Colombia Report From 2013 - 2022

Q2 2013
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COLOMBIA
BUSINESS FORECAST REPORT
INCLUDES 10-YEAR FORECAST TO 2022
Published by BUSINESS MONITOR INTERNATIONAL LTD
Consumer Recovery To Fuel Growth
ISSN 1745-0519
Published by Business Monitor International Ltd.
Copy Deadline: 15 March 2013
2
COLOMBIA MACROECONOMIC DATA AND FORECASTS
2012e 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f
Nominal GDP, US$bn [6] 363.4 383.8 411.2 447.3 489.4 534.4 586.7 632.2 669.2 723.5 762.0
Nominal GDP, COPbn [6] 652,942 696,614 750,410 811,870 880,868 956,534 1,044,277 1,138,047 1,238,109 1,338,468 1,447,819
Nominal GDP, EURbn [6] 286.1 286.4 323.8 363.7 407.8 445.3 488.9 526.9 557.7 602.9 635.0
COLOMBIA Q2 2013
GDP per capita, US$ [6] 7,642 7,969 8,431 9,061 9,797 10,576 11,483 12,242 12,824 13,725 14,316
GDP per capita, EUR [6] 6,017 5,947 6,639 7,367 8,164 8,813 9,569 10,202 10,687 11,438 11,930
Real GDP growth, % change y-o-y [1,6] 3.8 4.3 4.4 4.4 4.7 4.4 4.5 4.6 4.6 4.7 4.7
Private final consumption, % of GDP [6] 62.4 62.6 62.6 62.8 63.0 63.3 63.4 63.6 63.7 63.8 63.9
Private final consumption, real growth % y-o-y [6] 4.0 4.3 4.5 5.2 5.3 5.2 5.2 5.2 5.2 5.3 5.3
Government final consumption, % Total GDP [6] 16.0 15.8 15.4 15.1 15.0 14.9 14.8 14.6 14.5 14.3 14.2
Government final consumption, real growth % y-o-y [6] 2.5 2.5 2.0 3.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Fixed capital formation, % of GDP [6] 23.7 24.3 24.1 24.0 23.8 23.8 23.8 23.8 23.9 24.0 24.1
Fixed capital formation, real growth % y-o-y [6] 6.3 6.4 4.0 4.0 4.2 4.5 5.0 5.2 5.4 5.6 5.8
Population, mn [7] 47.6 48.2 48.8 49.4 50.0 50.5 51.1 51.6 52.2 52.7 53.2
Unemployment, % of labour force, eop [2,8] 9.6 8.5 8.5 8.4 8.4 8.3 8.2 8.1 - - -
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Consumer price index, % y-o-y, ave [3,9] 3.2 2.8 3.2 3.5 3.5 3.8 4.2 4.0 3.8 3.5 3.8
Lending rate, %, ave [10] 14.0 14.9 14.4 13.5 12.2 11.0 9.8 9.2 9.8 10.2 10.5
Central Bank policy rate, % eop [4,11] 4.25 3.00 3.50 4.50 4.75 4.75 5.00 4.75 4.75 4.50 4.50
Exchange rate COP/US$, ave [12] 1,796.81 1,815.00 1,825.00 1,815.00 1,800.00 1,790.00 1,780.00 1,800.00 1,850.00 1,850.00 1,900.00
Exchange rate COP/EUR, ave [12] 2,281.94 2,268.00 2,190.00 2,232.45 2,160.00 2,148.00 2,136.00 2,160.00 2,220.00 2,220.00 2,280.00
Budget balance, US$bn [5,11] -6.9 -7.1 -7.0 -5.6 -4.6 -4.7 -4.7 -4.6 -4.3 -4.1 -3.5
Budget balance, % of GDP [5,11] -1.9 -1.9 -1.7 -1.3 -0.9 -0.9 -0.8 -0.7 -0.6 -0.6 -0.5
Goods and services exports, US$bn [11] 72.8 86.9 101.9 116.5 133.7 153.3 175.4 200.5 229.2 255.6 282.8
Goods and services imports, US$bn [11] 73.7 86.6 99.2 112.1 126.7 143.4 162.4 184.1 208.8 233.0 260.0
Balance of trade in goods and services, US$bn [11] -0.9 0.3 2.6 4.4 7.0 9.9 13.0 16.4 20.4 22.7 22.7
Balance of trade in goods and services, % of GDP [11] -0.3 0.1 0.6 1.0 1.4 1.9 2.2 2.6 3.0 3.1 3.0
Current account balance, US$bn [11] -10.7 -11.3 -9.1 -7.9 -5.9 -3.6 -1.2 1.6 2.0 4.3 4.4
Current account balance, % of GDP [11] -2.9 -2.9 -2.2 -1.8 -1.2 -0.7 -0.2 0.2 0.3 0.6 0.6
Foreign reserves ex gold, US$bn [13] 37.5 42.1 46.4 50.1 54.1 57.3 60.8 63.2 65.7 68.0 70.4
Import cover, months [13] 6.1 5.8 5.6 5.4 5.1 4.8 4.5 4.1 3.8 3.5 3.2
e/f = BMI estimate/forecast. 1 Base year 2005; 2 Total National, 2001-2007, Metropolitan, 7 areas, 1990-2000; 3 Base December 1998 = 100; 4 Overnight Lending Rate; 5 Central Government. Source: 6 DANE/
BMI; 7 World Bank/UN/BMI; 8 DANE/BMI calculation; 9 BanRep; 10 IMF; 11 BanRep/BMI; 12 BMI; 13 IMF/BMI.
Business Monitor International Ltd

Contents
Executive Summary.................................................................................................................................. 5
Core Views:......................................................................................................................................................................................5
Major Forecast Changes:...............................................................................................................................................................5
Key Risks To Outlook:....................................................................................................................................................................5
Chapter 1: Political Outlook..................................................................................................................... 7

SWOT Analysis........................................................................................................................................................... 7
BMI Political Risk Ratings......................................................................................................................................... 7
Domestic Politics ...................................................................................................................................................... 8
Fragmentation In The FARC Challenges Peace Talks.................................................................................................................8
Ongoing attacks between the Colombian government and the FARC confirm our view that the current peace negotiations between both
sides are unlikely to result in a definitive end to the violence. Despite a two-month long unilateral ceasefire made by the FARC, a recent
string of attacks suggests the organisation could be splintering into various factions, a development that could lead to more violence.
TABLE: KEY FARC DATES...................................................................................................................................................................................... 8
Long-Term Political Outlook..................................................................................................................................... 9
Many Structural Challenges Ahead...............................................................................................................................................9
While Colombia's long-term political outlook is set to remain relatively stable compared with its neighbours, we identify several political
challenges for the government over the next decade and highlight three scenarios for change.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................. 9
Chapter 2: Economic Outlook................................................................................................................ 13

SWOT Analysis......................................................................................................................................................... 13
BMI Economic Risk Ratings.................................................................................................................................... 13
Economic Activity ................................................................................................................................................... 14
Growth To Accelerate In H213 And Remain Robust In 2014.....................................................................................................14
We believe Colombia's economy will continue to expand at a robust rate over the coming years, driven by an improving consumer story
and strong investment into the country's hydrocarbons and infrastructure sectors. As such, we forecast real GDP to expand by 4.3% and
4.4% in 2013 and 2014, respectively.
TABLE: GDP BY EXPENDITURE, REAL GROWTH %.......................................................................................................................................... 14
Fiscal Policy ............................................................................................................................................................. 15
On Track For Fiscal Consolidation..............................................................................................................................................15
We forecast Colombia's government fiscal deficit to come in at 1.9% and 1.7% of GDP in 2013 and 2014 respectively, compared to an
estimated 1.9% of GDP shortfall in 2012. We believe rising fiscal revenue, combined with the government's commitment to maintain
spending at manageable levels, will ensure Colombia remains on track for fiscal consolidation.
TABLE: FISCAL POLICY........................................................................................................................................................................................ 16
Balance Of Payments .............................................................................................................................................. 17
Strong Peso To Weigh On Exports..............................................................................................................................................17
We believe robust foreign investment in Colombia, particularly into the oil & gas sector, will ensure stability in the country's balance of
payment position over the long term. However, strong capital inflows will continue to drive significant peso strength, weighing on the
competitiveness of non-oil exports.
TABLE: CURRENT ACCOUNT............................................................................................................................................................................... 17
Monetary Policy ....................................................................................................................................................... 19
Record Low Inflation Will Prompt Aggressive Monetary Easing..............................................................................................19
Following a steep decline in inflation reaching its lowest level since 1955 we believe Colombia's central bank will pursue more
aggressive monetary easing than we initially expected, to stimulate domestic demand and export competitiveness. We are therefore,
revising down our end-2013 policy rate forecast for Colombia's central bank from 3.50% to 3.00%.
TABLE: MONETARY POLICY................................................................................................................................................................................ 19
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COLOMBIA Q2 2013
Exchange Rate Policy ............................................................................................................................................. 20

COP: Growing Intervention, But Only Modest Weakness.........................................................................................................20
We believe the Colombian peso will range trade near around thepsychologically important COP1,800/US$ level in the short-term, and
after a decisive break of that mark, head towards the next level of support around COP1,820/US$.
TABLE: EXCHANGE RATE FORECAST............................................................................................................................................................... 20
TABLE: EXCHANGE RATE.................................................................................................................................................................................... 21
Sovereign Risk Rating............................................................................................................................................. 22
Challenges Remain In 2013..........................................................................................................................................................22
While our latest Sovereign Risk Ratings show no change in the average overall score for Latin America since our last update in October
2012, we continue to see 2013 as a challenging year for several economies in the region.
TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS EVOLUTION OF ABILITY TO PAY......................................................................... 23
TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS EVOLUTION OF WILLINGNESS TO PAY.............................................................. 25
Chapter 3: 10-Year Forecast................................................................................................................... 27

The Colombian Economy To 2022.......................................................................................................................... 27
Sustainable And Sturdy Growth..................................................................................................................................................27
Business-friendly policies and a steadily improving security situation will help Colombia achieve sustainable levels of strong real GDP
growth, which we forecast will average 4.4 % y-o-y in 2012-21.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.................................................................................................................................... 27
Chapter 4: Business Environment......................................................................................................... 29

SWOT Analysis......................................................................................................................................................... 29
BMI Business Environment Risk Ratings.............................................................................................................. 29
Business Environment Outlook.............................................................................................................................. 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS............................................................................................................................... 30
Institutions................................................................................................................................................................ 31
TABLE: BMI LEGAL FRAMEWORK RATING........................................................................................................................................................ 31
TABLE: LABOUR FORCE QUALITY...................................................................................................................................................................... 32
Infrastructure............................................................................................................................................................ 33
TABLE: LATIN AMERICA - ANNUAL FDI INFLOWS............................................................................................................................................ 33
Market Orientation.................................................................................................................................................... 34
TABLE: TRADE AND INVESTMENT RATINGS..................................................................................................................................................... 34
Operational Risk....................................................................................................................................................... 35
Chapter 5: Key Sectors........................................................................................................................... 37

Autos ........................................................................................................................................................................ 37
TABLE: COLOMBIA AUTOS SECTOR SALES, 2010-2017............................................................................................................................... 38
TABLE: COLOMBIA AUTOS SECTOR PRODUCTION, 2010-2017................................................................................................................... 39
Food & Drink ............................................................................................................................................................ 40
TABLE: FOOD CONSUMPTION INDICATORS HISTORICAL DATA & FORECASTS, 2010-2017................................................................... 42
TABLE: HOT DRINKS VALUE SALES HISTORICAL DATA & FORECASTS, 2010-2017................................................................................ 43
TABLE: MASS GROCERY RETAIL SALES BY FORMAT HISTORICAL DATA & FORECASTS, 2010-2017................................................. 44
Other Key Sectors.................................................................................................................................................... 46
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS.................................................................................................................................. 46
TABLE: PHARMA SECTOR KEY INDICATORS.................................................................................................................................................... 46
TABLE: TELECOMS SECTOR KEY INDICATORS................................................................................................................................................ 46
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS...................................................................................................................... 47
TABLE: FREIGHT SECTOR KEY INDICATORS.................................................................................................................................................... 47
Chapter 6: BMI Global Assumptions..................................................................................................... 49

Global Outlook.......................................................................................................................................................... 49
Past The Major Obstacles To Recovery......................................................................................................................................49
TABLE: GLOBAL ASSUMPTIONS......................................................................................................................................................................... 49
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS................................................................................................................. 50
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%).......................................................................... 50
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS................................................................................................................ 51
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Executive Summary
Core Views We have revised down our end-2013 central bank policy rate forecast
from 3.50% to 3.00%, as we believe record low inflation will prompt
We believe Colombia's economy will expand at robust growth rates
monetary officials to seek additional growth-supportive monetary
in the coming years, characterised by improved macroeconomic
easing.
conditions and an increasingly friendly business environment.
Private consumption, while moderating, will drive the majority of

Key Risks To Outlook
Upside Risks: Elevated foreign investment inflows into the country
growth, although gross fixed capital formation (GFCF) will play an
following Colombia's upgrade to 'investment grade' by all three major
increasingly important role over the coming quarters.
ratings agencies could drive growth even faster than expected.
The infrastructure, mining and hydrocarbons sectors are particularly

Downside Risks: A further deterioration in global growth could
well positioned for growth.
place downward pressure on energy prices, dampening demand
Major Forecast Changes for Colombian exports and reducing foreign direct investment.
We revised down our 2012 real GDP growth estimate from 4.4% to
3.8%, on the back of an unexpected slowdown in the construction
sector. However, we expect the sector to improve in 2013 as the
slowdown was driven by a temporary delay in public works permits.
As such we maintain our 2013 and 2014 real GDP growth forecasts
of 4.3% and 4.4%, respectively.

Chapter 1:
Brief Methodology
Political Outlook
SWOT Analysis BMI Political Risk Ratings

Juan Manuel Santoss administration represents a broad continuation of
Strengths former president lvaro Uribes centre-right government. We view such
Colombias democratic security policy has significantly weakened policy continuity as positive for the countrys democratic and institutional
the power of leftwing insurgent groups across the country. frameworks.
Colombias relative political stability contrasts significantly with sev- S-T Political Rank Trend
Chile 76.7 1 +
eral neighbouring states, where interventionist policies and populist Uruguay 74.8 2 -
rhetoric jeopardise domestic political stability. Colombia 72.5 3 =
Costa Rica 72.5 3 =
Weaknesses Panama
Brazil
71.9
70.8
5
6
=
+
Ongoing allegations of corruption in politics could still threaten the Peru 67.5 7 =
Mexico 65.6 8 =
governments popularity. Nicaragua 55.2 9 =
Ecuador 55.0 10 -
While security has undoubtedly improved, state presence remains El Salvador 50.8 11 -
Bolivia 50.6 12 +
weak in many areas of Colombia and crime levels in the cities remain
Argentina 50.2 13 =
high. Venezuela 48.1 14 -
Guatemala 47.5 15 =
Opportunities Paraguay 45.6 16 =
Honduras 43.8 17 -
President Santos engendered strong popular support for his success Regional ave 61.0/Global ave 65.4/Emerging Markets ave 63.0
against the FARC and looks set to continue with a hardline security
L-T Political Rank Trend
policy. However, rising violence in recent months threatens some Chile 84.2 1 =
Costa Rica 71.8 2 =
of those gains, indicating that security outcomes over the next 12 Uruguay 71.4 3 =
Panama 67.9 4 =
months will have important implications for his key policy priorities,
Mexico 67.1 5 =
strong economic growth and social development. Brazil 66.5 6 =
Colombia 62.8 7 =
Threats Argentina 61.9 8 =
Peru 61.5 9 =
Despite clear improvements, ongoing civil violence persists, carried Paraguay 60.4 10 =
El Salvador 58.9 11 =
out by outlawed insurgent groups and criminal gangs. Honduras 53.3 12 =
Ecuador 50.6 13 =
High levels of inequality continue to threaten social stability and
Venezuela 48.8 14 =
are likely to become more pronounced if high unemployment levels Guatemala 45.8 15 =
Nicaragua 44.7 16 =
persist. Bolivia 44.2 17 =
Regional ave 61.3/Global ave 63.3/Emerging Markets ave 59.7

COLOMBIA Q2 2013
Signs Of FARC Disunity Suggest

Domestic Politics Violence Could Increase
While FARC negotiators announced a unilateral ceasefire effec-
Fragmentation In The FARC Challenges tive November 20, 2012 to January 20, 2013, the FARC carried
Peace Talks out 57 attacks during that time period according to Colombia's
human rights agency. We believe this is an indication that the
BMI VIEW FARC negotiators are not in total control of the organisation,
Ongoing attacks between the Colombian government and the FARC which could be splintering into smaller groups. A divided FARC
confirm our view that the current peace negotiations between both could result in increased violence through two dynamics. First,
sides are unlikely to result in a definitive end to the violence. Despite a different FARC factions could step up their attacks to reaffirm
two-month long unilateral ceasefire made by the FARC, a recent string their presence and send a strong signal they are in disagree-
of attacks suggests the organisation could be splintering into various ment with the way FARC negotiators are conducting the peace
factions, a development that could lead to more violence. process. Second, fragmentation within the organisation could
result in territorial disputes, as different factions of the FARC
While President Juan Manuel Santos has suggested November fight to exert control over many of the lucrative activities that
2013 as a deadline for the peace negotiations between the Co- have financed the insurgents' activities, including production
lombian government and the country's main leftwing insurgent and trafficking of illicit drugs, kidnapping, extortion and il-
group the Fuerzas Armadas Revolucionarias de Colombia legally extracting the country's minerals. In the week since the
(FARC), a recent string of violence between both sides reaf- end of the ceasefire, the FARC has carried out 22 attacks on
firms our belief that the peace process is unlikely to result in a security forces and infrastructure, the most attacks in a week
definitive solution to the five-decade long conflict (see our online since August 2012.
service, December 3, ' FARC Deal Would Be No Guarantee For
Peace). Moreover, there are growing signs that the FARC is A Deal Would Not Be A Long-Term
fragmenting into different groups, meaning that even if a peace Solution
deal is reached, it may not be adhered to by all FARC members. While President Juan Manuel Santos is likely to take necessary
steps to ensure concrete results from the peace negotiations in
order to bolster his chances of being re-elected in 2014, we be-
lieve the outcome will fall short of a long-term solution. While
TABLE: KEY FARC DATES

May 27, 1964 After a civil war that killed more than 300,000 people, mostly peasants and labourers in rural Colombia, a group of farmers
founded the Fuerzas Armadas Revolucionarias de Colombia (FARC).
March 28, 1984 Following two decades of fighting between the FARC and the government, the FARC agrees on a truce and start negotiations
with the government of President Belisario Betancur.
October 11, 1987 The truce ends when a hitman murders Jaime Pardo, a presidential candidate of the Unin Patritica, a leftist party sympathetic
to the FARC.
June 1, 1991 The FARC starts another round of peace talks in Caracas. In 1992 the negotiations move to Mexico and break off.
January 7, 1999 President Andrs Pastrana starts peace talks with the FARC and creates a demilitarised zone in southeast Colombia to facili-
tate the process.
February 20, 2002 Following high-profile FARC abductions, peace negotiations break and Pastrana sends troops into southeast Colombia.
February 23, 2002 FARC rebels kidnap presidential candidate Ingrid Betancourt.
August 7, 2002 President Alvaro Uribe takes power promising to intensify the military strategy against the FARC. The rebels attack the presi-
dential compound killing 21 people.
March 1, 2008 Colombian troops kill FARCS number two leader Ral Reyes in Ecuador.
July 2, 2008 Betancourt is freed in a military raid.
November 4, 2011 Top FARC commander Alfonso Cano is killed in a military operation.
February 26, 2012 The FARC pledges to stop kidnapping civilians.
September 4, 2012 President Juan Manuel Santos announces a new round of peace talks with the FARC.
October 18, 2012 Peace talks officially begin in Oslo.
November 20, 2012 The FARC announces a unilateral ceasefire until January 20, 2013.
Source: BMI, Reliefweb

