our peers

EMBI

Bloomberg

0

100

200

300

400

500

600

700

800

900

1000

50

150

250

350

450

550

650

750

11-0

8

2-09

5-09

8-09

11-0

9

2-10

5-10

8-10

11-1

0

2-11

5-11

8-11

11-11

2-12

5-12

8-12

11-1

2

2-13

Colombia Brazil

Chile Peru

Mexico EMBI+ (right axis)

Source:

•  On January 22nd, Colombia issued a 10 year global bond in the international markets, with the lowest rate (2.718%) in history.

•  The differential with US Treasury Bonds was the lowest in history (0.88%).

This has allowed us to issue external debt in USD at historical low rates

USD; 74%

JPY; 3%

COP; 24%

External Debt by Currency Dec 2012


Source:

Fiscal deficit and investment NCG (% of GDP)

Ministry of Finance and Public Credit. * Projected

Fiscal equilibrium has been reached with increases in public investment

1.9

2.9 2.9

3.3 3.9

2.8

2.4 2.4

2.0

2.5

3.0

3.5

4.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012* 2013* Investment NCG NCG Deficit (Right Axis)

Source: StaVsVcal InsVtutes

Investment growth has been the highest in Latin America

Investment rate change, 2000-2012 (% of GDP)

13.2

9.3

6.8

4.7

2.0

0.6 0

2

4

6

8

10

12

14

Colombia Peru Chile Argentina Brazil Mexico

Source:

Investor confidence has been evidenced by a record high FDI

Banco de la República. EsVmates GDMP – MFPC

9,485

14,795 16,684

- 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000

jan

feb

mar

apr

may jun

jul

aug

sep oct

nov

dec

Series1 Series2 2010 2011 2012 2013

* Trade balance figures

Min-Max 2002-2009 FDI in Colombia throughout the year (US$ million)

In 2013 FDI is expected to

reach a level of

US$16,271 million

Source:

External Equilibrium

Current Account Balance and FDI (% of GDP)

Current account deficit is currently at reasonable levels

Banco de la República

* Forecast

3.8 4.2 4.1 4.6 4.2

1.1 1.3 1.0 1.3

2.9 2.8 2.1

3.1 3.0 3.0

1.5 0.9

2.7

4.4

2.4 1.5

2.4 2.6 2.2 1.8 2.6

7.0

4.1 4.4 4.3

3.0 2.4

4.0 4.2

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

*

CURRENT ACCOUNT DEFICIT FDI

Source:

Although still high, unemployment has dropped consistently

Unemployment rate – National total (Moving average 3 months)

It currently locates at single digit levels

DANE

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

jan

feb

mar

apr

may

jun jul

aug

sep

oct

nov

dec

max-‐min 2001-‐2009 2010 2011 2012

Source:

2.0% 1%

2%

3%

4%

5%

6%

7%

8%

9%

1-03 1-04 1-05 1-06 1-07 1-08 1-09 1-10 1-11 1-12 1-13

Prices stand below the long term target (3%) There are no evident infla.on pressures, there is space for expansive monetary policy

Consumer Price Index (annual variation)

DANE

Source:



Source:

Economy activity as of January 2013

Google. GDMP – MFPC

“Nowcast” exercise with Google Trends (2013 (January) vs. last observation)

Growing above average

Growing below average

4

3.3

0.5

-‐0.1

-‐12.3

5.3

4.4

3.3

3.7

2.3

3.2

2.7

0.3

-‐0.5

9

5.4

4.2

3.8

3.8

3.3

-‐15 -‐10 -‐5 0 5 10 15

Agricultural

Electricity, gas and water

Mining

Manufacturig

ConstrucVon

Social Services

Financial services

TransportaVon

Retail

GDP

2013 (jan.) Last observed (2012 III)

Source:


3.1 Colombia: Macroeconomic and Fiscal Equilibrium 3.2 Macroeconomic Perspectives

a. Agriculture b. Mining c. Industry d. Construction e. Demand

3.3 Economic Policy

Source:

The agricultural sector has showed a strong recovery in 2012

DANE

-‐6.0

-‐4.0

-‐2.0

0.0

2.0

4.0

6.0

8.0

I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2007 2008 2009 2010 2011 2012

