Strong Q2 GDP Reduces Likelihood Of Rate Cut And Gives Santos A Boost


BMI View: A stronger-than-expected real GDP expansion in Q2 13 has prompted us to revise up our Colombia growth forecast from 4.1% to 4.3% in 2013 and from 4.3% to 4.5% in 2014. Moreover, the economy' s robust performance in H113 significantly re duces the likelihood of additional monetary easing by the central bank this year and bolsters President Juan Manuel Santos's re-election bid , though we still beli eve he faces significant challenges to win next year's election.

Strong er -than-expected real GDP growth of 4.2% year-on-year (y-o-y) in Q213 has prompted us to make an upward revision to our Colombia growth forecast from 4.1% to 4.3% in 2013 and from 4.3% to 4.5% in 2014, compared to 4.2% in 2012. The main driver of such robust growth in the second quarter was a 4.4% y-o-y real expansion in private consumption, reaffirming our favourable long-term outlook for the Colombian consumer ( see 'Consumer Well Positioned For Multi-Year Acceleration', July 18 ). In addition , despite significant labour-related disruptions to key export-oriented sectors such as agriculture and mining, exports expanded by 7.6% y-o-y in real terms in Q2 . From a sectors perspective, agr iculture expanded the most , by 7.6% y-o-y, followed by construction (6.4% y-o-y), the latter reaffirming our favourable outlook towards Colombian materials, expressed in our Macro-Industry Strategy through a bullish view on Cementos Argos ( see 'Bullish Materials Stocks', July 2 ).

However, we now see significant risks to our forecast of an additional 25 basis point (bps) rate by the Banco Central de la República (BanRep) to bring the policy rate to 3.00% by year- end, as stronger-than-expected growth could prompt offi cials to put an end to their monetary easing cycle, which has seen 100 bps worth of cuts this year. In addition, a rapidly improving economy also provides a boost to President Juan Manuel Santos' recently deteriorating popularity, improving his chances of being re-elected in May 2014. That said, we believe Santos' electoral prospects will remain largely hinged on the evolution of the government's peace negotiations with the left-wing insurgent group, the Fuerzas Armadas Revolucionarias de Colombia (Farc) ( see ' Less Convinced About Santos' Re-Election', September 4, 2013 ) , and we remain sceptical that an agreement will be reached before the election.

Economic Recovery To Be Sustained
Colombia - Real GDP Growth

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This article is tagged to:
Sector: Country Risk
Geography: Colombia