POLITICAL OUTLOOK
a peace agreement between the current FARC negotiators and

the Colombian government is plausible, it would be extremely Long-Term Political Outlook
difficult to completely demobilise the 8,000 members that the
FARC is currently estimated to have, particularly given that Many Structural Challenges Ahead
many could face severe criminal charges. That said, we do see
the potential for the FARC movement to lose steam over a longer BMI VIEW
period of time, particularly given the strong macroeconomic While Colombia's long-term political outlook is set to remain relatively
outlook we have for Colombia, which will reduce incentives stable compared with its neighbours, we identify several political chal-
to join the insurgent cause. lenges for the government over the next decade and highlight three
scenarios for change.
Colombia's long-term political outlook is set to remain stable over

the next decade. With a score of 62.8 in our proprietary ratings,
the country's political risk profile is one of the most attractive in
Latin America, ranking seventh in the region. The strong score
in the 'policy continuity' subcomponent of our ratings (80.0)
highlights Colombia's long-standing representative democracy.
On the other hand, a score of just 45.0 in the 'characteristics of
society' section illustrates the country's societal polarisation,
TABLE: POLITICAL OVERVIEW

System of Government Parliamentary Democracy, Universal Suffrage: Bicameral Congress; the 102-member Sen-
ate (the upper house) and 166-member Chamber of Representatives (the lower house) are
both directly elected for four-year terms
Head of State President (Juan Manuel SANTOS Caldern); Vice-president Angelino Garzn
Head of Government President
Last Election Parliamentary March 2010
Presidential May 2010
Composition Of Current Government Working majority made up of pro-Santos parties (composed of independents and former Partido
Liberal (PL) members) and the Partido Conservador (PC), Partido Social de la Unidad Nacional
(Partido de la U), and Cambio Radical (CR)
Key Figures Finance Mauricio Crdenas Santamara, Interior German Vargas Lleras, Foreign Affairs Ma-
ria Angela Holguin Cuellar, Foreign Trade, Commerce & Tourism Sergio Diaz Grandados, Mines
& Energy Carlos Rodado Noriega, Defense Juan Carlos Pinzon
President of Central Bank (BanRep) Jose Dario Uribe
Main Political Parties (number of seats in parliament) Partido Conservador (PC): Conservative, centre-right party; 38 seats in the Chamber of Repre-
sentatives and 22 seats in the Senate
Partido Liberal (PL) A social liberal-social democratic party led since 2005 by former president
Csar Gaviria Trujillo; 37 seats in the Chamber of Representatives and 18 seats in the Senate

Partido Social de la Unidad Nacional (Partido de la U): A broad coalition of supporters of Santos;
47 seats in the Chamber of Representatives and 17 seats in the Senate

Polo Democratico Alternativa (PDA): An alliance of the Independent Democratic Pole (PDI) and
the Democratic Alternative (AD); four seats in the Chamber of Representatives and eight seats in
the Senate
Cambio Radical (CR): A key support constituency for Santos 15 seats in the Chamber of Repre-
sentatives and eight seats in the Senate
Partido de Integracin Nacional: 12 seats in the Chamber of Representatives and nine seats in the
Senate
Next Election Parliamentary March 2014
Presidential May 2014
Insurgent Groups Fuerzas Armadas Revolucionarias de Colombia (FARC) (proscribed by EU/US)
Ongoing Disputes N/A
BMI Short-Term Political Risk Rating 72.5
BMI Structural Political Risk Rating 62.8
Source: BMI

COLOMBIA Q2 2013
which has contributed to an ideological divide in the domestic Cracking Down On Drug Trafficking
and external political spheres. And Related Crime:
Inequality Persists The Colombian government, aided by the US' 'Plan Colombia',
Gini Coefficient Between 2008-2010 has made considerable progress combating drug cultivation and
60
trafficking. But the problem remains endemic and associated
crime is now the most common cause of death after cancer.
50
According to a UN report, there were roughly 57,000 hectares
40
under coca cultivation in 2010, around one-third the level in the
late 1990s following more than US$7bn of military spending on
30 anti-drug operations. We believe counter-narcotics programmes
will continue to feature prominently in Colombian politics in the
20 long term, particularly due to the alleged ties between insurgent
groups, notably the Fuerzas Armadas Revolucionarias de Co-
10 lombia (FARC) and a significant portion of the drugs trade. This
view is further bolstered by the rise of criminal gangs (bandas
0
Colombia Brazil Chile Ecuador Mexico Peru Argentina
criminales emergentes, or BACRIMs) in recent years, many of
which are understood to have strong ties to narcotics trafficking.
Source: World Bank, BMI
Society: A Key Challenge
Components Of Long-Term Political Risk Rating
Colombia is on track to experience strong economic expansion 90
over the next 10 years, with a near-term surge in foreign direct 80

investment (FDI). We forecast real GDP growth to average 70
4.5% between 2013 and 2021. However, it will not escape some
60
chronic political problems, which will challenge the current
50
and future administrations. Inequality, drug trafficking, foreign
policy, leftwing insurgents and paramilitary links to politics are 40
the main long-term political risks facing the country. 30
20
Key Challenges 10
Tackling Inequality: Colombia has a vast income disparity
0
and, although it has moderated somewhat in recent years, the CharacteristicsCharacteristicsScope of state Policy Long Term
of polity of society continuity Political Rating
country remains one of the most unequal in Latin America,
with a Gini coefficient of 55.9 in 2010, according to World Source: BMI
Bank data. As a result, the country falls well outside our safety
threshold of 35.0. Given rapid economic growth and rising per- However, despite our expectation of continued strong anti-drug
capita income, the pressure for the authorities to step up social operations in the long term, we believe the problem is unlikely
spending programmes and ensure a broader spread of wealth to disappear over the coming years. This view is underpinned
within the economy is likely to mount. by the fact that cracking down on drug production in Colombia
often displaces the black market industry into countries such as
Despite the current administration's plan to post a balanced Venezuela, Peru and Ecuador. This is likely to remain a potential
budget in the medium term, social development remains a key source of tension between the Andean countries.
government priority, making up one of the largest portions of
fiscal expenditures. However, income inequality in Colombia is Improving Relations With Neighbours: Colombia's rela-
very much a symptom of the unequal distribution of land, with tionships with its leftwing neighbours, mainly Venezuela and
more than 60% of rural land owned by just 0.4% of landown- Ecuador, suffered following several years of US-focused foreign
ers. Therefore, the structural nature of this political challenge policy. However, the current administration has shifted towards
offers no easy solution for any government, and we would not improving political and economic relations within the region
be surprised to see this problem drag on for decades. (although relations with the US remain important) since taking

POLITICAL OUTLOOK
office in 2010. That said, the inability to address the underlying with regional neighbours could improve with closer alignment of
issues of previous diplomatic spats could result in future flare- political ideology and result in a unified effort in tackling drug
ups between the Andean neighbours. trafficking and related crime around the Andes. Furthermore,
prospects for peace with leftwing insurgents would also increase
Peace With Leftwing Insurgents: FARC and the Ejrcito de significantly, particularly as a leftwing government would be
Liberacin Nacional (ELN) are much diminished. The former keen to address land reform, the crux of the nation's extreme
is estimated to have just 9,000 fighters left and many of its income inequality.
top leaders have been killed in recent years. However, they
still pose a threat to Colombia's investment climate and are an Increased Rebel Activity: While a major increase in rebel
ideological challenge to the centre-right government. Despite activity is not part of our core scenario, we note that the drugs-
a renewed round of peace negotiations between the FARC and related enrichment of the FARC or ELN could raise the risk of
the government which began in October 2012, in our view, additional confrontations with state security forces. Moreover,
strict conditions on the terms for discussions will hold back any increased disenchantment with the level of inequality in society
progress towards a near-tem resolution. Furthermore, although could lead to a considerable increase in the number of insurgent
peace negotiations with the ELN have been in the cards since fighters. Deterioration in the country's security profile would deter
2004, it is unlikely that the terms for agreement will be met by foreign investment, hamper economic growth and consequently
either party. Therefore, we expect the government to continue limit the scope for military funding and anti-drug operations.
with heavy security policies until the insurgents are eliminated
or peace is negotiated, although the former is highly unlikely
during the next decade unless the Colombian leadership shifts
to the left.
Removing Paramilitary Links From Politics and Improving

Human Rights Record: With politics in Colombia still plagued
by allegations of links to armed groups, we believe the country
needs to make progress removing these ties to allow for a more
stable political risk profile. Furthermore, the government needs
to demonstrate a commitment to improving its human rights
record if it is to move up the table of our risk ratings and match
more stable countries such as Chile and Uruguay.
Scenarios For Change

Key Regional Player: In this scenario, which in our view is the
most likely, Colombia would strengthen diplomatic ties with
its South American neighbours (particularly Venezuela and
Ecuador) while maintaining strong relations with the US. Not
only would the economy be able to benefit from much needed
diversification in trade partners, but the region could coordinate
anti-drug operations and try to better deal with the problem of
drug cultivation and trafficking, rather than just moving it from
country to country. However, peace with leftwing insurgents is
likely to remain difficult if the centre-right government fails to
make progress in rural land reform.
Shift To Centre-Left: Although a political shift to the left

would be unlikely to take place until the next round of elections
in 2014, we believe such a swing could result in improvements
in tackling many of the challenges highlighted above. Relations

Chapter 2:
Economic Outlook
SWOT Analysis BMI Economic Risk Ratings

Colombia is one of the strongest economies in the region, but medium-
Strengths term economic threats remain. Its lack of export diversification implies that
Explicit backing from the IMF and the ratings agencies has boosted while we forecast economic growth to average a strong 4.4% between
confidence in the economy. 2013 and 2016, we doubt it will return to its 6%-plus real GDP growth
Although the public debt burden is relatively high, Colombia boasts levels experienced in 2006 and 2007.
an unblemished debt record and looks set improve its budget deficit
significantly over the medium term. S-T Economy Rank Trend
Chile 77.7 1 +
Weaknesses Mexico 77.1 2 =
Peru 75.8 3 +
A weak external environment is exposing Colombias overdepend-
Uruguay 74.0 4 =
ence on US trade and high oil prices. Brazil 69.8 5 -
Colombia 64.6 6 =
A sudden deterioration of the (admittedly improved) security situation Panama 64.2 7 =
Bolivia 63.5 8 -
could have a marked effect on business, investor and consumer Guatemala 57.3 9 =
Costa Rica 56.2 10 =
confidence. Ecuador 55.6 11 =
El Salvador 52.3 12 +
Although some advances have been made, there is still a pressing Paraguay 51.9 13
structural reform agenda substantial progress on this is the only Honduras 50.0 14 =
Argentina 46.7 15 -
way of promoting sustainable, long-term economic growth. Nicaragua 44.0 16 -
Venezuela 35.8 17 =
Opportunities Regional ave 57.8/Global ave 55.2/Emerging Markets ave 53.4
An improvement in the external inflationary environment and an
L-T Economy Rank Trend
independent central bank significantly improve Colombias invest- Brazil 74.3 1 -
Chile 73.4 2 +
ment climate. Peru 71.0 3
Threats Uruguay
Mexico
70.0
68.2
4
5
-
=
Exceptionally strong credit growth could result in a deterioration in Colombia 66.5 6 =
Argentina 66.0 7 -
credit quality or rise in non-performing loans if economic conditions Panama 65.3 8 =
Costa Rica 62.2 9 =
deteriorate over the coming quarters. Bolivia 60.4 10 =
Guatemala 55.6 11 =
Ecuador 52.9 12 +
Paraguay 50.2 13 -
El Salvador 49.0 14 +
Venezuela 44.0 15 =
Honduras 41.9 16 =
Nicaragua 38.6 17 =

COLOMBIA Q2 2013
through 2013 and remain robust over the coming years, as the
Economic Activity ongoing household deleveraging cycle gradually comes to an end.
Growth To Accelerate In H213 And Expenditure Breakdown

Remain Robust In 2014 Private Consumption: We expect gradual improvements in
private consumption over the coming years, following slower
BMI VIEW household spending growth in 2012. While an ongoing household
We believe Colombia's economy will continue to expand at a robust deleveraging cycle weighed substantially on the consumer in
rate over the coming years, driven by an improving consumer story and 2012, we expect its negative impact on spending to slowly fade in
strong investment into the country's hydrocarbons and infrastructure 2013, particularly in H113. Consumer credit growth has already
sectors. As such, we forecast real GDP to expand by 4.3% and 4.4% in slowed significantly from its August 2011 peak of 28.5% year-
2013 and 2014, respectively. on-year (y-o-y), coming in at 17.5% y-o-y in December 2012,
and we believe it is nearing its bottom as broad improvements
Only A Temporary Slowdown
Selected Components of Real GDP Growth By Expenditure, % chg in consumer confidence point to stronger household spending
y-o-y over the coming quarters. We therefore forecast real private
30 consumption growth to come in at 4.3% in 2013 and 4.4% in
25 2014, compared to 4.0% in 2012.
20
15 Improvements In Consumption Ahead

Consumer Credit, Retail Sales And Consumer Confidence Index
10
5 50
0
40
-5
30
-10
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
20
10
Private Consumption Gross Fixed Investment
Real GDP 0
Source: BMI, BanRep -10
-20
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Macro Strategy
While we recently revised our 2012 real GDP growth estimate Retail Sales, % chg y-o-y
Consumer Credit, % chg y-o-y
for Colombia from 4.4% to 3.8%, on the back of weak gross Consumer Confidence Index, %
fixed investment in H212, we maintain our real GDP growth Source: BMI, BanRep, Fedesarrollo
forecasts of 4.3% and 4.4% in 2013 and 2014, respectively. We
expect investment to pick up over the coming quarters, driven Government Consumption: We forecast real government
by a strong infrastructure pipeline and an attractive oil & gas consumption to grow by 2.5% and 2.0% in 2013 and 2014,
sector. Moreover, we expect private consumption to improve respectively, similar to the 2.5% expansion estimated for 2012.
TABLE: GDP BY EXPENDITURE, REAL GROWTH %

2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Real GDP growth, % change y-o-y [1,2] 1.7 4.0 5.9 3.8 4.3 4.4 4.4 4.7 4.4
Private final consumption, real growth % y-o-y [2] 0.6 5.0 6.5 4.0 4.3 4.4 5.2 5.3 5.2
Government final consumption, real growth % y-o-y [2] 5.9 5.5 2.6 2.5 2.5 2.0 3.0 4.0 4.0
Fixed capital formation, real growth % y-o-y [2] -1.3 4.6 16.6 6.3 6.4 4.0 4.0 4.2 4.5
Exports of goods and services, real growth % y-o-y [2] -2.8 1.3 11.4 5.0 7.0 10.2 10.1 10.1 10.1
Imports of goods and services, real growth % y-o-y [2] -9.1 10.5 21.5 9.7 10.0 7.0 9.0 9.0 10.0
Net exports of goods & services, real growth % y-o-y [2] -25.3 41.3 45.7 18.3 14.9 2.1 7.2 7.2 9.8
e/f = BMI estimate/forecast. 1 Base year 2005. Source: 2 DANE/BMI.

ECONOMIC OUTLOOK
Indeed, we believe the government will adhere to its fiscal con- COP1,796/US$ in 2012 to COP1,815/US$ in 2013, it will remain
solidation commitment, and therefore do not anticipate any major significantly stronger than its 2008-2012 COP1,933/US$ aver-
upticks in government spending. Moreover, the government's age. Peso strength will also bolster imports, although to a more
public-private partnership programme, will continue to reduce muted degree as the household deleveraging cycle continues
the amount of fiscal spending needed on key infrastructure will continue to weigh somewhat on the consumer. That said,
projects, given rising investor interest in the country. we expect imports to pick up gradually towards end-2013. As
such we forecast net exports to subtract 1.6 percentage points
Strong Peso Adds Downside Pressure On Exports
Export Growth, % chg y-o-y (pp) to real GDP growth in 2013, compared to an estimated
100 1.7pp in 2012.
80
Risks To Outlook
60
The main risks to our outlook lie to the downside. First, a signifi-
40 cant economic deterioration in the US, Colombia's main export
20
destination, would see lower-than-expected real GDP growth.
Slower export growth would also feed through to consumer
0
confidence and weigh on household spending. Second, were
-20 the infrastructure permit delays to extend through 2013, real
-40 GDP growth would likely come in below our current forecast,
Sep-10
Nov-10
Sep-11
Nov-11
Sep-12
Nov-12
Jan-10
Jan-11
Jan-12
Jul-10
Jul-11
Jul-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
as gross fixed investment would continue to weaken. Third, a

significant increase in rebel attacks could see foreign investors
Non-Traditional Exports Traditional Exports*
Total Exports reconsider their positions in Colombia, potentially driving
Notes: *Traditional Exports include coffee, coal, oil and iron. Source: BMI, slower real GDP growth.
BanRep
Gross Fixed Capital Formation: We believe the 4.6% y-o-y

contraction in real gross fixed capital formation in Q312 will Fiscal Policy
be reversed over the coming quarters for several reasons. First,
the contraction was largely driven by strong base effects in- On Track For Fiscal Consolidation
vestment in Q311 expanded by 24.3% y-o-y, the fastest pace
since 2007. Second, while a slowdown in construction-related BMI VIEW
investment was also a main driver behind the weak investment We forecast Colombia's government fiscal deficit to come in at 1.9%
data, we expect construction activity to pick up in 2013. In 2012, and 1.7% of GDP in 2013 and 2014 respectively, compared to an
a delay in the procurement of public works concessions drove estimated 1.9% of GDP shortfall in 2012. We believe rising fiscal
the weak performance in the construction sector. However, the revenue, combined with the government's commitment to maintain
government announced it will develop four new road projects spending at manageable levels, will ensure Colombia remains on
in 2013, amounting to over US$3.0bn in investment, generat- track for fiscal consolidation.
ing a robust 2013 project pipeline. Moreover, we expect strong
foreign investment to continue to flow into the Colombia's oil We maintain a favourable multi-year outlook on Colombia's
& gas sector, given the vast untapped reserves in the country, government fiscal position. Final 2012 fiscal data suggests the
as well as the government's favourable licensing process. As deficit was 1.9% of GDP (according to our 2012 GDP estimate)
such we forecast investment to improve slightly from 6.3% in last year, an improvement from our initial expectations of a 2.0%
2012 to 6.4% in 2013 and remain robust over the coming years. of GDP deficit. Over the last few years, Colombia has seen its
fiscal shortfall narrow, and we expect this to continue on the
Net Exports: We believe net exports will continue to weigh on back of growing tax revenues and fiscal prudence. We therefore
real GDP growth over the coming years. Ongoing peso strength forecast the budget deficit to come in at 1.9% and 1.7% of GDP
will hurt export competitiveness, particularly agricultural in 2013 and 2014.
and manufacturing exports. Both saw steep declines through
2012. While we forecast the peso to weaken from an average

COLOMBIA Q2 2013
Rising Incomes Will Drive Fiscal Fiscal Expenditure Geared Towards

