The Economic, Sectoral and Market Research team of Bancolombia published this Tuesday its projections for the Colombian economy in 2023.
The report highlights that the peak of inflation would be reached at the end of 2022, with a rate of 12.6%, and from there it will moderate gradually, until ending 2023 at 7.5%.
According to the research, the interest rate fixed by the Bank of the Republic would increase up to 12.5%, and in the second half of next year there would be gradual reductions.
(Economic Outlook 2023: What’s next for Colombia?).
The report also shows how the behavior would be on issues such as the growth of the economy, the exchange rate and the impact of the fiscal outlook. See the projections.
Bancolombia contemplates a growth of 7.8% in 2022, rate that exceeds the expectations of the previous closing.
Such performance would be attributable to the strength of domestic consumption, the recovery of exports, and the lagged effect of the expansionary policies that were adopted after the arrival of covid-19.
As opposed, by 2023, it forecasts that GDP would expand below 1%. “We anticipate aggregate demand to cool on the back of high interest rates and tight financial conditions, the global slowdown and uncertainty”says the report.
(The reasons why Colombia’s GDP would slow down, according to the OECD).
Among the best-performing sectors next year are utilities, agriculture, and professional and financial services. On the contrary, they anticipate contractions in commerce, transport, accommodation and meals, as well as in entertainment.
After the slowdown of 2023, the growth of the Colombian economy would remain below 3%. This supposes expansion rates lower than the potential growth prior to the arrival of covid-19.
Additionally, and as a consequence of the moderation in economic activity, an increase in unemployment is anticipated. “In particular, we project that the annual unemployment rate would increase by 0.7 pp, which would rise to 12.1% during 2023.”
Inflation and interest rates
It is contemplated that 2022 would close with a variation of the CPI of 12.6%maximum level in this cycle, and from that point a slow correction process will begin. “In this sense, we forecast that by the end of 2023 inflation would be 7.5%, well above the Issuer’s target level”says the analysis.
This forecast contemplates a marked deceleration in food prices.
However, this would be offset by persistently high core inflation due to wage increases, the operation of indexation mechanisms, and the pass-through of the depreciation of the peso.
(The increase in prices would reach 8%, reveal OECD forecasts).
In monetary policy, “We anticipate that the increases in the reference rate would continue until the first quarter of 2023, when a terminal level of 12.5% would be reached, which would be maintained during the first half of the year. In the second semester, a gradual phase of cuts, so that the intervention rate would end at 10% at the end of next year. This implies that monetary policy would remain in contractive territory throughout 2023”.
External sector and exchange rate
It is estimated that the current account deficit of the balance of payments will adjust from 5.8% of GDP in 2022 to 4.1% of GDP in 2023. This change would be explained by a moderation in imports caused by the slowdown in domestic demand, and due to a lower outflow of factor income given a lower transfer of dividends abroad.
These factors would offset the lower dynamics of exports and a moderation in remittance flows. Likewise, we anticipate lower external financing flows given the tight financial conditions. This perspective is consistent with an exchange rate that would increase from an average of $4,825 in the last quarter of 2022 to $4,930 in the fourth quarter of 2023.
Finally, it is projected that the deficit of the National Government would go from 5.6% of GDP in 2022 to 4.8% of GDP in 2023, values that would imply compliance with the fiscal rule.
This result would be a consequence, on the one hand, of the additional revenue generated by the recently approved tax reform and the higher income from the oil sector. On the other hand, it would also incorporate increases in current and investment spending, as well as higher debt service payments.
It is worth mentioning that the addition to the Nation’s budget that will be processed in the first semester and the update of the financial plan, which would be released at the beginning of 2023, will be two key elements to elucidate the fiscal strategy for next year.
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