Colombian Economy Transition and Outlook 2024

The Colombian economy is expected to expand by 1.3% in 2024.

Inflation has been declining since its peak last March, reaching 8.4% in January this year. It is projected to decline further, reaching around 3% by the end of 2025.

The current account deficit is projected to increase slightly to around 3¼ percent of GDP in 2024, mainly due to a recovery in imports.

Colombia's medium-term growth is projected to be around 3%, supported by factors such as large-scale infrastructure projects, further recovery in private investment, and economic gains from integrating Venezuelan migrants.

Appropriately tight macroeconomic policies over the past two years helped reduce domestic and external imbalances. These measures included managing credit growth and ensuring higher provisioning requirements for consumer loans.

Credit growth has slowed from its peak in August 2022 to 3% in December 2023 due to tight macroeconomic policies, higher provisioning requirements for consumer loans, and tightened lending standards.

Private consumption is expected to moderate in 2024 as households deleverage and labor market conditions soften.

While risks have receded, there are still downside risks to the economy.

Factors that could negatively impact the global economy and, in turn, Colombia's growth and inflation.

Factors within Colombia that could negatively affect its economic growth and inflation.

A monetary policy strategy where the central bank sets a specific inflation rate target and adjusts interest rates to achieve it.

The gradual process of returning interest rates to normal levels after a period of low rates, often following a recession.

A monetary policy strategy where decisions are made based on the latest economic data and indicators.

The public's perception of future inflation rates, which can influence actual inflation.

The public's trust and confidence in the central bank's commitment to its stated monetary policy goals.

Clear and transparent communication by the central bank about its policy decisions and rationale, helping to manage inflation expectations.

The specific level of inflation that a central bank aims to achieve.

The process of building market confidence that the central bank will achieve its inflation target.

A currency's value that is allowed to fluctuate freely based on market forces.

A responsible approach to government spending and revenue collection that aims to maintain fiscal sustainability.

The total amount of money that all government entities are borrowing in a specific period.

A measure of the government's long-term fiscal health, adjusted for temporary factors.

The interest rate that a government pays when it borrows money from lenders.

Government actions designed to influence the economy, such as adjustments to spending or taxes.

The need to adjust spending plans (reduce them) when there are pressures on public finances, such as shocks or the approval of reforms like healthcare and pension reform.

Re-allocating spending priorities to favor investment projects, particularly infrastructure and climate-related initiatives, within a reduced overall spending plan.

A mechanism where banks build up reserves during good economic times to help cushion them during bad times, when bad loans (NPLs) tend to increase.

The ability of banks to withstand economic challenges and continue to operate effectively despite rising NPLs. This resilience comes from healthy capital reserves, liquidity, and well-managed credit growth.

Potential threats to the stability of the financial system, which can be exacerbated by factors like rising NPLs, the impact of reforms on pension funds, and potential for economic volatility.

The potential consequences of pension reform on the financial and capital markets, including the stability and performance of private pension funds.

A rating assigned to a country's debt by credit agencies, indicating a low risk of default. Colombia aims to regain this status to attract more investment.

Social reforms aim to increase equity and inclusion, promoting a fairer and more inclusive society. These reforms are crucial for long-term economic stability and growth by fostering a more productive workforce, reducing inequality, and creating a more stable and prosperous society.

While beneficial, implementing social reforms requires careful planning and execution. They must be designed within existing policy frameworks, striking a balance between equity and efficiency. It's also important to ensure they are fiscally responsible, address existing problems effectively, and encourage investment without distorting economic incentives.

To accelerate growth, Colombia needs to improve its productivity. This requires addressing factors like a difficult business environment, rigid labor markets, and a lack of policy certainty. Measures like simplifying regulations, reducing labor market rigidity, providing more predictable rules, and supporting businesses to grow can significantly contribute to boosting productivity.

Increased domestic savings, possibly achieved through higher public savings, are essential to support higher investment levels, thus fostering economic growth. Lowering the cost of capital, which can be done through prudent financial policies, also encourages investment and helps to improve productivity.

Colombia is facing a global shift away from fossil fuels. To secure its long-term economic sustainability and resilience, it needs to move towards cleaner energy sources. Reducing dependence on oil and coal, which are declining resources globally, is a priority for a sustainable future.

Identifying and nurturing comparative advantages across various sectors is crucial to diversify exports and reduce reliance on specific commodities. Creating an environment that attracts private investment by removing market barriers and promoting fair competition, while avoiding trade protectionism, is vital to achieving this goal.

Finding the right balance between achieving climate goals and preserving growth, fiscal stability, and external stability is paramount to a successful energy transition. This necessitates careful planning and prioritization, focusing on both environmental goals and economic realities.

A successful energy transition requires strong partnerships between public and private entities, efficient pricing of energy, and a well-structured plan. It needs to be tailored to Colombia's specific circumstances, taking into account the need for fiscal responsibility and the potential impact on the economy.