Revenue Growth Investment
We forecast government revenue to grow by 14.4% on average
between 2013-2017, an improvement from the 10.7% average Strong Commitment To Keep Spending At
growth in the previous five-year period. We believe a favour- Manageable Levels
Government Fiscal Expenditure
able long-term performance of the Colombian economy will see 120,000 60
unemployment decline and real incomes rise, driving greater 100,000 50
fiscal revenue. Moreover, the recent tax reform, which seeks 80,000 40
to stimulate employment in the formal sector by reducing the 60,000 30
tax burden of hiring, will further bolster the government's fiscal 40,000 20
position (see our online service, November 27, 2012, 20,000 10
0 0
Starting 2013 With A Bang -20,000 -10
Government Fiscal Revenue
-40,000 -20
120,000 60
-60,000 -30
Nov-11
Nov-12
Jan-11
Jan-12
Jan-13
Jul-11
Jul-12
May-11
May-12
Mar-11
Mar-12
Sep-11
Sep-12
100,000 50
80,000 40
YTD Fiscal Expenditure (LHS), COPbn
60,000 30 YTD Fiscal Expenditure (RHS), % chg y-o-y
Source: BMI, BanRep

40,000 20
20,000 10
We believe the favourable trajectory of fiscal revenue will mo-
0 0 tivate the government to increase spending at a modest pace,
-20,000 -10
while maintaining broad fiscal prudence over the long-term. A
Nov-11
Nov-12
Jan-11
Jan-12
Jan-13
Jul-11
Jul-12
May-11
May-12
ccording to the government budget, investment will be a main

Mar-11
Mar-12
Sep-11
Sep-12
component of spending, with mining, housing, infrastructure,

YTD Fiscal Revenue (LHS), COPbn
YTD Fiscal Revenue (RHS), % chg y-o-y agriculture and technological innovation being key investment
Source: BMI, Bloomberg recipients. The government has allocated COP23.8bn for invest-
ment in 2013, above 3.0% of GDP, and a 23.3% increase from
2012 levels. The government has made it clear investment will
'Tax Reform To Lead Towards Fiscal Consolidation'). In ad- be a fiscal priority and will continue to expand over the com-
dition, the government's budget will also benefit from growing ing years. We therefore forecast fiscal expenditure growth to
fiscal proceeds from majority state-owned oil company Eco- average 12.8% between 2013-2015, above the 9.1% average
petrol, which we expect to continue to see improvements in oil growth seen in the previous five-year period, but at a slower
production over the coming years. Fiscal revenue growth came pace than revenue growth.
in strong at 52.9% y-o-y in January, underpinning our view
that fiscal improvements will continue over the coming years.
TABLE: FISCAL POLICY

2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Fiscal revenue, COPbn [1,3] 77,957.4 74,940.3 94,230.5 107,017.0 121,999.4 139,079.3 161,332.0 185,531.8 209,650.9
Revenue, % of GDP [1,3] 15.4 13.8 15.3 16.4 17.5 18.5 19.9 21.1 21.9
Fiscal expenditure, COPbn [1,3] 96,867.0 94,208.5 106,877.5 119,421.7 134,946.5 151,814.8 171,550.8 193,852.4 218,083.9
Expenditure, % of GDP [1,3] 19.2 17.3 17.4 18.3 19.4 20.2 21.1 22.0 22.8
Budget balance, COPbn [1,3] -18,909.7 -19,268.3 -12,647.0 -12,404.7 -12,947.1 -12,735.5 -10,218.8 -8,320.6 -8,433.0
Budget balance, % of GDP [1,3] -3.7 -3.5 -2.1 -1.9 -1.9 -1.7 -1.3 -0.9 -0.9
Primary balance COPbn [2,3] 4,973.7 5,765.2 8,569.7 8,357.0 14,179.9 14,975.2 14,772.7 14,550.0 14,305.0
Primary balance % of GDP [2,3] 1.0 1.1 1.4 1.3 2.0 2.0 1.8 1.7 1.5
e/f = BMI estimate/forecast. 1 Central Government; 2 Fiscal balance stripping out interest payments on government debt. Source: 3 BanRep/BMI.

ECONOMIC OUTLOOK
Risk To Outlook to an estimated 2.9% of GDP in 2012. The main driver of the
A significant deterioration of the external environment poses expected narrowing in the current account deficit will be a robust
downside risks to our Colombian fiscal outlook. Weaker demand hydrocarbons oil exports supported by rising production and
for Colombian exports would see external tax revenue decline, elevated oil prices.
potentially interrupting the fiscal improvements currently re- Profit Repatriation Will Continue To Weigh On
flected in our forecast. Moreover, deterioration in the country's Current Account
Current Account Balance, US$bn
exports would also see income and consumption come in below 3
our expectations, further reducing fiscal revenue. 2
Balance Of Payments -1
-2
-3
Strong Peso To Weigh On Exports
-4
BMI VIEW -5
We believe robust foreign investment in Colombia, particularly into the -6
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
oil & gas sector, will ensure stability in the country's balance of pay-
ment position over the long term. However, strong capital inflows will G&S Trade Balance Income Account Balance Transfers Balance
continue to drive significant peso strength, weighing on the competi-

Source: BMI, BanRep
tiveness of non-oil exports.
We forecast Colombia's current account deficit will be 2.9% However, ongoing profit repatriation amid a growing presence
and 2.2% of GDP in 2013 and 2014, respectively, compared of foreign firms in Colombia, will keep the income account
TABLE: CURRENT ACCOUNT

2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Goods imports, US$bn [2] 30.5 37.5 50.7 66.2 79.1 91.7 104.6 119.2 135.9
Goods imports, % of GDP [2] 13.0 13.1 15.2 18.2 20.6 22.3 23.4 24.4 25.4
Goods exports, US$bn [2] 32.6 39.5 56.2 67.8 81.4 95.2 109.5 125.9 144.8
Goods exports, % of GDP [2] 13.9 13.8 16.9 18.7 21.2 23.2 24.5 25.7 27.1
Goods exports, % of imports [2] 106.7 105.4 111.0 102.4 102.9 103.8 104.7 105.6 106.6
Balance of trade in goods, US$bn [2] 2.1 2.0 5.6 1.6 2.3 3.5 4.9 6.7 8.9
Balance of trade in goods, % of GDP [2] 0.9 0.7 1.7 0.4 0.6 0.8 1.1 1.4 1.7
Services imports, US$bn [2] 7.0 8.1 9.5 7.5 7.5 7.5 7.5 7.5 7.5
Services imports, % of GDP [2] 3.0 2.8 2.9 2.1 2.0 1.8 1.7 1.5 1.4
Services exports, US$bn [2] 4.2 4.4 4.9 5.0 5.5 6.7 7.0 7.8 8.5
Services exports, % of GDP [2] 1.8 1.6 1.5 1.4 1.4 1.6 1.6 1.6 1.6
Goods and services exports, US$bn [2] 36.8 44.0 61.1 72.8 86.9 101.9 116.5 133.7 153.3
Goods and services exports, % of GDP [2] 15.7 15.4 18.3 20.0 22.6 24.8 26.0 27.3 28.7
Balance of trade in goods and services, US$bn [2] -0.8 -1.6 0.9 -0.9 0.3 2.6 4.4 7.0 9.9
Balance of trade in goods and services, % of GDP 2 -0.3 -0.6 0.3 -0.3 0.1 0.6 1.0 1.4 1.9
Income account balance, US$bn [2] -9.3 -11.8 -15.8 -13.5 -15.3 -15.8 -16.5 -17.2 -18.1
Income account balance, % of GDP [2] -4.0 -4.1 -4.8 -3.7 -4.0 -3.8 -3.7 -3.5 -3.4
Net transfers, US$bn [2] 4.6 4.5 4.9 3.7 3.7 4.0 4.2 4.3 4.6
Net transfers, % of GDP [2] 2.0 1.6 1.5 1.0 1.0 1.0 0.9 0.9 0.9
Current account balance, US$bn [2] -5.0 -8.8 -10.0 -10.7 -11.3 -9.1 -7.9 -5.9 -3.6
Current account balance, % of GDP [2] -2.1 -3.1 -3.0 -2.9 -2.9 -2.2 -1.8 -1.2 -0.7
Openness to international trade, % [1,2] 27.0 26.9 32.1 36.9 41.8 45.5 47.9 50.1 52.5
e/f = BMI estimate/forecast. 1 Imports plus exports, % of GDP. Sources: 2 BanRep/BMI.

COLOMBIA Q2 2013
balance in the red, preventing further improvements in the accounts. We expect the infrastructure, mining, and oil & gas
country's current account. sectors will continue to receive significant amounts of investment
from abroad, with the latter receiving the greatest proportion, in
Manufacturing Taking A Beating From A Strong
line with the historical trend. The country's vast untapped oil &
Currency
Export Growth gas reserves, combined with a favourable business environment
100 and investment-friendly government licensing programmes, will
80 continue to attract foreign investment into energy companies
60 such as majority state-owned Ecopetrol and Canadian-based
40
Pacific Rubiales. In the first three quarters of 2012, foreign
direct investment grew by 17.6% y-o-y, putting the country on
20
pace to a post a record foreign investment figure. Moreover,
0
we expect foreign inflows to continue rising over the coming
-20
quarters. While we believe strong foreign direct investment alone
-40
will be enough to finance the majority of the current account
-60
shortfall, at the same time, it will continue to add appreciatory
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
pressures on the peso and weigh on export competitiveness.

Manufacturing Exports, % chg y-o-y
Total Exports, % chg y-o-y
Source: BMI, BanRep Robust FDI Here To Stay

FDI, US$mn
4,500
Non-Oil Exports Will Continue To 4,000
Underperform
3,500
We believe a robust performance by the country's oil exports
3,000
due to sizeable ongoing investment directed at improving oil
2,500
production will ensure Colombia maintains a trade surplus
2,000
over the coming years. However, we believe non-oil exports
1,500
will continue to underperform due to a strong currency. Despite
1,000
the central bank's efforts to weaken the peso through monetary
500
easing and its FX purchasing programme, we expect strong
0
appetite for Colombian assets and record foreign investment
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
inflows keep substantial appreciatory pressures on the currency.
We forecast the peso to average COP1,820/US$ over 2013- FDI Into Oil Sector Other FDI
2014, significantly stronger than its COP1,930/US$ five-year Source: BMI, BanRep
average. A strong peso has seen growth in manufacturing ex-
ports, which account for nearly one-third of total exports, slow
from 18.8% in 2011 to an estimated 6.0% 2012, and we expect Risks To Outlook
them to remain sluggish in 2013 and 2014 as well.Moreover, a There are significant downside risks to our Balance Of Pay-
strong currency will also stimulate import growth due to strong ments outlook. First, a larger-than-expected deterioration in
consumer purchasing power, although this will be somewhat the eurozone would weigh on demand for Colombian exports,
muted due to the ongoing household deleveraging cycle (see and could see the current account deficit come in larger than
our online service, March 5, 'Growth To Accelerate In H213 we currently forecast. In addition, a break-up of the ongoing
And Remain Robust In 2014). peace negotiations between the Colombian government and the
leftwing insurgent group, the Fuerzas Armadas Revolucionarias
Oil Sector Will Remain The Main de Colombia (FARC), could see foreign investment inflows
Recipient Of Foreign Investment slow substantially. This in turn would likely weigh on future
While the income account deficit and a weak performance by export growth due to losses in production capacity, particularly
non-oil exports will keep the current account in deficit, robust in the oil & gas sector.
foreign direct investment will anchor the country's external

ECONOMIC OUTLOOK
Fiscal Reform To Keep Inflation Below

Monetary Policy Target
Record Low Inflation Will Prompt Monetary Easing Cycle Has More Room To Go
Aggressive Monetary Easing Consumer Price Inflation And Policy Rate
6
BMI VIEW 5
Following a steep decline in inflation reaching its lowest level since
4
1955 we believe Colombia's central bank will pursue more aggres-
sive monetary easing than we initially expected, to stimulate domestic 3
demand and export competitiveness. We are therefore, revising down
2
our end-2013 policy rate forecast for Colombia's central bank from
3.50% to 3.00%. 1
0
Colombia's Banco Central de l a Repblica (BanRep) has made
Nov-10
Nov-11
Nov-12
Jan-10
Jan-11
Jan-12
Jan-13
Jul-10
Jul-11
Jul-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Mar-13
Sep-10
Sep-11
Sep-12
150 basis points worth of policy rate cuts since July 2012, bring-
ing the rate to 3.75%, and we expect additional monetary easing Inflation, % chg y-o-y Lower Target Range
Upper Target Range Target Inflation
over the coming months. Consumer price inflation declined to
Source: BMI, BanRep
1.8% y-o-y in February, its lowest level since 1955, and falling
be low BanRep's 3.0% (+/- 1) target for the first time since March
2010. Additionally, high frequency data that suggests that real We believe tax reforms (see our online service, October 16,
GDP growth continues to slow on the back of weak domestic 'Tax Reform Would Offer Modest Benefits To Consumption)
demand, after coming in below 3.0% y-o-y in H212, compared will see inflation remain below target throughout 2013, giving
to 4.9% y-o-y growth in H112. We are therefore revising down BanRep room to extend its ongoing monetary easing cycle over
our end-2013 BanRep policy rate forecast from 3.50% to 3.00%. the coming months. According to the new fiscal regime, the
In 2014, we forecast BanRep to hike rates to 3.50 %, as base effective consumer tax burden for many goods in the inflation
effects will see inflation tick above-target. basket has been reduced, in some cases by as much as half,
TABLE: MONETARY POLICY

2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Consumer price index, % y-o-y, eop [1,6] 2.0 3.2 3.7 2.4 3.2 3.1 3.9 3.1 4.5
Consumer price index, % y-o-y, ave [1,6] 4.8 2.6 3.4 3.2 2.8 3.2 3.5 3.5 3.8
Producer prices, % y-o-y, eop [2,6] -2.2 4.4 5.5 -3.0 3.0 4.5 6.5 7.5 8.5
Producer prices, % y-o-y, ave [2,6] 1.9 1.7 5.5 1.3 0.0 3.8 5.5 7.0 8.0
M1, COPbn [7] 52,756 62,089 68,792 73,234 80,557 88,613 97,474 107,221 117,944
M1, % change y-o-y [7] 7.5 17.7 10.8 6.5 10.0 10.0 10.0 10.0 10.0
M2, COPbn [7] 177,816 195,877 232,948 271,354 301,203 334,335 371,112 411,934 457,247
M2, % change y-o-y [7] 5.4 10.2 18.9 16.5 11.0 11.0 11.0 11.0 11.0
Central Bank policy rate, % eop [3,7] 3.50 3.00 4.75 4.25 3.00 3.50 4.50 4.75 4.75
Lending rate, %, eop [8] 14.0 12.0 13.0 15.0 14.8 14.0 13.0 11.5 10.5
Lending rate, %, ave [8] 15.0 13.0 12.5 14.0 14.9 14.4 13.5 12.2 11.0
Real lending rate, %, eop [4,9] 12.0 8.8 9.3 12.6 11.6 10.9 9.1 8.4 6.0
Real lending rate, %, ave [4,9] 10.2 10.4 9.1 10.8 12.1 11.2 10.0 8.8 7.2
3-month money market rate, % eop [5,10] 3.8 2.9 4.8 - - - - - -
Real 3-month money market rate, %, eop [4,10] 1.8 -0.3 1.1 - - - - - -
3-month money market rate, %, ave [5,10] 6.0 3.6 4.2 - - - - - -
Real 3-month money market rate, %, ave [4,10] 1.2 1.0 0.8 - - - - - -
e/f = BMI estimate;/forecast. 1 Base December 1998 = 100; 2 Base June 1999 = 100; 3 Overnight Lending Rate; 4 Real rate strips out the effects of infla-
tion; 5 90 day fixed term deposit certificates. Source: 6 BanRep; 7 BanRep/BMI; 8 IMF; 9 IMF/BMI; 10 BMI.

COLOMBIA Q2 2013
as in the case of food. This, combined with a strong currency market consensus for the time being. The nine-month interest
which will mute supply-side pressures, will likely continue to rate swap an indication of where the market expect rates to
see inflation remain at benign levels. As such, we have revised be by end-2013 is trading at 3.50%, pricing in only 25 basis
down our end-2013 inflation forecast from 3.2% to 2.8%. points worth of cuts this year. We expect interest rate swaps
to move in our direction over the coming months, particularly
BanRep Will Continue To Target Peso once upcoming inflationary data releases suggests price levels
will remain below target for an extended period.
We Remain Below Market Consensus
9-Month Interest Rate Swap, %
Risks To Outlook
6.0
There are several factors that pose risks to our policy rate outlook.
5.5 First, while monetary policy minutes suggest a high degree of
dovishness among BanRep officials, any indication that domestic
5.0
Current demand is improving could see monetary officials put further
Policy Rate 4.5
monetary easing on hold, even if inflation remains below target.
4.0
Second, while a strong peso has muted supply-side inflationary
pressures, recent disruptions in Brazilian ports could see food
3.5
BMI's End-2013 prices tick up more than expected, reducing the scope for mon-
Policy Rate
Forecast 3.0 etary easing. Third, should our expectations for a substantial
slowdown in Chinese growth in H213 not play out, demand for
2.5
Colombian exports would remain robust, reducing the pressure
Nov-11
Nov-12
Jan-12
Jun-12
Jan-13
Jul-12
May-12
Feb-12
Mar-12
Feb-13
Mar-13
Oct-11
Apr-12
Oct-12
Dec-11
Aug-12
Sep-12
Dec-12
on BanRep to bolster export competitiveness through rate cuts.
Source: BMI, BanRep
Weakness Exchange Rate Policy

In addition to below-target inflation, we believe a strong peso
will motivate BanRep authorities to pursue additional rate cuts. COP: Growing Intervention, But Only
Despite BanRep's ongoing monetary easing cycle and exten- Modest Weakness
sive FX purchasing programme, the peso has remained strong
by historical standards, averaging COP1,792/US$ during the BMI VIEW
last year, compared to its COP1,972/US$ five-year average. A We believe the Colombian peso will range trade near around thepsy-
strong currency has weighed heavily on export growth, which chologically important COP1,800/US$ level in the short-term, and after
slowed from 18.8% in 2011 to an estimated 6.0% in 2012, and a decisive break of that mark, head towards the next level of support
has resulted in unrest among agricultural producers in recent around COP1,820/US$. Increasing central bank intervention, com-
months. We expect appreciatory pressures on the peso to continue bined with greater expectations of further monetary easing, will drive a
throughout 2013, on the back robust appetite for Colombian assets weaker peso over the coming weeks.
and strong foreign investment, forecasting the unit to average
COP1,815/US$. We therefore expect BanRep to seek to reduce Core View
the carry trade to bolster export competitiveness. We believe Colombia's Banco Central de la Repblica (BanRep)
will take decisive steps to weaken the peso in order to bolster
Finally, we highlight that our recent revision puts us below export competitiveness. We expect record FX purchases in 2013,
TABLE: EXCHANGE RATE FORECAST

Spot Short-Term 2013 2014
COP/US$, ave 1,802 1,820 1,815 1,825
COP/EUR, ave 2,353 - 2,268 2,190
BanRep Policy Rate, % eop 3.75 - 3.00 3.50
Source: BMI March12 2013

ECONOMIC OUTLOOK
as well as ongoing monetary easing during H113. However, recent quarters, growing by 7.2% in January-November 2012,
growing appetite for Colombian assets, as well as rising foreign down from 41.8% growth during the same period in 2011. We
direct investment, will limit the effectiveness of central bank therefore expect BanRep FX purchases in 2013 to surpass the
intervention. As such, we maintain our forecast for the peso to US$4.8bn seen in 2012, adding modest depreciatory pressures
average COP1,815/US$ in 2013, implying a slightly weaker to the peso.
unit than in 2012 when it averaged COP1,797/US$.
Forecasting Record FX Purchases in 2013