%

Agricultural Sector Evolution

Agricultural GDP

Source:




3.3 Economic Policy

Source:

In January oil production surpassed 1 million barrels per day

Oil production (Thousand barrels per day) and oil prices (USD per barrel)

ANH

1012

700

750

800

850

900

950

1000

1050

60

70

80

90

100

110

120

130

1-10

3-10

5-10

7-10

9-10

11-1

0

1-11

3-11

5-11

7-11

9-11

11-11

1-12

3-12

5-12

7-12

9-12

11-1

2

1-13

Production (right axis) WTI BRENT Export price

Source:



a. Agriculture b. Mining c. Manufacturing d. Construction e. Demand

3.3 Economic Policy

Source:

Manufacturing has shown a recovery in the last quarter of 2012

DANE

Industrial activities 2011-2011 (fourth quarter vs. third quarter)

PrinVng

Sawmill industries

Oils and processed foods

Basic metals

Sugar refineries

Electrical machinery

Other food prods.

Meat and fish

Rubber

Grain mills

Oil Refining

Basic chemicals

Sawmill industries

Oils and processed foods

Transport equipment

Basic metals

Sugar refineries

Electrical machinery

Meat and fish

Grain mills

Glass

-‐40%

-‐30%

-‐20%

-‐10%

0%

10%

20%

30%

40%

50%

-‐30% -‐20% -‐10% 0% 10% 20% 30% 40%

2011 (a

nnua

l growth)

2012 (annual growth)

Fourth Quarte (2012)

Third Quarter (2012)

Fourth Quarter (2012)

Third Quarter (2012)

Source: OECD & Dane

*Forecast

External demand and industrial activity are expected to recover during 2013

External demand (G-20) and manufacturing (Annual variation)

-‐8% -‐6% -‐4% -‐2% 0% 2% 4% 6% 8% 10% 12%

-‐40%

-‐30%

-‐20%

-‐10%

0%

10%

20%

30%

II 2001

IV 2001

II 2002

IV 2002

II 2003

IV 2003

II 2004

IV 2004

II 2005

IV 2005

II 2006

IV 2006

II 2007

IV 2007

II 2008

IV 2008

II 2009

IV 2009

II 2010

IV 2010

II 2011

IV 2011

II 2012

2013

External demand Manufacturing GDP

Source:




3.3 Economic Policy

Source:

Why do we think that construction will improve in 2013?

Investment of COP 10.9 billion in housing and infrastructure

ExecuVon of COP 9.1 billion of the RGS

Housing Program:

100.000 homes

Temporary issues halted

the construcVon sector in 2012

Source:




3.3 Economic Policy

Source:

23.1

-20

-10

0

10

20

30

40

1-09

4-

09

7-09

10

-09

1-10

4-

10

7-10

10

-10

1-11

4-

11

7-11

10

-11

1-12

4-

12

7-12

10

-12

1-13

Consumer Confidence Index

4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

I III I III I III I III I III I III I III I III I III I III I III I III

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

DANE & Fedesarrollo

Private consumption maintains a positive dynamic

Private Consumption (annual variation)

Source:

Credit is still growing at healthy rates

Credit by type (annual variation)

Superfinanciera.

13.1%

16.9% 15.0%

-2%

2%

6%

10%

14%

18%

22%

26%

30%

7-08

10-0

8

1-09

4-09

7-09

10-0

9

1-10

4-10

7-10

10-1

0

1-11

4-11

7-11

10-11

1-12

4-12

7-12

10-1

2

1-13

Commercial Consumption Mortgage

Source:

Public investment has reached historically high levels

National Central Governement Investment (% of GDP)

Ministry of Finance and Public Credit.