Seeking To Reignite Exports BanRep FX Purchases And Export Growth
6,000 60
Heading Towards 1,820
5,000 50
Exchange Rate, COP/US$
4,000 40
2,000
3,000 30
2,000 20
1,950
1,000 10
1,900 0 0
-1,000 -10
1,850 -2,000 -20
-3,000 -30
Nov-10
Nov-11
Nov-12
Jan-10
Jan-11
Jan-12
Jan-13
Jul-10
Jul-11
Jul-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Sep-10
Sep-11
Sep-12
1,800
1,750
Central Bank FX Purchases (LHS), YTD US$mn
Total Exports (RHS), % chg y-o-y
1,700
Source: BMI, BanRep
Nov-11
Nov-12
Jan-12
Jan-13
Jul-11
Jul-12
May-11
May-12
Mar-11
Mar-12
Sep-11
Sep-12
Source: BMI, Bloomberg

In addition, we believe BanRep's ongoing monetary easing cycle
will also drive a weaker peso. BanRep has implemented policy
Competitiveness rate cuts in the last five out of seven monetary policy meetings,
In line with our view, BanRep increased its FX purchasing bringing the rate down to 3.75 % in February. With inflation
programme during its January monetary policy meeting, from surprising to the downside, coming in at 1.8% year-on-year in
a minimum of US$20mn/daily to US$30mn/daily. We believe February, below BanRep's inflation target range, we now see
this presages even greater intervention by BanRep officials over scope for additional monetary easing during H113. Colombia's
the coming months, as they take action to stimulate export com- policy rate is already the lowest in Latin America, meaning
petitiveness. A strong peso has undermined the competitiveness further cuts will see investors increasingly shift their exposure
of Colombia's key agricultural and manufacturing exports, as towards other currencies that offer better carry.
evidenced in the significant slowdown in export growth seen in
TABLE: EXCHANGE RATE

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Exchange rate COP/US$, ave [1] 1,898.17 1,848.02 1,796.81 1,815.00 1,825.00 1,815.00 1,800.00 1,790.00
COP/US$, ave % change y-o-y [1] -12.0 -2.6 -2.8 1.0 0.6 -0.5 -0.8 -0.6
COP/US$, ave, PPP [2] 1,247.67 1,306.52 1,290.52 1,287.46 1,301.05 1,321.39 1,344.87 1,371.03
Exchange rate COP/EUR, ave [1] 2,517.86 2,568.74 2,281.94 2,432.10 2,317.75 2,232.45 2,160.00 2,148.00
COP/GBP, ave [1] 2,942.17 2,975.31 2,864.65 2,922.15 2,920.00 2,994.75 3,060.00 3,132.50
COP/CHF, ave [1] 1,820.27 2,082.43 1,916.68 1,767.42 1,702.43 1,712.26 1,711.03 1,714.56
COP/AUD, ave [1] 1,742.59 1,907.54 1,860.76 1,814.46 1,633.38 1,433.85 1,350.00 1,342.50
JPY/COP, ave [1] 166,590.93 147,356.08 143,471.76 165,165.00 171,550.00 176,055.00 177,300.00 179,895.00
COP/CNY, eop [1] 281.83 299.87 280.12 291.07 287.84 281.40 276.34 273.48
e/d = BMI estimate/forecast. Source: 1 BMI; 2 BMI/IMF.

COLOMBIA Q2 2013
BanRep Will Fight An Uphill Battle the Fuerzas Armadas Revolucionarias de Colombia (FARC),
Despite BanRep's aggressive currency intervention, we believe poses significant downside risks to our outlook. While we
growing investor interest in Colombian assets will limit the peso's remain sceptical that negotiations will result in a definitive
depreciation in 2013. We maintain a bullish stance on Colom- resolution to the five-decade long conflict, (see, 'Fragmenta-
bia's equity benchmark index, underpinned by our constructive tion Within The Farc Challenges Peace Talks, January 28), a
outlook on the country's energy sector (see our online service, greater-than-expected outbreak in violence would see foreign
January 30, 'Equities Remain The Preferred Asset Class'). investors reconsider their positions in Colombia.
Bond Rally Bolstering Peso Strength

Exchange Rate Performance Against Fixed Income
Appetite For Colombian Assets Will Limit Peso
150 1,500
Weakness
Exchange Rate Performance Against Equities 140
18,000 1,500 1,700
130
16,000 120
1,700 1,900
110
14,000
100 2,100
1,900
12,000 90
2,300
10,000 2,100 80
70
8,000 2,500
2,300 60
6,000
50 2,700
2,500
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jul-09
Jul-10
Jul-11
Jul-12
4,000
2,000 2,700
COLTES 2024 Price Index (LHS), 30-day moving average
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jul-09
Jul-10
Jul-11
Jul-12
COP/US$ Exchange Rate (RHS), inverted

IGBC Index COP/US$ Exchange Rate (RHS), inverted
The peso would be particularly hit if the attacks by the insur-

Moreover, while we currently prefer equities over fixed income in gents, on the country's oil infrastructure, pose significant risks
Colombia, we believe the government's global peso-denominated to production, decreasing investor appetite for oil companies
bonds (COLTES) will remain an attractive instrument over the such as majority state-owned Ecopetrol and Canadian-based
long term, driving robust demand for the peso. A dovish stance Pacific Rubiales.
by BanRep authorities, combined with a recent reduction in the
tax rate on non-residential holdings of government bonds from
33% to 14%, will likely drive robust demand for Colombian
debt (see, 'Local Debt Markets Have Major Room To Grow', Sovereign Risk Rating
January 14).
Challenges Remain In 2013
Moreover, our favourable outlook for Colombia's oil sector
underpins our view that foreign direct investment will remain BMI VIEW
robust in 2013, further limiting the effects of BanRep's inter- While our latest Sovereign Risk Ratings show no change in the average
vention. Our Oil & Gas team forecasts a 36.0% increase in overall score for Latin America since our last update in October 2012,
Colombia's oil reserves by 2016. Combined with the govern- we continue to see 2013 as a challenging year for several economies
ment's increasingly favourable licensing terms and initiatives in the region. Our ratings continue to highlight a number of themes
to expand refining capacity, we expect significant investment we believe will be key in 2013, such as economic underperformance
inflows will continue to add appreciatory pressures to the peso. in Argentina and Venezuela, the impacts of slowing Chinese growth
on Latin America's industrial metals exporters, and continued robust
Risks To Outlook economic expansion and fiscal consolidation in Mexico and Colombia.
A significant deterioration in the ongoing negotiations between
the government and the country's main leftwing insurgent group, The most recent Sovereign Risk Ratings (SRR) for Latin America

ECONOMIC OUTLOOK
highlight a number of themes we have long emphasised for 2013, Fiscal Outlook', January 18), further weighing on the country's
including that the industrial metals exporters will be hit hard by 'ability to pay' score.
a rebalancing of the Chinese economy, Mexico and Colombia
will remain two of the region's most dynamic growth stories A Mixed Bag
while Argentina and Venezuela will underperform, and Central Latin America - Change In Sovereign Risk Ratings Scores Since Our
Last Update
America and the Caribbean will continue to face significant
macroeconomic headwinds (see our online service, December Mexico
Peru
12, 'Our Key Themes For 2013'). However, the average score Jamaica
for Latin America remains steady at 54, following significant Nicaragua
Barbados
declines in our previous two updates, keeping the average rating Argentina
at D (see 'Sovereign Risk Ratings: Global Headwinds Further Brazil
Colombia
Erode Creditworthiness', October 17). This comes as the majority Costa Rica
of the significant downgrades to our macroeconomic forecasts Trinidad & Tobago
El Salvador
for 2013 have already taken place. Panama
Uruguay
Ecuador
A Shake-Up At The Top Chile
Venezuela
Although Chile (76, B) retained the top spot in our regional rank- Honduras
ings, its score has declined significantly in recent months (-8) as -11 -6 -1 4
we expect that China's rebalancing away from an investment- Source: BMI
led growth model will see Chile's current account dynamics
deteriorate significantly. In addition, we expect a slowdown Despite our expectation that a rebalancing of the Chinese
in headline real GDP growth, combined with weaker copper economy will weigh on Peru (71, B-) as well, we have seen its
prices and an election in 2014, will result in net budget deficits 'ability to pay' score rise modestly on the back of upgrades to
of 0.1% and 0.8% of GDP in 2013 and 2014 (see 'An Enviable the country's fiscal outlook. We now forecast fiscal surpluses
TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS EVOLUTION OF ABILITY TO PAY

Country Total Score Rating Market View Ability To Pay
2013 2013 2013 2008 2009 2010 2011 2012 2013
Chile 76 B 2 69 76 64 82 75 67
Mexico 75 B 3 69 69 64 67 67 71
Colombia 74 B 2 - 51 56 60 56 58
Peru 71 B- 3 73 69 67 76 75 71
Brazil 69 C+ 4 73 60 73 69 67 69
Uruguay 66 C 3 36 49 40 49 44 56
Trinidad & Tobago 63 C- 3 - 67 65 71 73 73
Panama 62 C- 4 44 33 44 44 42 42
Costa Rica 58 D+ 3 45 42 49 45 45 46
Guatemala 54 D 4 32 42 55 53 53 55
Dominican Republic 53 D 3 22 17 40 33 38 35
Barbados 47 E+ 3 - 24 25 24 31 33
Ecuador 45 E 3 - 36 47 53 53 51
El Salvador 44 E 4 16 12 33 29 29 31
Nicaragua 42 E 3 18 9 11 20 29 29
Honduras 41 E 3 55 35 44 51 38 36
Jamaica 33 E 4 20 5 15 24 7 13
Argentina 29 E 4 56 38 53 49 29 33
Venezuela 27 E 4 65 47 42 38 38 27
Sovereign ratings in ranges from A to E, with + indicating that a credit is in the top of its range (eg B+ is 77, 78, 79), and indicating it is near the bottom
(eg B- is 70, 71, 72). Market outlook is on a scale of 1 to 5, from very bullish to very bearish, with 3 being neutral. Total and willingness to pay is out of
100. Source: BMI

COLOMBIA Q2 2013
of 0.5% and 0.4% of GDP in 2013 and 2014, up from modest Argentina And Venezuela To Remain
deficits previously, on the back of more moderate spending (see Underperformers
'Moderate Spending To Improve Fiscal Outlook', November 30). We highlighted in our 'Key Themes for 2013' that Argentina
In addition to these factors bolstering the country's 'ability to (29, E) and Venezuela (27, E) are in for a turbulent year, a view
pay' score, we have modestly upgraded Peru's 'willingness to which our SRR data continues to reflect. Following the most
pay' score on the back of our expectation that fiscal policy will
remain relatively sound in future. Venezuela And Honduras Lead The Way Down
Latin America - Change In Ability To Pay Scores Since Our Last
Update
Chile The Biggest Loser Among Major Economies
Latin America - Change In Ability To Pay Score Since Last Update Uruguay
For Selected Countries Jamaica
Mexico
Colombia
Mexico Brazil
Peru
El Salvador
Colombia Barbados
Argentina
Costa Rica
Brazil Guatemala
Ecuador
Dominican Republic
Chile
Peru
Venezuela
Honduras
-12 -7 -2 3 8
Chile
Source: BMI
-10 -8 -6 -4 -2 0 2 4 6
recent downgrades to our macroeconomic forecasts, as well as
Source: BMI
the countries' 'willingness to pay' scores, they rank at the bottom
We believe the moves in Chile and Peru are also indicative of of our league table.
a broader shake-up at the top of our regional rankings in recent
quarters, with Brazil (69, C+) and Chile losing their lustre, while CentAm Scores Head Lower
Colombia (74, B) and Mexico (75, B) have climbed toward the Latin America - Change In Willingness To Pay Scores Since Our
Last Update
top of our ratings in recent quarters. This chimes well with our
view that Brazil is set for a period of more moderate growth Dominican Republic
in the coming years and fiscal consolidation is likely to remain
Peru
off the cards in the near term due to a general election and the
Nicaragua
expiration of the government's growth acceleration programme
Mexico
in 2014 (see 'Expenditures To Keep Fiscal Deficit Substantial
Trinidad & Tobago
In 2013', January 18).
Panama
Meanwhile, Mexico continued to rise in our ratings to occupy Guatemala
second spot in our most recent update, largely due to an improve- Honduras
ment in its 'ability to pay' score. This follows an improvement El Salvador
in our 2013 fiscal deficit forecast from 2.1% of GDP to 2.0%, Uruguay
as well as an upgrade to our 2013 real GDP growth forecast to -15 -10 -5 0 5 10
3.6% from 3.4% previously, due to a more optimistic outlook
Source: BMI
for the US economy (see 'Stronger US Performance To Boost
Growth', January 15). Meanwhile, despite losing the second spot Following Venezuela's devaluation of the bolvar in February,
in our league table to Mexico, Colombia's 'ability to pay' score the country has seen a substantial downgrade (-9) in the 'ability
increased to 58 (out of 100), from 56 in our last update, as we to pay' category of our SRR due to rising debt-to-GDP, declin-
expect real GDP growth to rise from 3.8% in 2012 to 4.3% in ing foreign reserves and our expectation for real GDP growth
2013 and the state to continue with its fiscal consolidation agenda. to slow to 2.6% in 2013, from an estimated 5.3% in 2012 (see

ECONOMIC OUTLOOK
'Government Intervention To Increase Following Devaluation'). mid-2013 (see 'ARS: Weakening Reserves Picture To Trigger
Venezuela's 'willingness to pay' score held steady at 26 second Devaluation', December 3).
to last in the region. This suggests that risks to the Venezuelan
economy remain significant, with the country scoring particu- However, Argentina is not the only Southern Cone country to
larly poorly in the sub-components of our 'willingness to pay' score poorly in the 'willingness to pay' portion of our ratings, as
ratings that discuss fiscal responsibility, debt management and Uruguay (66, C) has seen a major downgrade (-12) in our most
political upheaval. recent update. This is underpinned by our view there is divi-
sion within the government about whether fiscal responsibility
Default risk is higher Argentina, with the country scoring or promoting growth should take precedence, implying further
only 23 in the 'willingness to pay' category the lowest in the fiscal slippage is likely on the cards in the coming quarters.
region. The country's weak score is underpinned by a number
of factors, many of which are highlighted in the ongoing legal Central American Creditworthiness Is
battle between the government and the 'hold-out' investors who Lacking
have rejected restructuring offers, and appear on the verge of Central American countries have long languished at the bottom
winning a major decision in US courts. The Argentine govern- half of our SRR, and the most recent update is no exception,
ment has repeatedly said it will not pay the 'hold-out' investors, highlighting that the region's creditworthiness remains sub-par.
regardless of the case's outcome, leading us to believe there is a Honduras (41, E) has seen the region's largest downgrade in its
high likelihood the country will enter technical default in order overall score (-10) on the back of a major deterioration in the
to avoid doing so (see 'Technical Default Risk Remains High', country's 'ability to pay'. This comes as we believe the Novem-
January 16). Moreover, we expect the government's unsustain- ber 2013 presidential election is likely to encourage a sizeable
able economic policies will prompt a one-off devaluation of increase in government spending over the coming quarters,
the peso in 2013, weighing on its 'ability to pay score', as we weighing on the fiscal accounts. We also foresee a significant
forecast the unit to be 22.5% weaker on average in 2013 than deterioration of the external accounts in 2013 as an outbreak
in 2012. We believe depreciatory pressure on the currency will of coffee rust weighs heavily on the country's exports and the
rise during 2013, while the policies employed to keep the cur- income account shortfall widensas foreign companies repatri-
rency overvalued will grow less effective. As such, we believe ate profits on the back of rising uncertainty surrounding the
the country's international reserves position will fall to a point upcoming election(see 'Pressure Rising On External Account
where Argentina must allow the peso to depreciate, likely by Position', February 28). In addition, the country's 'willingness
TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS EVOLUTION OF WILLINGNESS TO PAY

Country Total Score Rating Market View Willingness To Pay
2013 2013 2013 2008 2009 2010 2011 2012 2013
Chile 76 B 2 79 93 91 89 86 86
Mexico 75 B 3 89 89 82 74 78 80
Colombia 74 B 2 - 82 82 93 93 93
Peru 71 B- 3 71 72 79 64 66 70
Brazil 69 C+ 4 87 78 78 73 68 68
Uruguay 66 C 3 84 84 83 87 89 77
Trinidad & Tobago 63 C- 3 - 58 58 54 49 50
Panama 62 C- 4 82 89 89 88 87 86
Costa Rica 58 D+ 3 78 80 79 76 73 73
Guatemala 54 D 4 35 60 56 50 52 52
Dominican Republic 53 D 3 33 31 70 71 71 76
Barbados 47 E+ 3 - 76 79 70 64 64
Ecuador 45 E 3 - 31 30 30 37 37
El Salvador 44 E 4 34 34 76 69 62 59
Nicaragua 42 E 3 44 44 46 44 54 58
Honduras 41 E 3 56 34 58 54 48 46
Jamaica 33 E 4 73 57 62 61 57 57
Argentina 29 E 4 48 41 34 38 28 23
Venezuela 27 E 4 53 54 38 26 26 26
Sovereign ratings in ranges from A to E, with + indicating that a credit is in the top of its range (eg B+ is 77, 78, 79), and indicating it is near the bottom
(eg B- is 70, 71, 72). Market outlook is on a scale of 1 to 5, from very bullish to very bearish, with 3 being neutral. Total and willingness to pay is out of
100. Source: BMI

COLOMBIA Q2 2013
to pay' score declined on the back of downward revisions to the believe the restructuring will do little to substantially improve
'election' and 'fiscal discipline' sub-components of our ratings. the country's macroeconomic position over the long term, given
our expectation for only limited reforms to bolster growth and
Panama (62, C-) and El Salvador (4 4, E) also saw their 'willing- encourage greater fiscal consolidation (see 'New Restructuring,
ness to pay' scores decline modestly on the back of an anticipated Old Problems', February 14).
uptick in spending before the May and March 2014 elections,
respectively. El Salvador's willingness to pay score was also Meanwhile, although T&T now tops the region in terms of 'abil-
negatively impacted by a downward revision of its 'debt man- ity to pay' with a score of 73, we believe this is due to a decline
agement' sub-component given that the country continues to in Chile's score rather than a substantial improvement in T&T.
post one of the highest debt-to-GDP ratios in Central America. While the country's score remains supported on the back of a
low debt-to-GDP ratio and a strong current account surplus, the
long-term decline in T&T's hydrocarbons production, as well
Risk Appetite Keeps Spreads Low as our view that the economy is likely struggle to adjust to the
Latin America - Risk Ratings
unconventional oil & gas boom in the US mean it could fall in
2,200
Argentina
our ratings over the coming quarters.
Spread Over US$ 10-Year Bond Yield, BPS
1,700
Sovereigns Continue To Benefit From
Risk Appetite
1,200
We have changed adjusted the methodology for our market
outlook slightly this quarter, looking at our SRR and the spread
Venezuela
700
Dominican Republic of similar maturity US$-denominated global bond yields over
Barbados
Jamaica Costa Rica Uruguay
average US 10-year bond yields. This comes as we look to
200 El Salvador Peru Colombi
Guatemala a Chile
neutralise the effect of rising US bond yields on emerging
Panama T&T Brazil
Mexico market debt. Investors' search for yield has continued to bolster
-300 emerging market debt in recent months, bringing the spreads in
25 35 45 55 65 75 85
BMI Sovereign Risk Rating some of the Latin America's riskier economies to near record
lows. While we believe risk appetite and loose monetary policy
in developed states could see this trend continue in the coming
months, we highlight rising risks due to increasing debt issu-
Caribbean Not All Rosy Despite ance in emerging markets and potential for several countries'
Upgrades macroeconomic positions to deteriorate in coming months.
Although both Barbados (47, E +) and Jamaica (33, E) have seen Our 'fair value' frontier continues to suggest room for yields
upgrades in their overall SRR scores, and Trinidad & Tobago on Salvadoran and Guatemalan debt to head higher, while Peru
(T&T, 63, C-) has taken the top spot in the region's 'ability to and Mexico remain near fair value.
pay' table, we believe significant macroeconomic headwinds,
stemming from still-weak global growth, are likely to continue As financial markets increasingly price in normalisation in US
impacting the Caribbean in the coming years. Indeed, while monetary policy in future, while creditworthiness declines in
Barbados' 'ability to pay' score rose on the back of a pick-up in some cases, we expect to see yields of some of the region's
growth and slightly more robust export and reserves positions, riskier sovereigns head higher. This highlights potential for these
our forecast for average real GDP growth of just 1.6% between spreads to widen quickly, saddling sovereigns with both higher
2013 and 2018 means that the country's debt burden is unlikely nominal debt loads and higher debt servicing costs.
to decline substantially over the coming years.
Jamaica's 'ability to pay' score also got a boost from an upgrade to

our fiscal forecasts, and we believe the recently agreed-upon debt
swap and the increased likelihood of IMF support will improve
the country's macroeconomic prospects over the coming quarters.
However, this is a fundamentally short-term phenomenon. We

Chapter 3:
10-Year Forecast
situation should create a more attractive investment environment

The Colombian Economy To and is likely to encourage a surge in FDI. For the time being,
2022 Colombia is one of the most attractive investment prospects in
the region, particularly as ongoing investment into key sectors
Sustainable And Sturdy Growth supports our relatively positive outlook for domestic demand
throughout the 10-year forecast period to 2022, thus helping
BMI VIEW maintain sustainable levels of economic growth.
Business-friendly policies and a steadily improving security situa-
tion will help Colombia achieve sustainable levels of strong real GDP While increased gross fixed capital formation will drive the Co-
growth, which we forecast will average 4.4 % y-o-y in 2012-21. A surge lombian economy throughout 2013, taking up a larger proportion
in fixed investment will catalyse such growth over the coming years of GDP, private consumption is likely to remain the principal
and we expect consumption to follow suit and remain the main driver of driver of domestic demand over the longer term. That said, we
the Colombian growth story. do not see it reaching the 7.8% and 6.8% y-o-y growth levels
witnessed in 2006 and 2007. The twin storms of high inflation
A Bright Outlook: Like most of the major regional economies, and restrictive headline interest rates (which hampered consumer
Colombia's economy suffered during the recent downturn, with spending in late 2008 and early 2009) have now abated, and we
real GDP growth narrowly avoiding recession at 0.8% y-o-y expect general credit conditions to gradually improve. Moreover,
in 2009. This was primarily owing to a slowdown in private further developments of domestic financial institutions, such
consumption, the principal driver behind the country's recent as the expansion of the recently opened derivatives market,
expansionary cycle, as well as tighter credit conditions and a should help Colombia become one of the regional leaders in
drying up of domestic capital investment. However, given the the financial services industry, along with Chile and Brazil.
improvement in Colombia's political risk profile, following the This should fuel further private consumption growth patterns
election of President Juan Manuel Santos, we expect a continu- in 2013 and beyond.
ation of the previous administration's security and business-
friendly policies to encourage an foreign direct investment Despite the recent uptick in government consumption, Santos'
(FDI)-financed investment boom, catalysing strong economic plans for fiscal consolidation and a balanced budget mean we
growth for the remainder of our 10-year forecast to 2022, av- expect more moderate levels of government consumption. The
eraging 4.5% y-o-y. A solid political foundation is essential return of the domestic consumer beginning in 2011 should also
to fostering sustained levels of economic expansion over the negate the need for high levels of public expenditure, which we
10-year forecast period to 2022. A steadily improving security expect to remain under the 3% level for the duration of our forecast
TABLE: LONG-TERM MACROECONOMIC FORECASTS

2015 2016 2017 2018 2019 2020 2021 2022
Nominal GDP, US$bn 3 447.3 489.4 534.4 586.7 632.2 669.2 723.5 762.0
Real GDP growth, % change y-o-y 1,3 4.4 4.7 4.4 4.5 4.6 4.6 4.7 4.7
Population, mn 4 49.4 50.0 50.5 51.1 51.6 52.2 52.7 53.2
GDP per capita, US$ 3 9,061 9,797 10,576 11,483 12,242 12,824 13,725 14,316
Consumer price index, % y-o-y, ave 2,5 3.5 3.5 3.8 4.2 4.0 3.8 3.5 3.8
Current account balance, % of GDP 6 -1.8 -1.2 -0.7 -0.2 0.2 0.3 0.6 0.6
Exchange rate COP/US$, ave 7 1,815.00 1,800.00 1,790.00 1,780.00 1,800.00 1,850.00 1,850.00 1,900.00
Notes: f BMI forecasts. 1 Base year 2005; 2 Base December 1998 = 100. Sources: 3 DANE/BMI; 4 World Bank/UN/BMI; 5 BanRep; 6 BanRep/BMI; 7
BMI.

COLOMBIA Q2 2013
period. We do not expect any significant change in economic average of 1.4 percentage points to headline GDP growth over
policy over the medium term, and therefore market-oriented the same period. While we expect investment to cool somewhat
policies should contrast favourably with more left-leaning over the longer term, we believe the current robust investment
economic strategies pursued by several Andean counterparts. outlook places the country in a strong economic position among
However, we are cautious that a weak export picture owing to regional peers.
reduced external demand could keep public spending levels
elevated over the medium term, causing a reversal of private Risks To Outlook: The key risk to our view comes from a po-
capital investment, which might hamper growth and lead to a tential failure of the new president to live up to high expectations
deterioration in the public debt profile. placed on him from the international and domestic community.
A sudden reversal of investment flows could place strain on the
Risks To External Sector: One main concern lies with Colom- country's financial sector and significantly alter the country's
bia's external sector, which we believe is dangerously skewed strong growth outlook. That said, given that Santos' manifesto
towards dependence on oil exports, and lack of diversification is a broad continuation of the previous government's policies,
n export markets. With over 50% of all exports traditionally with no radical reforms or ambitious targets, we do not see a
destined for two countries, the US and Venezuela, Colombia high probability of this scenario playing out.
is dangerously exposed to both a consumption slowdown in the
US and the political instability of its Andean neighbour. This Another risk could come in the form of a 'double-dip' global
risk came to the fore with a trade spat between Colombia and recession, which could lead to a rise in unemployment owing
Venezuela and we continue to see a reliance on Venezuelan to poor external demand, resulting in increased political risk
demand as a potential economic threat in the coming years. (although we would not expect the type of fallout experienced by
other regional countries). This in turn may lead to a resurgence in
Recent trends show a rise in capital goods imports, which we insurgent activity or perhaps the creation of a populist-political
see as a positive for the manufacturing sector over the medium party from the remnants of the leftwing FARC rebel group.
term. Moreover, forward-looking economic policy should help Either way, this would threaten our relatively positive outlook.
boost value-added exports to other Latin American and Asian
markets in the longer term, hence our forecast of a significant The final risk to outlook of sustained economic growth is the
uptick in exports from 2013 onwards. prevalence of illicit crops, with the government estimating total
production of over COP5bn in current prices in recent years.
FDI Remains Key: One of the key drivers of Colombian eco- With stakes high in the battle for control over drug production
nomic growth over recent years has been inward flows of FDI, and trafficking, we may well see the type of spiralling violence
and we believe this remains crucial for future growth. Once currently being seen in Mexico, once the government's focus
again, an improving security environment and relative political shifts from the FARC to tackling the powerful drug cartels.
stability compared with other regional economies means stronger Such violence could well threaten FDI levels, although given
inward foreign investment is likely to flow into the infrastruc- that we are yet to see a direct correlation between violence and
tural, mining, energy and financial sectors, although global lower FDI flows in Mexico, this may not be significant enough
risk aversion remains a risk to this view in 2013. We forecast to damage investor sentiment towards Colombia.
investment growth to average 5.2% y-o-y from 2013 to 2014,
a slight moderation from 2011 levels, but still contributing an
BMIs long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.

Chapter 4:
Business Environment
SWOT Analysis BMI Business Environment Risk

Ratings
Strengths
President Juan Manuel Santos offensive against the countrys rebel Colombia has several key weaknesses in terms of its business environ-
movements has boosted investor confidence as the security situation ment. First, its labour market suffers from a rigid employment infrastructure
has improved. and relatively low literacy levels across the country. In addition, Colombia
Colombias geographic location on the north-west tip of South scores poorly on the paying taxes components of our business envi-
America, with ports on both the Caribbean Sea and Pacific Ocean ronment ratings, although there has been some improvement recently.
is an advantage as it provides easy access for exports and imports. Nevertheless, we expect the Santos government will continue to build
Weaknesses on the improvements made by Uribes administration, which should bode
Although progress has been made to reduce the amount of govern- well for inward investment in the coming years.
ment red tape, bureaucracy and non-tariff barriers to trade still hinder
Business Environment Rank Trend
the business community. Chile 64.0 1 +
Political uncertainty in Venezuela could rattle investor confidence in Uruguay 59.8 2 +
Mexico 53.8 3 +
Colombia. Brazil 53.7 4 +
Peru 53.5 5 +
Opportunities Colombia 52.6 6 +
Costa Rica 52.1 7 +
The US Congress ratification of the US-Colombia free trade agree- Panama 51.6 8 =
Argentina 48.3 9 -
ment provides a significant opportunity for Colombia, and we expect Paraguay 43.2 10 +
the countrys infrastructure and external sectors to benefit consider- El Salvador 42.0 11 -
Guatemala 40.9 12 +
ably from increasing investment and greater access to the US market Nicaragua 40.3 13 +
Ecuador 38.4 14 +
in the medium term. Bolivia 37.5 15 +
Honduras 36.3 16 -
Threats Venezuela 32.6 17 +
Risks to the personal security of foreign employees persist, although
substantial improvements have been made recently.
A resurgence of rebel violence remains a key risk, as does a rise in
drug-related activity

COLOMBIA Q2 2013
for the larger development of Colombia's oil and gas industry

Business Environment Outlook and should engender confidence in Ecopetrol's ability to lead
the expansion.
Introduction
Over recent years, Colombia has been seen as one of Latin The third and final contract for Colombia's Ruta Del Sol toll
America's more reliable targets for foreign investment. While road concession has been awarded to Yuma Concesionaria. The
we see some risks on the horizon, we expect this view to con- US$900mn project will involve rehabilitating, expanding and
tinue with the administration of President Juan Manuel Santos. operating an existing 464km single-lane section of highway,
However, we caution rising global risk aversion could hamper with the concession period capped at 25 years. With a total
fixed investment flows into the country, as could rising politi- investment of almost US$4.0bn, the Ruta del Sol highway is
cal instability in some key regional economies. Nevertheless, one of the largest infrastructure projects being undertaken in
business-friendly policies and sound monetary policy are likely the country, with the road linking Colombia's main agricultural,
to see the country remain one of the most attractive regional industrial and urban centres. Colombia is one of our favourite
locations for foreign investors. infrastructure markets in the region, reflected in our bullish
forecasts for the country's construction industry, where we
Latest Developments expect y-o-y growth to average 5.4% between 2013 and 2017.
The free trade agreement (FTA) with the US was launched in However, we note that persistent corruption remains the major
May 2012, ending years of tension over the issue. Moreoever, downside risk to continued strong growth for the sector.
the treaty should bolster Colombia's external and infrastructure
sectors, as well as its investment outlook, which are poised to Minister of Social Protection, Mauricio Santamaria, will be
benefit from the treaty. responsible for major changes the country's public healthcare
system. Our Pharmaceuticals team believes the government is
Colombia's part state-owned oil company Ecopetrol will spend likely to make significant improvements to the previous health-
US$4.2bn building a new oil pipeline from the Llanos region to care strategy as the administration aims to achieve universal
its main export point in Coveas. Infrastructure improvements healthcare by 2013. These reforms will include efforts to increase
will play a crucial role in facilitating greater exports as Colombia state intervention to remove access barriers, which currently exert
ramps up oil production over the next 10 years. A clear plan from a high financial burden on the provision of medical services.
Ecopetrol on the development of this infrastructure bodes well
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS

Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment
Argentina 55.8 44.8 44.4 48.3
Brazil 60.9 53.3 47.0 53.7
Chile 53.4 68.1 70.4 64.0
Colombia 51.6 56.4 49.8 52.6
Costa Rica 55.1 51.1 50.0 52.1
Dominican Republic 38.6 45.8 49.6 44.6
El Salvador 42.4 43.1 40.5 42.0
Guatemala 39.2 37.2 46.4 40.9
Guyana 36.9 46.8 46.7 43.5
Honduras 32.0 32.6 44.5 36.3
Jamaica 42.1 49.7 37.5 43.1
Mexico 52.1 53.0 57.2 53.8
Nicaragua 34.6 38.0 48.5 40.3
Panama 48.6 54.2 51.9 51.6
Peru 49.4 50.2 60.8 53.5
Trinidad & Tobago 44.9 47.3 61.0 51.0
Uruguay 63.5 66.2 49.7 59.8
Venezuela 40.9 24.6 32.5 32.6
Scores out of 100, with 100 representing the best score available for each indicator. Source: BMI

BUSINESS ENVIRONMENT
Quota-based firms, which include limited partnerships,

Institutions joint-stock companies and limited liability companies
(LLCs)
Legal Framework
Colombia has a comprehensive legal business framework. The Share-based companies, which include stock corporations.
judicial system defines the legal rights of commercial entities,
reviews regulatory enforcement procedures and adjudicates General and limited partnerships are normally used by family
contract disputes in the business community. The judicial frame- or small operations. The limited liability company is frequently
work includes the Council of State, the Constitutional Court, adopted by small and medium enterprises (SMEs), while the
the Supreme Court of Justice and the various departmental and stock corporation is invariably a large company.
district courts, which are also overseen for administrative mat-
ters by the Superior Judicial Council. The UN Conference on Trade and Development (UNCTAD)
has identified the high level of legal instability arising from the
The judiciary was granted greater administrative and financial frequent issuing of regulations and administrative rulings as a
independence from the executive branch in the 1991 constitu- significant impediment to investment in Colombia. To address
tion. However, the judicial system remains hampered by red the issue, Colombia's congress passed Laws 962 and 963 in
tape and corruption. 2005. Law 962 simplified existing administrative procedures
and provided for the review of new procedures; Law 963 guar-
The structure and the incorporation procedure of business com- antees investors that the laws applicable to the investment at
panies, sole trader companies and foreign company branches and the time the investment is entered into will remain in effect for
subsidiaries are regulated by the Code of Commerce. There are a period of up to 20 years, depending on the type and amount
five types of business companies, which are in turn subdivided of the investment. The minimum dollar value of the investment
into three groups, as follows: must reach US$1.2mn and those seeking to benefit from the law
are required to pay a fee based on the investment. Investments
Interest-based companies, which include general partner- in manufacturing, agriculture, tourism, mining, petroleum,
ships telecommunications, construction, electricity production and
TABLE: BMI LEGAL FRAMEWORK RATING

Investor Protection Score Rule of Law Score Contract Enforceability Corruption Score
Score
Argentina 26.0 46.3 64.0 56.8
Brazil 42.5 69.8 55.4 52.4
Chile 61.9 90.2 53.7 72.2
Colombia 67.1 64.3 8.7 36.9
Costa Rica 31.5 79.4 38.7 89.5
Dominican Republic 42.4 37.2 42.8 44.7
El Salvador 28.0 24.7 49.2 68.6
Guatemala 24.1 42.0 27.6 46.1
Guyana 41.2 48.5 50.9 50.5
Haiti 5.8 9.6 35.9 42.7
Honduras 26.4 41.3 20.4 22.9
Jamaica 38.9 53.6 23.1 70.5
Mexico 51.9 55.5 54.8 30.8
Nicaragua 23.1 33.8 64.0 43.2
Panama 61.1 60.9 20.1 47.4
Peru 53.6 41.1 49.2 44.8
Trinidad & Tobago 48.1 63.1 17.8 64.8
Uruguay 60.6 85.0 52.3 84.9
Venezuela 4.2 17.1 38.1 20.8

COLOMBIA Q2 2013
transmission, port and railroad development, and other activities protected than in the case of physical property, particularly in
approved by a special committee are particularly favoured by the areas of computer software piracy and video recordings. The
this regulation. Portfolio investment is specifically excluded. country has been on the US government's Special 301 'Watch
List' every year since 1991.
Property Rights
Individual rights against state actions and the right to private The registration and administration of IP rights in Colombia
property are explicitly protected by Colombia's constitution, and are carried out by four different government entities. The Su-
expropriation for public utility or for social interest reasons is perintendence of Industry and Commerce acts as the Colom-
guaranteed to be conducted through a proper process and with bian patent and trademark office. The Colombian Agricultural
adequate compensation. In the 2011 International Property Rights Institute is in charge of the issuance of plant variety protection
Index, Colombia was ranked 72 out of 129 countries surveyed. and agro-chemical patents; the Ministry of Social Protection
is in charge of the issuance of pharmaceuticals patents; and
Intellectual Property Rights the Ministry of Justice is in charge of the issuance of literary
As a member of the World Trade Organization (WTO), Colom- copyrights. However, the lack of uniformity and consistency in
bia has approved legislation to comply with the Agreement on IPR registration and oversight procedures limits the transparency
Trade Related Aspects of Intellectual Property Rights (TRIPS) and predictability of the IPR enforcement regime.
signatory obligations related to intellectual property. As a
TRIPS signatory, national laws must meet internationally agreed The FTA, with the US, provides for improved standards for
standards pertaining to copyright rights, including the rights of the protection and enforcement of a broad range of intellectual
performers, producers of sound recordings and broadcasting property rights, consistent with both US standards of protection
organisations, industrial designs, patents and trademarks. The and enforcement and with emerging international standards.
agreement also specifies enforcement procedures and dispute
resolution procedures, and is considered to be the most com- Corruption
prehensive international agreement on intellectual property. Transparency International's 2011 Corruption Perceptions
Index puts Colombia in 94th place in a global ranking of 182
Although a signatory to TRIPS, and despite increasingly ac- countries. In the Americas, the country ranks ahead of Mexico
tive law enforcement, IP rights in Colombia remain much less and slightly below Brazil
TABLE: LABOUR FORCE QUALITY

Literacy Rate,% Labour Market Rigidity Score Female Labour Participation, %
Argentina 97.6 21.0 52.4
Brazil 89.6 46.0 60.1
Chile 96.4 18.0 41.8
Colombia 92.3 10.0 40.7
Costa Rica 95.8 39.0 45.1
Dominican Republic 88.8 21.0 50.5
El Salvador 83.6 24.0 45.9
Guatemala 72.5 28.0 48.1
Guyana 91.8 19.0 44.7
Haiti 61.0 10.0 57.5
Honduras 82.6 57.0 40.1
Jamaica 85.5 4.0 56.1
Mexico 91.7 41.0 43.2
Nicaragua 80.1 27.0 47.1
Panama 93.2 66.0 48.4
Peru 88.7 39.0 58.2
Trinidad & Tobago 98.6 7.0 55.1
Uruguay 97.8 18.0 53.8
Venezuela 93.0 69.0 51.7
Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score. Source: BMI, International Labour Organization, World Bank