2013 Public Investment (NCG) 3,3% of GDP

2000 Public Investment (NCG) 0,9% of GDP

0.9

3.3

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

Source:



Source:

The monetary policy reacted promptly

2% 3% 4% 5% 6% 7% 8% 9%

10% 11%

1-07

5-07

9-07

1-08

5-08

9-08

1-09

5-09

9-09

1-10

5-10

9-10

1-11

5-11

9-11

1-12

5-12

9-12

1-13

Intervention Rate Overnight Rate

Central Bank Intervention Rate and Overnight Rate (%)


The reduction in the interest rate has been transmitted efficiently to interest rates in the financial system

Source:

15

20

25

30

35

40

45

50

1,750

1,800

1,850

1,900

1,950

2,000

1-‐12 2-‐12 3-‐12 4-‐12 5-‐12 6-‐12 7-‐12 8-‐12 9-‐12 10-‐12 11-‐12 12-‐12 1-‐13 2-‐13 3-‐13 4-‐13 5-‐13

IntervenVons USD million (right axis) Exchange rate

Exchange rate and interventions in the exchange market (US Million)


Interventions in the market have stabilized the exchange rate

Projected

Source:

International Reserves (US$ million)

International reserves have grown due to the interventions


22,000 24,000 26,000 28,000 30,000 32,000 34,000 36,000 38,000 40,000

1-09

3-

09

5-09

7-

09

9-09

11

-09

1-10

3-

10

5-10

7-

10

9-10

11

-10

1-11

3-

11

5-11

7-

11

9-11

11

-11

1-12

3-

12

5-12

7-

12

9-12

11

-12

1-13

US$ 37.870 m

+16.4%

Source:

98

121

98

102

91

100

90 94 98

102 106 110 114 118 122

1-11

4-11

7-11

10-11

1-12

4-12

7-12

10-1

2

1-13

LATAM, Exchange rate index (foreign currency (fc)/dollar) (october 2010=100)

Colombia Brazil Chile Mexico Peru

Tasa de cambio nominal

Banco de la República, Bloomberg, DGPM-MHCP.

App

recia.

on (fc)

Dep

recia.

on (fc)

The Colombian Peso variations are in line with those of its peers

Source:

Why are we optimistic about the future? External demand is recovering

In 2013 we will have the highest infraestructure investment in history

About two-‐year worth of royalty resources for investment

Historically high investment budget

Consumer confidence remains in high levels

Therefore, we expect the economy to grow in 2013 at its poten.al (4.5% -‐ 4.8%)

Colombia: A Macroeconomic Equilibrium

Luis Fernando Mejía General Director of Macroeconomic Policy

Ministry of Finance and Public Credit February 2013

Source:

ADDENDUM 1.  Pension reform 2.  Health Reform

Source:

Pension Reform aims to reduce inequality

Ministry of Finance and Public Credit-‐ DGRESS

0 2 4 6 8 10 12 14

2

10

Valor del Subsidio (SM) Valor de la Mesada Pre Reforma RPM (SM)

Valor de la Mesada Post Reforma (SM)

Subsidy Pension with reform

Pension without reform

Pension (# of Minimum Wages)

•  Contribu.ons of up to 1 Minimum Salary will be made in a pay-‐as-‐you-‐go scheme (Colpensiones)

•  Contribu.ons above 1 Minimum Salary will be made in Individual Re.rement Acounts (AFPs)

•  With the reform, government subsidies will be the same for every income level

Pensions with and without the reform (# of minimum wages)

Mon

thly Salary (# of m

inim

um wages)

Source:

ADDENDUM 1.  Pension reform 2.  Health Reform

Source:

Health Reform will change dramatically the way health services are offered

Ministry of Finance and Public Credit-‐ DGRESS

6 Main Aspects of the Reform:

1. The Government (Misalud) will be in charge of affilia.ons, collec.on

and payments.

(Fosyga will disappear)

2. The EPS will stop receiving funds. With the reform, they will be in charge of administra.ng risks and organizing the

networks of health services.

4. The POS as a list of medica.ons and procedures will be

eliminated and will be replaced with a benefit

plan with defined exclusions.

5. The country will be divided in 10 to 12 districts, each of them with several networks of health services. These regions will be defined by the Ministry of Health.

6. Municipali.es and Local Governments will be able to administrate directly the subsidized regime, only if

they fulfill several requirements.

3. Hospitals and health ins.tu.ons will receive their payments directly from the Government

(Misalud).

Documents

Colombia: A Macroeconomic Equilibrium · 1. A History of Macroeconomic Stability 2. Structural Reforms and Fiscal Sustainability 3. How is the economy today? 3.1 Colombia: Macroeconomic