President Juan Manuel Santos is committed to fighting corrup- decade ago the government began to invest heavily in improving
tion as the influence of the FARC weakens. However, despite the network, with a US$100mn loan from the Inter-American
significant advances in fighting corruption, criminal narcotics Development Bank (IDB) and a number of large private con-
organisations have infiltrated parts of the military, the judiciary tracts. We note that the greatest risk to the realisation of the
and civil service at all levels. The government's Comptroller government's PPP ambitions is that the transport concession's
General estimates Colombia's economy loses up to US$6bn a authority, Inco, has been instructed to coordinate too many major
year to corruption, and the future of US aid to Colombia under tenders at the same time, which may cause delays.
the 'Plan Colombia' programme looks increasingly uncertain.
In the energy and utilities sector, it is worth highlighting the Hi-
droelctrica Ituango hydropower project, which when complete
will have a capacity of 2.4GW. It is a major infrastructure project
Infrastructure that has already attracted 22 companies interested in contracts.
Physical Infrastructure An encouraging development has been the proliferation of

To a large extent, the Colombian economy's growth and devel- infrastructure funds for Colombia. At present, there are more
opment has been powered by the infrastructure segment. With than 10 infrastructure projects with a value of US$1.0bn at some
considerable expenditure by both private and public players, state of development, including the US$2.0bn Bogot Metro
Colombian infrastructure, particularly the transport and water and the US$2.1bn Sogasmo hydro-power plant.
infrastructure segments, has seen tremendous growth in recent
years. The government of Colombia outlined plans to invest Labour Force
substantially in the country's infrastructure over the coming Colombia has one of the most qualified workforces in the
years, a plan predicated upon the procurement of new projects Andean Community and Latin America, with an adult
under public private partnership (PPP) schemes. At the time of literacy rate of almost 93%, according to the World Com-
the announcement we questioned whether or not the government petitiveness Yearbook (WCY).
was banking on too much support from the private sector at a
time when the project finance market had come to a standstill. The WCY places Colombia 24 th in terms of availability
of information technology skills, ahead of countries such
The main cities are well served, with numerous internal domes- as Brazil, Spain and Mexico.
tic flights between Bogot, Medelln, Cartagena, Barranquilla
and other major cities, and a good domestic network of 103 Colombia's labour force is both highly qualified and com-
airports with paved runways. There is an extensive domestic petitive. WCY indicators show that hourly wages in the
flight network operated by the national airline, Avianca, and industrial sector and yearly wages in the service sector
other operators. in Colombia are extremely competitive compared with
those in other developing and industrialised countries.
Colombia's road network measures in excess of 113,000km,
but only around 16,000km are adequately surfaced. However, a
TABLE: LATIN AMERICA - ANNUAL FDI INFLOWS

2009 2010 2011
US$bn Per Capita US$bn Per Capita US$bn Per Capita
Argentina 4.0 100.3 7.1 174.6 7.2 177.7
Brazil 25.9 134.3 48.5 248.8 66.7 339.0
Chile 12.9 760.1 15.4 898.3 17.3 1001.7
Colombia 7.1 156.3 6.9 149.0 13.2 282.0
Mexico 16.1 143.9 20.7 182.6 19.6 170.3
Peru 6.4 223.6 8.5 290.8 8.2 280.0
Trinidad & Tobago 0.7 530.6 0.5 409.6 0.6 426.3
Venezuela -2.5 -88.9 1.2 41.7 5.3 180.1
Source: UNCTAD, BMI

COLOMBIA Q2 2013
The number of female administrators and managers in Market Orientation

Colombia exceeds many Latin American countries and also
industrialised nations such as Canada, the UK, Germany, Foreign Investment Policy
Japan and France. According to the WCY, 38% of Colom- The Colombian government provides incentives for importers
bia's legislators, senior officials and managers are female, of capital goods using a number of drawback and duty deferral
higher than in any other country in the region, especially programmes. Examples of these programs are the free trade zones
at the ministerial level. (FTZs) and 'special import-export systems' located throughout
the country. Companies operating within FTZs are exempt from
Colombian Labour Law allows any group of 25 or more work- import tariffs and VAT on imports, and have access to special
ers, whether or not they are employees of the same company, credit lines offered by Colombia's foreign trade bank, Bancoldex.
to constitute a labour union. Employees of companies with Foreign capital investments in duty-free zones are entitled to un-
fewer than 25 employees may affiliate themselves to other such restricted repatriation of capital and profits. Investors are exempt
organisations. There is, however, no strong labour union culture from paying sales tax on the sale of goods and services on the
in Colombia, as more than half of the labour force belongs to the official exchange market, and are also exempt from income and
informal sector, and only around 10% of the country's formal remittance taxes related to foreign sales. Goods traded within
labour force is unionised. As such, strikes and public protests do duty-free zones are considered outside of Colombian territory
not present a significant risk to business operations in Colombia. for import-export tariff purposes. The aim is to promote com-
The largest and most influential unions are composed mostly of petitiveness, employment, good business practices, technology,
public employees, particularly in the state-owned oil industry sector or regional development, foreign investment, and new
and the state-run education sector. capital investment. More than 350 companies operate in such
zones, which are managed as private enterprises, independent
of state involvement.
Foreign Trade Regime

Though the US-Colombia FTA was signed in 2006, it was only
ratified in October 2011 and launched in 2012, providing a boost
TABLE: TRADE AND INVESTMENT RATINGS

Openness To Investment Score Openness To Trade Score
Argentina 58.5 20.2
Brazil 64.7 9.4
Chile 44.0 68.5
Colombia 53.9 9.3
Costa Rica 66.0 63.6
Dominican Republic 62.8 44.4
El Salvador 19.3 66.0
Guatemala 42.2 45.3
Guyana 60.5 87.8
Haiti 47.5 44.6
Honduras 54.9 61.8
Jamaica 21.4 32.9
Mexico 63.4 38.7
Nicaragua 56.9 73.4
Panama 46.4 81.4
Peru 76.8 49.1
Trinidad & Tobago 37.4 70.5
Uruguay 45.7 38.0
Venezuela 36.8 20.0

to relations between the two countries. Though more than 90%

of US imports from Colombia already enter the country duty- Operational Risk
free under the recently extended Andean Trade Preference Act
(ATPA), US exports to Colombia still currently face tariffs up Security Risk
to 35%. Once implemented, the FTA should eliminate tariffs on Violence has decreased markedly in many urban destinations,
more than 80% of American exports of industrial and consumer including Bogot, Medelln, Barranquilla and Cartagena. Cali
goods immediately rising to 100% over time and make continues to experience more violence than most other large
permanent Colombia's preferential access to the US market. cities, and the level of violence in Buenaventura remains high.
Most violence characterised as political is attributed to one
Colombia has signed a number of bilateral trade treaties, inter of three insurgent groups: the one-time Marxist-Leninist but
alia, with Chile, Peru and the UK (1994), Spain, Panama and now essentially narco-terrorist organisation Fuerzas Armadas
the Czech Republic (1995), a treaty with El Salvador, Guate- Revolucionarias de Colombia (FARC); the smaller Ejrcito de
mala and Honduras (Group of Three), as well as with Canada. Liberacin Nacional (ELN); and remnants of the right-wing
Colombia also has an FTA with Chile and the European Free paramilitary organisation Autodefensas Unidas de Colombia
Trade Association (although the latter is awaiting ratification). (AUC), all of which the US has designated as Foreign Terrorist
It has been a member of the WTO since 1995, as well as an Organisations. In 2006, the AUC completed its demobilisation
associate member of Mercosur, a regional trade agreement of 32,000 former paramilitaries, although small criminal gangs
between Argentina, Brazil, Paraguay and Uruguay which aims remain.
to promote free trade and the fluid movement of goods, people
and currency. On top of this, Colombia has bilateral trade agree- Recent government figures show the murder rate at its lowest for
ments with Algeria, the Czech Republic, Eqypt, Hungary, India, more than two decades. Kidnapping is still a serious problem,
Indonesia, Israel, Ivory Coast, Malaysia, Romania, Russia and particularly in the south where FARC is based, but with just
South Africa. 282 incidents in 2010 the figure is substantially lower than the
2,885 kidnappings reported in 2002. Small towns and rural areas
Tax Regime can still be dangerous due to the presence of narco-terrorists,
The Colombian tax system is in the process of a major and street crime remains a significant problem in many urban
overhaul, which has sometimes led to confusion among and rural areas.
investors struggling to keep up with the latest changes.
Corporate and individual taxes are being lowered gradually. Although noting that most foreign visits are trouble free,
A possible simplification of some taxes has been mooted. because of the constantly changing security situation the UK
Foreign & Commonwealth Office recommends against all but
Corporate tax: The standard rate is 33%. A 7% surcharge essential travel to all rural areas bordering Panama, Venezuela
on remittances abroad was abolished in January 2007. and Ecuador. Furthermore, it advises against travel to the towns
Residents are taxed on global income. Non-residents are of Buenaventura and San Jos del Guaviare and the areas sur-
taxed only on Colombian-sourced income. rounding them as well as to the Parque Nacional Natural de
La Macarena in the department of Meta. Pre-booking taxis is
Individual tax: Charged progressively up to 33% (reduced strongly recommended.
form 34% in 2007). Residents are taxed on global income.
Non-residents are taxed only on Colombian-sourced income.
VAT: Normal rate of 16% applies to most transactions. A

10% rate applies to commercial air transport. A 7% rate
applies to some foodstuffs. VAT-exempt items include
insurance, financial leasing, utilities, leasing of property
for housing, and healthcare.
Capital gains: Usually taxed as income.

Chapter 5:
Key Sectors
Autos country's development into a regional export hub. However, this

will only occur over the longer term, and for now sales growth
Executive Summary on the local market will continue to be met by import growth.
Colombia's auto industry experienced a disappointing 2012, with
new vehicle sales falling 3% y-o-y in the first 10 months of the Industry Forecast
year, to just 260,013 units, according to the Automotive Cham- Sales
ber of the National Business Association of Colombia (ANDI).
BMI has become increasingly bearish on vehicle sales in the Colombias auto industry experienced a disappointing 2012, with
country during 2012, estimating a fall of 3% in sales, based on new vehicle sales falling 3% y-o-y over the first 10 months of the
a reduction in consumer spending brought about by tightening year, to just 260,013 units, according to information provided by
credit availability and the depreciation of the Colombian peso, the Automotive Chamber of the National Business Association
which will make imported vehicles more expensive. of Colombia (ANDI). Of this total, 85,642 units were produced
locally, while 174,471 units were imported.
For 2013, however, BMI adopts a more bullish outlook, forecast-
ing growth of 3.4% in vehicle sales, as the currency strengthens BMI has become increasingly bearish on vehicle sales in the
and private consumption growth picks up. country over the past year, forecasting a fall of 3% in sales
in 2012, based on a reduction in consumer spending brought
Further underlining our upbeat stance towards the Colombian about by tightening credit availability and the depreciation of
auto sector in 2013 was the news in December 2012 that the Eu- the Colombian peso, which will make imported vehicles more
ropean Parliament has approved a Free Trade Agreement (FTA) expensive. This outlook is continuing to play out, and we main-
with Peru and Colombia. It is expected that this agreement will tain our forecast for now.
take effect in Q113. BMI believes this will boost autos imports
from Europe to Peru and Colombia, providing some upside risk For 2013, however, we adopt a more bullish outlook, forecasting
to our European production forecasts and sales outlooks for both growth of 3.4% in vehicle sales, as the currency strengthens and
Peru and Colombia. This follows the successful conclusion of private consumption growth picks up.
another FTA with South Korea in June 2012, which should see
a further increase in Korean auto imports into Colombia over We also believe that robust foreign investment will strengthen the
the short to medium term. Colombian peso, bolstering the purchasing power of consumers,
which will help imported vehicles particularly. We forecast the
To protect the local vehicle assembly industry, auto import peso to average COP1,815/US$ in 2013, significantly stronger
tariffs will reportedly be reduced gradually, in line with FTAs than its 2008-2012 average of COP1,934/US$. Lastly, we forecast
signed between other countries. At the present time, General unemployment to decline to 8.5% by end-2013, down from its
Motors, Renault, Mazda Motor and Daimler operate small- recent high of 14.6% in January 2012, as the economys expansion
scale assembly plants within Colombia, with a total capacity of contributes to labour market improvements, further bolstering
around 200,000 units a year. News that Japan is now seeking private consumption through increases in disposable income.
to enter into an Economic Partnership Agreement (EPA) with These factors have influenced our 2013 vehicle sales forecast.
Colombia could see additional Japanese automakers looking
to establish local production facilities in order to combat the Beyond 2013, BMI continues to forecast steady growth in Co-
current strength of the yen currency. Over the longer term, we lombian auto sales, reaching almost 400,000 units by the end
believe FTAs will facilitate greater investment in Colombia from of our forecast period in 2017.
its trading partners' auto manufacturers, which will support the

COLOMBIA Q2 2013
Another key advantage is the relatively small size of its auto its locally assembled Dacia Duster mid-size SUV while GM
market. The vehicle ownership rate is 43.2 cars per thousand is looking to invest about US$250mn over the coming five
people, meaning that Colombia offers a whole new consumer years at its Colmotores plant in Bogota. Equally promising is
base with improved incomes levels and affordability. Per capita the prospect of the resumption of Colombian vehicle exports
GDP income is set to grow nearly 45% in the next five years, to Venezuela. These developments confirm BMIs view about
BMI forecasts, which will be further supported by a large up- the Colombian production segment benefitting from domestic
tick in private sector credit growth and an ongoing investment demand potential and improved trade ties with its export desti-
boom, leading to rising employment and hence spending power. nations, particularly Venezuela.
Production With BMI expecting domestic vehicle demand to grow at an

annual average of nearly 9% between 2012 and 2016, there
In 2011, a total of 131,510 vehicles were produced in Colombia, are strong reasons for carmakers to seek local production in
according to ProExport Colombia. A number of international the country. Meanwhile, Colombias improving trade ties with
auto manufacturers currently produce vehicles in Colombia. major auto producers such as the US, Mexico and South Korea
General Motors (GM), based in Bogot, has an annual capacity bolsters its prospects for export-orientated production. BMI cur-
of about 100,000 units and assembles some GM Korea vehicles rently expects Colombian vehicle production to reach 218,000
from complete knock-down (CKD) kits. Renault, based in units by the end of the forecast period in 2017, up an impressive
Medelln, with an annual capacity of 80,000, assembles CKD 70% compared with the levels seen in 2010.
kits bought from Turkey, France, Spain and Brazil. Mazda
Motor, also based in Bogot, with a capacity of 15,000 units Renault revealed that with the signing of a free trade agreement
annually, builds up the 2, 3 and BT50 pickup trucks. German (FTA) with the US and Mexico in 2011, the Medellin plant of
automaker Daimlers subsidiary Daimler Colombia operates a its Colombian vehicle assembler Sofasa will be looking to send
CKD assembly facility in Bogot, producing the Mercedes-Benz almost one-fifth of its annual production capacity of 50,000
Atego 1016 and Thomas Built EF 1723 bus chassis. Further, vehicles to Mexico. Parts for the Duster will be sourced from
GM is currently building a stamping plant in Bogot to make not only the rest of Latin America but also from India, China,
and export the body sections of the Aveo Sonic. Japan, South Korea, France and Turkey. In past, Renault has
also attributed much of its focus on Colombia to the stable legal
Optimism is increasing in the autos production segment in set-up in the country. Sofasa reportedly has an agreement for
Colombia, owing largely to the improving business and regu- tax benefits for 10 years, meaning the company will be able to
latory environment in the country. Renault has now launched build competitively priced models in the country.
TABLE: COLOMBIA AUTOS SECTOR SALES, 2010-2017

2010 2011e 2012f 2013f 2014f 2015f 2016f 2017f
Vehicles, units 253,869 324,570 314,715 325,283 338,089 353,416 368,339 383,248
Vehicles, % chg y-o-y 37.1 27.8 -3.0 3.4 3.9 4.5 4.2 4.0
Passenger cars, units 157,254 198,787 188,251 195,668 204,045 213,171 223,455 233,985
Passenger cars, % chg y-o-y 30.8 26.4 -5.3 3.9 4.3 4.5 4.8 4.7
Passenger cars, % of total domestic vehicle unit sales 61.9 61.2 59.9 60.3 60.6 60.7 61.1 61.6
Commercial vehicles, units 96,615 125,783 126,463 129,615 134,044 140,245 144,883 149,263
Commercial vehicles, % chg y-o-y 48.9 30.2 0.5 2.5 3.4 4.6 3.3 3.0
Commercial vehicles, % of total domestic vehicle unit sales 38.1 38.8 40.1 39.7 39.4 39.3 38.9 38.4
Light commercial vehicles, units 80,715 97,515 101,416 105,873 109,681 112,712 115,533 117,770
Light commercial vehicles, % chg y-o-y 56.8 20.8 4.0 4.4 3.6 2.8 2.5 1.9
Heavy trucks, units 12,115 24,605 25,048 23,742 24,363 27,533 29,350 31,493
Heavy trucks, % chg y-o-y 33.4 103.1 2.0 -5.0 3.0 13.6 6.6 7.3
Buses and coaches, units 3,785 3,663 3,443 3,512 3,695 4,239 4,375 4,893
Buses and coaches, % chg y-o-y -12.3 -3.2 -6.0 2.0 5.2 14.7 3.2 11.8
Motorbikes, units 393,440 530,304 543,423 556,690 570,983 585,981 602,563 619,060
Motorbikes, % chg y-o-y 20.9 34.8 2.5 2.4 2.6 2.6 2.8 2.7
e/f = estimate/forecast; Source: ANDI/BMI

KEY SECTORS
Meanwhile, General Motors (GM)s investment was prompted estimates the recently signed FTA with South Korea will in-
by the ongoing talks on a FTA with South Korea, which were crease its economic growth for 2012 by 0.5%, to between 4%
concluded in June 2012. GM has long been wary of Colombias and 5%. Over the long term, Colombia is likely to become a
increasing ties with South Korea and the consequent ease of prime location for carmakers pursuing export-orientated produc-
entry for South Korean carmakers into the South American tion in the country. The sentiment has been encouraged by the
country. To that end, in 2010, it made its investment in its local regulatory setup, government support of the autos industry and
manufacturing plant and the development of its local supply the countrys increasing trade ties with leading auto producing
chain conditional on Colombia keeping its tax-free regime for nations around the world.
completely knocked-down imports intact. The carmaker has
confirmed it plans to start its press shop in Bogota in 2013, We also see opportunities for investment in more autos manufac-
which will allow it to add 60,000 vehicles to its current installed turing as the US and South Korean carmakers could be looking to
capacity of 80,000 units. exploit their FTAs as a springboard for their increased presence
in the Latin American region on the whole.
A further boost to the production segment will come from a
possible relaxation in Venezuelas autos import policy towards Trade
Colombia, which in the past has been the biggest market for
Venezuelan autos imports. In 2007, a record 70,000 vehicles Further underlining our upbeat stance towards the Colombian
imported into Venezuela came from Colombia representing auto sector in 2013 was the news in December 2012 that the Eu-
14% of the total vehicles sold in the former country. Industry ropean Parliament has approved a FTA with Peru and Colombia.
experts believe that bilateral trade agreement between the two It is expected that this agreement will take effect in Q113. BMI
countries could make way for increased vehicle trade in as lit- believes this will boost autos imports from Europe to Peru and
tle as 90 days. Colombia, providing some upside risk to our European produc-
tion forecasts and sales outlooks for Peru and Colombia. This
At this rate, Colombia could soon be on its way to becoming follows the successful conclusion of another FTA with South
one of the leading and most competitive autos production bases Korea in June 2012, which should see an increase in Korean
in the region. auto imports into Colombia over the short to medium term.
The vehicle assembly industry currently represents 10% of the To protect the local vehicle assembly industry, auto import tariffs
Latin American countrys GDP. The Colombian government will reportedly be reduced gradually, in line with FTAs signed
TABLE: COLOMBIA AUTOS SECTOR PRODUCTION, 2010-2017

2010 2011e 2012f 2013f 2014f 2015f 2016f 2017f
Vehicles, units 128,265 120,354 114,141 117,343 122,121 126,394 130,340 134,807
Vehicles, units, % chg y-o-y 40.8 -6.2 -5.2 2.8 4.1 3.5 3.1 3.4
Passenger cars, units 99,662 93,782 89,187 91,595 94,892 97,929 100,964 104,599
Passenger cars, units, % chg y-o-y 41.3 -5.9 -4.9 2.7 3.6 3.2 3.1 3.6
Passenger cars, % of total domestic vehicle unit production 77.7 77.9 78.1 78.1 77.7 77.5 77.5 77.6
Commercial vehicles, units 28,603 26,572 24,955 25,749 27,229 28,465 29,375 30,208
Commercial vehicles, units, % chg y-o-y 38.9 -7.1 -6.1 3.2 5.7 4.5 3.2 2.8
Commercial vehicles, % of total domestic vehicle unit production 22.3 22.1 21.9 21.9 22.3 22.5 22.5 22.4
Light commercial vehicles, units 10,903 10,271 9,778 10,208 10,739 11,265 11,632 11,865
Light commercial vehicles, units, % chg y-o-y 40.8 -5.8 -4.8 4.4 5.2 4.9 3.3 2.0
Heavy trucks, units 14,109 12,994 12,098 12,993 13,864 14,626 15,182 15,819
Heavy trucks, units, % chg y-o-y 40.8 -7.9 -6.9 7.4 6.7 5.5 3.8 4.2
Buses and coaches, units 3,591 3,307 3,079 2,548 2,627 2,574 2,561 2,524
Buses and coaches, units, % chg y-o-y 27.1 -7.9 -6.9 -17.3 3.1 -2.0 -0.5 -1.5
Motorbikes, units 373,620 508,989 483,743 493,757 499,734 503,803 509,657 511,415
Motorbikes, units, % chg y-o-y 22.8 36.2 -5.0 2.1 1.2 0.8 1.2 0.3
e/f = estimate/forecast; Source: ANDI/BMI

COLOMBIA Q2 2013
between other countries. Looking forward, news that Japan is We believe this will serve to boost the quality of production,
now seeking to enter into an Economic Partnership Agreement and should help incentivise vehicle manufacturers to invest in
(EPA) with Colombia could see additional Japanese automakers the country.
looking to establish local production facilities in order to combat
the current strength of the yen currency.
In this context, the terms of the EPA should reportedly be Food & Drink
finalised in 2013, and will include an FTA covering the autos
sector, among others. A number of Japanese auto companies Executive Summary
currently sell in the country. BMI expects the FTA to facilitate Despite shorter-term weakness expected for its consumer out-
substantial growth for these companies, as lower import taxes look, Colombia is rapidly evolving into one of Latin Americas
will reduce prices. high-potential consumer markets, with this position bolstered
by its improving political risk and employment profile. Major
Previously agreed FTAs between Colombia and other countries foreign retailers can be expected to continue targeting Colombias
have dictated that tariffs on vehicle imports into the country be rising middle class, although income disparities will remain an
gradually reduced from 35% FOB (free on board) to zero over a obstacle to faster growth of food and beverage sales values, in
10-year period. We expect a similar arrangement for this FTA. the organised and non-organised retail segments.
We believe FTAs will facilitate greater investment in Colombia Headline Industry Data (in local currency)
from its trading partners auto manufacturers, which will support
the countrys development into a regional export hub. BMI has 2012 per capita food consumption = +6.61%; five-year
long maintained that the current strength of the yen encourages forecast compound annual growth rate (CAGR) to 2017
Japanese companies to produce outside of the country, as the = +8.12%.
currency makes exports more expensive. We believe that, as
Colombias auto sector matures and Japanese auto manufacturers 2012 alcoholic drink sales = +5.20%; forecast CAGR to
gain market share and establish themselves, some may attempt to 2017 = +5.89%.
develop production facilities in the country. This will, however,
only occur over the longer term. 2012 soft drink sales = +5.69%; forecast CAGR to 2017
= +8.79%.
Due to the recent signing of several FTAs with Europe, the US,
and South Korea, Colombia has decided to address some of the 2012 mass grocery retail sales = +8.34%; forecast CAGR
terms of the agreement. Initial reports suggest the key changes to 2017 = +9.92%.
will be that assemblers will not be obligated to fulfil the original
equipment manufacturers (OEM) local content meaning that Key Company Trends
they can buy OEM parts overseas and, second, assemblers
will have to pay tariffs on completely knocked-down kits. These Carrefour s Colombian Business Purchased By Chilean Cen-
changes are expected to be implemented in 2013. BMI believes cosud: Despite previous speculation that US retailer Walmart
this policy may serve to boost investment in Colombia, as it would purchase French chain Carrefours assets in Colombia,
seeks to increase trade levels through these new FTAs, and the business was finally acquired in October 2012 by Chilean
manufacturers operating in the country will be able to purchase major Cencosud. The recent cooling of the Brazilian economy
auto parts from overseas. However, we believe Colombian trade may have pushed the firm to look elsewhere, with Colombias
with Ecuador may decline on the back of this change. consumer sector currently outperforming its regional counterpart.
During 2012 Cencosud reported same-store growth in all of its
The Colombian government is investing in a research and de- markets with the exception of Brazil.
velopment centre capable of evaluating materials, quality and
design. The commerce and industry ministry is working with Retail Sales Post Stronger-Than-Expected Growth: Co-
assemblers and OEM producers on a Productive Transforma- lombian retail sales surprised to the upside, expanding by
tion Programme to improve logistics, quality, and distribution. 6.7% year-on-year (y-o-y) in November 2012, compared with

KEY SECTORS
Bloomberg consensus of 1.3% y-o-y growth. We expect retail Food consumption growth will be driven by increased demand
sales growth to remain broadly subdued in the coming months for value-added and premium products, in line with rising in-
amid ongoing household deleveraging. comes and falling unemployment, with producers investing in
Colombia to tap the growing demand for indulgence products
Colombian Food Conglomerate Nutresa Expands Its Cen- such as chocolate, ice cream, yoghurt and coffee. International
tral America Reach: In December 2012, the leading domestic investors such as Danone and Nestl, and local firms such as
food conglomerate, Grupo Nutresa, acquired a 100% stake in Grupo NutresaBody 1and Alpina Productos Alimenticios,
the US-based American Franchising Corp (AFC). The value are all keen to capitalise on this rising demand and are investing
of the transaction, which includes the acquisition of the plant significant funds to increase capacity.
engaged in the manufacturing of dairy products, was reportedly
in the region of US$110mn. The move will allow Nutresa to Canned Food
significantly expand its ice-cream business in Central America,
as the Colombian company also gains the licence to distribute Canned food sales value CAGR, 2012 to 2017 (local cur-
Haagen Dazs and General Mills products. AFC owns the Costa rency): +5.78%.
Rican franchise Pops, which has around 180 stores.
Canned food sales volume CAGR, 2012 to 2017: +2.27%.
Key Risks To Outlook
As disposable incomes rise and more consumers start to look
Strong Peso Hurting Competitiveness: The peso is nowtesting for convenient meal options, canned food sales are expected
key resistance around COP1,750$/US, a level that has triggered to increase by 32.4% in value terms (local currency, nominal
greater central bank intervention in the past. The strength of growth rate), and by 11.9% in volume terms between 2012 and
the pesohas hurt export competitiveness, and with recent data 2017. In US dollar terms, the canned food market is expected to
suggesting exports grew by only around 2.5%y-o-y in Q312. increase by just over 33.0%, owing to the strengthening value
of the peso against the US dollar.
Industry Forecast It can be expected that food manufacturers will continue to invest
Food significant sums in modernising facilities and expanding produc-
tion capacities, supported by rising investor confidence on the
Food Consumption back of an improved security situation. One area of the canned
food market expected to record strong growth is canned tuna.
Total food consumption compound annual growth rate Investment from US and European companies in the regional
(CAGR), 2012 to 2017 (local currency): +9.44%. tuna-canning industry has enabled the sector to develop ahead
of other food industries, with the products gaining a reputation
Per capita food consumption CAGR, 2013 to 2017 (local for quality and traceability. Meanwhile, the internal market is
currency): +8.12%. growing because, as a predominantly Catholic region, Latin
American countries have a high demand for canned tuna during
Strong growth is still expected in food consumption (retail sales the annual Lent fasting period and on Fridays, when, tradition-
of food and drink, excluding alcoholic drinks) over the next five ally, fish is consumed instead of meat.
years, with economic growth remaining steady in the longer term,
while falling unemployment should push up disposable incomes. Confectionery
Between 2013 and 2017 total food consumption is expected to
rise by 57.0% (nominal growth rate in local currency terms). Confectionery sales value CAGR, 2012 to 2017 (local
This will stem from a projected 47.7% increase in per capita currency): +5.77%.
spending and a 10% increase in the size of the population. Using
BMI forecasts for the COP/US$ exchange rate, this translates Confectionery sales volume CAGR, 2012 to 2017: +2.83%.
into total food consumption growth of just less than 58.0% in
US dollar terms, as the Colombian peso is forecast to strengthen Sales of non-essential products such as chocolate have recorded
against the US dollar over the next five years. some of the biggest increases in Colombia over the past few

COLOMBIA Q2 2013
years, in line with rising disposable income. Between 2012 and and of butter at 0.51kg. By 2017 BMI forecasts that ice cream
2017 value sales are forecast to increase by 32.4%, as calculated consumption will increase to 3.54kg per capita, while cheese
in local currency terms (+33.1% in US dollars). Colombias consumption will increase to 1.44kg per capita and butter con-
confectionery sector benefits from the fact that almost two-thirds sumption will increase to 0.56kg per capita.
of the population is below the age of 30. As in other markets
Colombian confectionery sales are influenced by the health trend. In all three dairy subsectors domestic production is substantial,
accounting for the bulk of local consumption. Currently, local
Jams & Jellies producers account for around 98% of demand in Colombia, with
this dominance expected to remain for the considerable future.
Consumption of jams and jellies in Colombia is forecast to Exports account for a small proportion of total production..
increase through to 2017. From an estimated 1.57kg per capita
consumption in 2012, BMI forecasts this will rise to reach Meat
2.11kg per capita by 2017. This growth is likely to be driven by
increased demand for value-added and premium products from In terms of overall meat demand, consumption of sausages in
Colombian consumers. Domestic production of jams/jellies is Colombia is far higher than that of bacon/ham. In 2012 per capita
substantial, standing at over 74,000 tonnes in 2012, and showing consumption of sausages stood at just over 8kg, which BMI is
y-o-y forecast growth of around 9% between 2012 and 2017. forecasting will rise to 12.31kg by 2017. In contrast, per capita
consumption of bacon/ham stood at just 0.40kg in 2012, which
Pasta BMI forecasts will edge up to 0.50kg by 2017.
Consumption of pasta is climbing in Colombia as consumer tastes Domestic production of meat accounts for the majority of local
become more sophisticated in nature. Per capita consumption demand in both the bacon/ham and sausages sectors. Imports of
of uncooked pasta was 22.4 kg in 2012 andof prepared pasta bacon/ham are greater than the level for sausages and are forecast
at 0.36kg per capita. By 2017, BMI forecaststhat per capita to increase more substantially year on year through to 2017.
consumption of uncooked pasta will rise to 32.2kg and prepared
pasta to 0.54kg. Fish
In terms of uncooked pasta, domestic manufacture accounts for Colombias fisheries industry is of relevance for both domestic
virtually all consumption in Colombia. As far as prepared pasta consumption and exports. In terms of domestic demand, per
is concerned, imports are more important and through to 2017 capita consumption of frozen fish stood at an estimated 4.45kg
are forecast to increase y-o-y by about 14%. in 2012, which BMI forecasts will rise to 7.33kg by 2017. Per
capita consumption of preserved fish is much lower, standing at
an estimated 1.86kg in 2012, which BMI forecasts will increase
Dairy to 2.37kg by 2017.
With a large percentage of the population on low incomes Frozen fish exports stood at an estimated 55,700 tonnes in 2012,
the consumption of dairy products in Colombia is lower than with the rate of growth forecast to slow on an annual basis through
many other countries in the Andean region. In 2012, per capita to 2017, averaging only 1%. In contrast, although exports of
consumption of ice cream stood at 2.50kg, of cheese at 1.35kg preserved fish stood at a modest 6,530 tonnes in 2012, through
TABLE: FOOD CONSUMPTION INDICATORS HISTORICAL DATA & FORECASTS, 2010-2017

2011 2012e 2013f 2014f 2015f 2016f 2017f
Food consumption (COPbn) 69,378 74,730 80,703 87,695 96,469 106,282 117,325
Food consumption (US$bn) 37.54 41.52 44.46 48.05 53.15 59.05 65.54
Per capita food consumption (COP) 1,478,425 1,571,594 1,675,549 1,798,121 1,954,141 2,127,650 2,321,977
Per capita food consumption (US$) 800 873 923 985 1,077 1,182 1,297
Total Food consumption y-o-y growth (local currency, %) 12.65 7.71 7.99 8.66 10.00 10.17 10.39
e/f = BMI estimate/forecast. NB nominal growth rate, US$ values vary with year using BMI exchange rate forecasts. Source: National Department of
Statistics, BMI calculations

KEY SECTORS
to 2017, they are forecast to grow at double-digit rates. Alcoholic drinks sales volume CAGR, 2012 to 2017:
+2.64%.
Drink
Beer sales value CAGR, 2012 to 2017 (local currency):
Hot Drinks +6.23%.
Coffee sales value CAGR, 2012 to 2017 (local currency): Beer sales volume CAGR, 2012 to 2017: +2.71%.
+4.00%.
Wine sales value CAGR, 2012 to 2017 (local currency):
Coffee sales volume CAGR, 2012 to 2017: +0.55%. +7.27%.
Tea sales value CAGR, 2012 to 2017 (local currency): Wine sales volume CAGR, 2012 to 2017: +3.72%.
+2.79%.
Spirit sales value CAGR, 2012 to 2017 (local currency):
Tea sales volume CAGR, 2012 to 2017: -0.62%. +4.53%.
Coffee consumption in volume terms has been relatively stag- Spirit sales volume CAGR, 2012 to 2017: +1.07%.
nant over the last five years, at around 1.2mn 60-kg bags a year,
which equates to 1.5kg per person. In global terms, this level In the year to March 2012, SABMiller reported a 26% rise in
of consumption is moderate, but per capita consumption is far volumes in the Colombian market.
below that of Brazil (4.6kg per capita) and Argentina (4.0kg).
This tax increase is expected to continue weighing on demand
The market for Colombian coffee is dominated by instant over the forecast period to 2017. However, the growing popu-
(soluble) coffee, and the sector has delivered only moderate larity of beer among Colombias middle classes is forecast to
growth. Traditionally, the best Colombia coffee beans had been push volume sales up by about 14% between 2012 and 2017.
reserved for export markets. This is gradually changing, with
Compaia Nacional de Chocolates and local industry asso- Consumption of wine in Colombia is low. Colombia is not a
ciation Fedecafe running campaigns to encourage Colombian major wine producer. However, wine consumption is forecast to
consumers to consume higher quality coffee. Gourmet coffee grow moderately over the next five years as a result of growing
stands and cafs in all the major cities are increasing, giving consumer affluence and growing muiddle clasee.
producers a new sales outlet and pushing up margins. As such,
BMI forecasts growth in the sector over our forecast period, Soft Drinks
with value sales increasing by just under 21% between 2012
and 2017 to reach COP1,239bn (US$692mn). Soft drinks sales value CAGR, 2012 to 2017 (local cur-
rency): +8.79%.
Alcoholic Drinks
Soft drinks sales volume CAGR, 2012 to 2017: +5.51%.
Alcoholic drinks sales value CAGR, 2012 to 2017 (local
currency): +5.89%. Carbonated soft drinks sales value CAGR, 2012 to 2017
(local currency): +7.00%.
TABLE: HOT DRINKS VALUE SALES HISTORICAL DATA & FORECASTS, 2010-2017
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Coffee sales (COPmn) 950,894 990,586 1,018,374 1,050,606 1,087,762 1,133,009 1,183,329 1,238,862
Coffee sales (US$mn) 501.0 536.0 565.8 578.8 596.0 624.2 657.4 692.1
Tea sales (COPmn) 2,892 3,005 3,124 3,227 3,321 3,411 3,497 3,585
Tea sales (US$mn) 1.52 1.63 1.74 1.78 1.82 1.88 1.94 2.00
e/f=BMI estimate/forecast. Source: National Department of Statistics, FENALCO, BMI

COLOMBIA Q2 2013
Carbonated soft drinks sales volume CAGR, 2012 to 2017: currency): +10.79%.
+3.76%.
Once the economy picks up, we expect expansion to begin again.
Fruit/vegetable juice sales value CAGR, 2012 to 2017 (local We see expansion being focused on well served areas, such as
currency): +10.25%. the capital, Bogot, and Cali and Medelln, as well as regions
of the country with a low presence of MGR outlets, particularly
Fruit/vegetable juice sales volume CAGR, 2012 to 2017: the Atlantic coast cities of Barranquilla, Cartagena and Santa
+6.77%. Marta. While progressing with their expansion, store formats
are being adapted to take account of inequalities in income
Bottled water sales value CAGR, 2012 to 2017 (local cur- distribution, hence the gradual emergence of discount retailing.
rency): +12.27%. Despite these developments significant parts of the population
will continue to be excluded from shopping in modern MGR
Bottled water sales volume CAGR, 2012 to 2017: +8.77%. outlets, with about 17% of the population estimated to be living
in extreme poverty.
Local players are likely to be increasingly squeezed by competi-
tion from multinationals in this sector. Soft drinks sales (in local Trade
currency, nominal terms) are expected to increase by just over
52% between 2012 and 2017. Growth for carbonates is forecast Exports value CAGR, 2012 to 2017 (US$): +13.64%.
to be modest, owing to the increased health consciousness of
consumers. However, bottled water, fruit juices and functional Imports value CAGR, 2012 to 2017 (US$): +12.26%.
drinks can be expected to experience particularly strong growth
as a result of the aggressive marketing and promotional strate- Colombia has a positive food and drink trade balance, owing to
gies of manufacturers. a large agricultural sector that exports worldwide and a fairly
advanced processed food industry that exports mainly to neigh-
Mass Grocery Retail bouring countries such as Venezuela and Ecuador. Agriculture
accounts for nearly 20% of Colombias gross national product
MGR sales value CAGR, 2012 to 2017 (local currency): (GNP) and employs more than 30% of the working population.
+9.92%.
Supermarket sales value CAGR, 2012 to 2017 (local cur-

rency): +8.18%.
Hypermarket sales value CAGR, 2012 to 2017 (local cur-

rency): +11.56%.
Convenience stores sales value CAGR, 2012 to 2017 (local
TABLE: MASS GROCERY RETAIL SALES BY FORMAT HISTORICAL DATA & FORECASTS, 2010-2017
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Supermarkets (COPbn) 10,456 11,568 12,375 13,256 14,261 15,483 16,834 18,339
Hypermarkets (COPbn) 9,397 10,949 11,939 13,077 14,459 16,261 18,305 20,633
Convenience stores (COPbn) 468.0 542.5 596.5 655.5 722.7 804.5 895.0 995.7
Total mass grocery retail sector (COPbn) 20,321 23,060 24,911 26,989 29,443 32,548 36,034 39,967
Total mass grocery retail sector growth, COP, (y-o-y) 8.91 13.48 8.03 8.34 9.09 10.55 10.71 10.92
Supermarkets (US$bn) 5.51 6.26 6.87 7.30 7.81 8.53 9.35 10.25
Hypermarkets (US$bn) 4.95 5.92 6.63 7.21 7.92 8.96 10.17 11.53
Convenience stores (US$bn) 0.247 0.294 0.331 0.361 0.396 0.443 0.497 0.556
Total mass grocery retail sector (US$bn) 10.71 12.48 13.84 14.87 16.13 17.93 20.02 22.33
e/f=BMI estimate/forecast. Source: National Department of Statistics, FENALCO, BMI

KEY SECTORS

COLOMBIA Q2 2013
Other Key Sectors

Latest Forecast Data
Below are the latest forecast tables for our other core key sectors:
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Construction industry value, COPbn [1] 38,128.00 42,778.00 46,628.02 50,824.54 55,144.63 59,831.92 65,216.79 70,760.22
Construction industry value, US$bn [1] 20.1 23.1 25.9 28.0 30.2 33.0 36.2 39.5
Construction industry, real growth, % y-o-y [1] -1.74 5.66 5.55 5.80 5.35 5.00 5.50 4.70
Construction industry value, % GDP [1] 7.0 6.9 7.1 7.2 7.3 7.3 7.3 7.3
e/f = BMI estimate/forecast. Source: 1 DANE/BanRe
TABLE: PHARMA SECTOR KEY INDICATORS

2012e 2013f 2014f 2015f 2016f 2017f
Pharmaceutical sales, US$bn [2] 4.208 4.479 4.783 5.192 5.658 6.166
Pharmaceutical sales, US$bn, % chg y-o-y [2] 9.91 6.44 6.78 8.56 8.98 8.97
Pharmaceutical sales, COPbn [2] 7,574 8,129 8,728 9,423 10,184 11,037
Pharmaceutical sales, COPbn, % chg y-o-y [2] 7.05 7.33 7.37 7.96 8.08 8.37
Health expenditure, US$bn [3] 27.434 29.394 31.440 34.050 37.019 40.248
Health expenditure, US$bn, % chg y-o-y [3] 11.38 7.14 6.96 8.30 8.72 8.72
Health expenditure, COPbn [3] 49,381 53,350 57,378 61,800 66,633 72,043
Health expenditure, COPbn, % chg y-o-y [3] 8.49 8.04 7.55 7.71 7.82 8.12
Communicable, maternal, perinatal and nutritional conditions, DALYs [1,4] 983,697 965,267 947,357 929,969 913,103 896,759
Non-communicable diseases, DALYs [1,4] 4,263,445 4,308,455 4,351,851 4,393,633 4,433,797 4,472,342
e/f = BMI estimate/forecast. 1 Data is DALYS, disability-adjusted life years. Source: 2 AFRIDRO, IMS Health, BMI; 3 World Health Organization (WHO),
BMI; 4 WHO, World Bank, IMF, BMI research.
TABLE: TELECOMS SECTOR KEY INDICATORS

2011 2012e 2013f 2014f 2015f 2016f 2017f
Number of Main Telephone Lines in Service ('000) [1] 7,126.0 6,300.2 6,168.7 6,032.2 5,868.4 5,767.8 5,726.6
Number of Main Telephone Lines in Service, % change y-o-y [1] -0.8 -11.6 -2.1 -2.2 -2.7 -1.7 -0.7
Number of Main Telephone Lines/100 Inhabitants [1] 15.2 13.2 12.8 12.4 11.9 11.5 11.3
Number of Cellular Mobile Phone Subscribers ('000) [1] 46,201 49,666 51,911 53,769 55,138 57,093 59,689
Number of Cellular Mobile Phone Subscribers, % change y-o-y [1] 3.8 7.5 4.5 3.6 2.5 3.5 4.5
Number of Mobile Phone Subscribers/100 Inhabitants [1] 98.5 104.4 107.8 110.2 111.7 114.3 118.1
Number of Mobile Phone Subscribers/100 Inhabitants [1] 98.5 104.4 107.8 110.2 111.7 114.3 118.1
Number of Mobile Phone Subscribers/100 Inhabitants, % change y-o-y [1] 2.4 6.1 3.2 2.3 1.3 2.3 3.4
Number of Internet Users ('000) [1] 24,957 27,132 28,967 30,389 31,289 32,527 34,140
Number of Internet Users, % change y-o-y [1] 10.5 8.7 6.8 4.9 3.0 4.0 5.0
Number of Internet Users/100 Inhabitants [1] 53.2 57.1 60.1 62.3 63.4 65.1 67.6
Number of Internet Users/100 Inhabitants, % change y-o-y [1] 9.0 7.3 5.4 3.6 1.7 2.7 3.8
Number of Broadband Internet Subscribers ('000) [1] 4,836 7,013 7,995 8,954 9,760 10,346 10,656
Number of Broadband Internet Subscribers, % change y-o-y [1] 57.4 45.0 14.0 12.0 9.0 6.0 3.0
e/f = BMI estimate/forecast. Source: 1 CRC, SIUST, Operators, World Bank (International Telecommunications Union ITU), BMI research.

KEY SECTORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS

2011 2012e 2013f 2014f 2015f 2016f 2017f
Defence expenditure, COPmn [1] 24,178,100 26,302,911 28,681,641 31,523,151 34,796,862 38,520,080 42,679,091
Defence expenditure, COP, % change y-o-y [1] 15.5 8.8 9.0 9.9 10.4 10.7 10.8
Defence expenditure, % of GDP [2] 3.9 4.0 4.1 4.2 4.3 4.3 4.4
Defence expenditure, COP per capita of population [2] 515,226.5 553,155.0 595,484.5 646,356.0 704,867.2 771,132.3 844,660.8
Defence expenditure, COP per serviceman [2] - - - - - - -
Defence expenditure, US$mn, constant prices [1] 12,966.1 14,066.9 14,762.1 15,678.1 16,790.2 18,221.1 19,481.3
Defence expenditure, US$, constant prices % change y-o-y [1] 14.9 8.5 4.9 6.2 7.1 8.5 6.9
Defence expenditure, constant US$ per capita of population [1] 276.3 295.8 306.5 321.5 340.1 364.8 385.6
Defence expenditure, constant US$ per serviceman [1] - - - - - - -
e/f = BMI estimate/forecast. Source: 1 SIPRI/BMI; 2 SIPRI, BMI calulation.
TABLE: FREIGHT SECTOR KEY INDICATORS

2011 2012e 2013f 2014f 2015f 2016f 2017f
Port of Cartagena container throughput, TEU 1,691,341 2,008,637 2,264,652 2,521,385 2,841,072 3,190,945 3599101.6
Port of Cartagena container throughput, TEU, % y-o-y 17.198 18.760 12.746 11.337 12.679 12.315 12.8
e/f = BMI estimate/forecast. Source: BMI
This report is abstracted from BMIs industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables
showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find
out about BMIs other 1,113 industry reports, please contact subs@businessmonitor.com

Chapter 6:
BMI Global Assumptions
Global Outlook chiefly, a renewed slowdown in Chinese economic activity.

For the time being, loose monetary policy and the removal of
Past The Major Obstacles To Recovery some major tail risks mean that the risks to global growth are
Our global real GDP growth estimateshave changed little since more tilted to the upside than they were in 2012, but we see
ourlast Global Assumptions update, at2.9% for 2013 and 3.3% enough headwinds to prevent us from becoming too exuberant
for2014 (down a notchfrom 3.4% previously). The most notable on the growth outlook.
forecast changes include a downgrade of our 2013 eurozone
growth forecast to 0.0% (from 0.1% previously), which incor- We have revised our 2013 average US$/EUR forecast to US$1.34/
porates a downward revision to our Spanish projections. Our EUR from US$1.25/EUR previously to account for the H113
projection for 2.3% real GDP growth in the US in 2013 is above rally, while also assuming a sell-off later in the year. We have
the Bloomberg consensus of 1.8%, while our China forecast of also nudged up our 2014 average US$/EUR forecast to US$1.27/
7.5% is below the 8.1% average of analysts forecasts. EUR from US$1.20/EUR previously.Our broad outlook for the
euro has not changed significantly we are still bearish euro
We continue to believe that the biggest obstacles to a continued over the medium term from a fundamental perspective. However,
recovery (eg, the US fiscal cliff) have been mostly avoided, but we believe that a confluence of positive policy developments
expect headwinds to come into force in the second half of 2013 favours a stronger euro in the first half of 2013.
TABLE: GLOBAL ASSUMPTIONS

2012e 2013f 2014f 2015f 2016f 2017f
Real GDP Growth (%)
US 2.2 2.3 2.5 2.5 2.4 2.4
Eurozone -0.6 0.0 1.2 1.5 1.7 1.8
Japan 0.5 0.9 1.1 1.1 1.0 1.1
China 7.7 7.5 6.7 6.0 5.8 5.8
World 2.6 2.9 3.3 3.4 3.4 3.5
Consumer Inflation (ave)
US 2.1 2.1 2.1 2.1 2.1 2.1
Eurozone 2.1 1.7 1.8 1.9 2.1 2.2
Japan 0.0 0.0 0.6 1.3 1.8 2.3
China 2.7 2.8 2.9 2.8 2.7 2.7
World 3.5 3.4 3.3 3.2 3.3 3.3
Interest Rates (eop)
Fed Funds Rate 0.00 0.00 0.00 0.00 1.00 2.25
ECB Refinancing Rate 0.75 0.75 0.75 0.75 1.00 1.50
Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.25 0.50
Exchange Rates (ave)
US$/EUR 1.27 1.34 1.27 1.23 1.20 1.20
JPY/US$ 79.85 91.00 94.00 97.00 98.50 100.50
CNY/US$ 6.31 6.27 6.38 6.45 6.55 6.60
Oil Prices (ave)

OPEC Basket (US$/bbl) 109.5 104.4 101.0 95.2 93.3 93.3
Brent Crude (US$/bbl) 111.7 110.0 105.0 98.0 96.0 96.0
e/f = BMI estimate/forecast. Source: BMI

COLOMBIA Q2 2013
Developed States Q412 (in which a 0.1% quarter-on-quarter annualised figure

Our developed state aggregate growth forecast for 2013 remains was recorded). We will wait until at least the second estimate
1.3%, while we project an improvement in 2014 to 1.8%. Our of the US GDP figures before altering our 2013 forecast. None-
downgrade for the eurozone growth outlook stems mainly from theless, our core view remains the same: US economic activity
a revision of our Spanish forecasts on the back of poor Q412 is likely to pick up as the year progresses, led by business and
data. With the Spanish economy contracting by 1.8% y-o-y in residential investment.
real GDP terms in Q412, we have revised our real GDP growth
forecast to -1.7% in 2013 and 0.3% in 2014, from -0.5% and Emerging Markets
0.5% previously. We expect weak domestic demand, sluggish We forecast emerging market real GDP growth of 5.0% in 2013,
fixed capital formation and the countrys perilous fiscal position with a slight acceleration in growth in 2014 to 5.1%. Our ag-
to weigh on growth over the next few quarters. gregate regional forecasts remain relatively steady since our last
update, with the major downward revisions confined to Poland
Our 2.3% real GDP growth forecast for the US in 2013 faces (with 1.9% real GDP growth now forecast in 2013, versus our
downside risks from the base effects of an unexpectedly poor previous 2.3% growth projection, and 3.0% in 2014, down from
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS

2012e 2013f 2014f 2015f
Developed States Aggregate Growth 1.0 1.3 1.8 2.0
G7 1.2 1.5 1.9 2.0
Eurozone -0.6 0.0 1.2 1.5
EU-27 -0.4 0.3 1.4 1.8
Selected Developed States

Australia 3.2 2.1 1.8 2.5
Austria 0.4 0.9 1.5 1.9
Belgium -0.5 0.4 1.6 1.9
Canada 2.0 1.9 2.5 2.5
Denmark -0.1 1.2 1.4 1.6
Finland -0.4 0.8 1.5 1.9
France 0.0 0.4 1.0 1.6
Germany 0.7 0.8 1.9 1.8
Ireland -0.5 0.3 1.4 2.0
Italy -2.3 -0.8 0.7 1.0
Japan 0.5 0.9 1.1 1.1
Netherlands -1.1 0.2 0.9 1.5
Norway 3.2 2.8 2.5 2.5
Portugal -3.4 -1.9 0.1 0.7
Spain -1.4 -1.7 0.3 1.1
Sweden 0.6 1.2 2.6 3.4
Switzerland 0.7 1.5 1.8 1.6
UK 0.0 1.1 1.4 2.0
US 2.2 2.3 2.5 2.5
e/f = estimate/forecast. Source: BMI
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%)
US Eurozone Japan Brazil China Russia India
2013 Bloomberg Consensus 1.8 -0.1 1.0 3.5 8.1 3.3 5.6
BMI 2.3 0.0 0.9 3.5 7.5 3.4 6.1
2014 Bloomberg Consensus 2.7 1.1 1.2 4.0 8.0 3.8 6.5
BMI 2.5 1.2 1.1 3.7 6.7 3.6 6.7

BMI GLOBAL ASSUMPTIONS
3.7%) and Egypt (2.6% in 2013, down from the previous projec- we are more optimistic on the growth prospects of India, the
tion of 3.0%, and 3.7% in 2014, down from 5.2%). US for 2013 and, by a small margin, the eurozone.
We continue to see emerging Asia being an outperformer,

with real GDP growth of 6.3% in 2013 reflective of a strong
but temporary bounce in Chinese activity in H113 (the 2014
and 2015 projections for emerging Asia mark a deceleration to
6.1% and 5.6%, respectively). Growth in Latin America, Sub-
Saharan Africa and emerging Europe is also set to pick up the
pace in 2013, with reasonably steady growth going into 2014.
BMI is below consensus on growth in China in 2013 and 2014

(compared with the Bloomberg survey of analysts). However,
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS

2012e 2013f 2014f 2015f
Emerging Markets Aggregate Growth 4.7 5.0 5.1 5.0
Latin America 2.9 3.5 3.7 3.9

Argentina 2.0 1.6 2.6 3.9
Brazil 1.0 3.5 3.7 4.0
Mexico 4.0 3.6 3.7 3.5
Middle East And North Africa 4.8 3.9 4.6 4.1

Saudi Arabia 6.8 4.1 3.7 2.3
UAE 3.9 3.7 3.8 3.8
Egypt 2.2 2.6 3.7 5.6
Sub-Saharan Africa 4.4 6.0 5.9 6.1

South Africa 2.3 2.8 3.4 3.5
Nigeria 6.6 6.8 7.2 7.3
Emerging Asia 6.0 6.3 6.1 5.6

China 7.7 7.5 6.7 6.0
Hong Kong 1.8 2.5 3.6 3.6
India* 5.5 6.1 6.7 6.5
Indonesia 6.2 6.1 6.5 6.5
Malaysia 4.2 4.5 4.3 4.2
Singapore 1.2 2.5 3.4 3.3
South Korea 2.1 3.0 4.6 4.6
Taiwan 0.9 3.0 4.0 4.1
Thailand 4.3 4.4 4.4 4.3
Emerging Europe 2.6 3.1 3.9 4.3

Russia 3.6 3.4 3.6 4.1
Turkey 3.0 4.4 5.0 5.2
Czech Republic -1.2 0.5 1.9 2.4
Hungary -1.2 -0.4 2.0 2.7
Poland 2.0 1.9 3.0 4.1
e/f = BMI estimate/forecast; *Fiscal years ending March 31 (2012 =2011/12). Source: BMI

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Q2 2013

Consumer Recovery To Fuel Growth

Business Monitor International Ltd

Chapter 1: Political Outlook..................................................................................................................... 7

Chapter 2: Economic Outlook................................................................................................................ 13

Business Monitor International Ltd www.businessmonitor.com 3

Exchange Rate Policy ............................................................................................................................................. 20

Chapter 3: 10-Year Forecast................................................................................................................... 27

Chapter 4: Business Environment......................................................................................................... 29

Chapter 5: Key Sectors........................................................................................................................... 37

Chapter 6: BMI Global Assumptions..................................................................................................... 49

4 www.businessmonitor.com Business Monitor International Ltd

Private consumption, while moderating, will drive the majority of

The infrastructure, mining and hydrocarbons sectors are particularly

Business Monitor International Ltd www.businessmonitor.com 5

SWOT Analysis BMI Political Risk Ratings

Business Monitor International Ltd www.businessmonitor.com 7

Signs Of FARC Disunity Suggest

TABLE: KEY FARC DATES

8 www.businessmonitor.com Business Monitor International Ltd

a peace agreement between the current FARC negotiators and

Colombia's long-term political outlook is set to remain stable over

TABLE: POLITICAL OVERVIEW

Business Monitor International Ltd www.businessmonitor.com 9

over the next 10 years, with a near-term surge in foreign direct 80

the main long-term political risks facing the country. 30

10 www.businessmonitor.com Business Monitor International Ltd

Removing Paramilitary Links From Politics and Improving

Scenarios For Change

Shift To Centre-Left: Although a political shift to the left

Business Monitor International Ltd www.businessmonitor.com 11

SWOT Analysis BMI Economic Risk Ratings

Business Monitor International Ltd www.businessmonitor.com 13

Growth To Accelerate In H213 And Expenditure Breakdown

15 Improvements In Consumption Ahead

Source: BMI, BanRep -10

TABLE: GDP BY EXPENDITURE, REAL GROWTH %

14 www.businessmonitor.com Business Monitor International Ltd

as gross fixed investment would continue to weaken. Third, a

Gross Fixed Capital Formation: We believe the 4.6% y-o-y

Business Monitor International Ltd www.businessmonitor.com 15

Rising Incomes Will Drive Fiscal Fiscal Expenditure Geared Towards

position (see our online service, November 27, 2012, 20,000 10

Source: BMI, BanRep

ccording to the government budget, investment will be a main

component of spending, with mining, housing, infrastructure,

TABLE: FISCAL POLICY

16 www.businessmonitor.com Business Monitor International Ltd

We believe robust foreign investment in Colombia, particularly into the -6

continue to drive significant peso strength, weighing on the competi-

TABLE: CURRENT ACCOUNT

Business Monitor International Ltd www.businessmonitor.com 17

pressures on the peso and weigh on export competitiveness.

Source: BMI, BanRep Robust FDI Here To Stay

18 www.businessmonitor.com Business Monitor International Ltd

Fiscal Reform To Keep Inflation Below

TABLE: MONETARY POLICY

Business Monitor International Ltd www.businessmonitor.com 19

on BanRep to bolster export competitiveness through rate cuts.

Source: BMI, BanRep

Weakness Exchange Rate Policy

TABLE: EXCHANGE RATE FORECAST

20 www.businessmonitor.com Business Monitor International Ltd

Forecasting Record FX Purchases in 2013