Macroeconomic Outlook for ColombiaBBVA 5th Latin America Local Markets Conference

Carolina SotoMember of the Board of DirectorsJanuary 2019

*These opinions are personal and do not represent the official position of the Banco de la República or its Board of Directors.

1

17/0

1/20

19

2

Co

nte

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Long-term Trends in Colombia

Recent Developments in the Colombian Economy

Policy Responses and Challenges

Financial System

Dealing with Increased External Volatility

Source: DANE, Banco de la República 3

• Colombia has gained important benefits after the adoption of sound economic policies in recent decades.

• Inflation and its volatility decreased notoriously with the inflation targeting regime.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dec-70 Dec-74 Dec-78 Dec-82 Dec-86 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18

Annual Inflation Rate in Colombia

Annual Inflation Rate

Inflation Target

Inflation Targeting

Source: Banco de la República 4

• The positive results of the inflation targeting regime were possible due to a successful implementation of monetary policy.

0%

10%

20%

30%

40%

50%

60%

70%

Interest Rates in Colombia

Minimum contraction rate

Monetary Policy Rate

Maximum Expansion Rate

Interbank Rate

Inflation Targeting

0

500

1.000

1.500

2.000

2.500

3.000

3.500

Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-18

Exchange Rate - Monthly Average

CO

P/U

SD

CrawlingPeg

Exchange rate target

zones

Inflation Targeting(Exchange rate

flexibility)

5

• Growth remains remarkably stable over time compared to other countries in the region.

Source: International Monetary Fund. Calculations by Banco de la República

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Last 30 years Last 20 years Last 10 years Last 5 years

Average Annual GDP Growth RateArgentina

Brazil

Chile

Colombia

Ecuador

Mexico

Paraguay

Peru

6

• And macroeconomic stability, along with improved security and favorable external conditions, has in turn allowed for higher investment and higher levels of foreign direct investment.

Source: Departamento Administrativo Nacional de Estadística - DANE

14,3%

16,7% 16,8%

23,1%

0%

5%

10%

15%

20%

25%

1980-1989 1990-1999 2000-2009 2010-2018

Investment(Real, % GDP)

0,9%

1,8%

3,6%

4,1%

0%

1%

2%

3%

4%

5%

1980-1989 1990-1999 2000-2009 2010-2017

FDI(% of GDP)

Source: Banco de la República – Balance of Payments

7

• Fiscal policy has also improved thanks to lower deficits and the establishment of a fiscal rule.

Source: Ministry of finance

-2,6%

-3,8%

-3,1%

-4%

-3%

-2%1990-1999 2000-2009 2010-2018

Central National Government Balance(% PIB)

14,4%

39,0% 38,6%

10%

15%

20%

25%

30%

35%

40%

1990-1999 2000-2009 2010-2017

Net Debt of the Central National Government(% of GDP)

Source: Ministry of finance

8

• Colombians have benefited from the stable macroeconomic environment as shown by the consistent reduction in the unemployment rate since the year 2000.

• On the other hand, labor informality is still an important challenge, despite improvements achieved during the last decade.

Source: Departamento Administrativo Nacional de Estadística - DANE

20,2%

10,5%

6%

8%

10%

12%

14%

16%

18%

20%

22%

Unemployment Rate(yearly moving average – seven metropolitan areas)

46,7%

43%

44%

45%

46%

47%

48%

49%

50%

51%

52%

53%

54%

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18

Informal employment(quarterly moving average)

9

• The improvements in the labor market, together with the reduction of poverty and inequality, allowed for the consolidation of the middle class.

* For the 1990s: 1992, 1996 and 1999. For the 2000s: all decade except 2006 and 2007.Source: World Bank

0,560,55

0,53

0,45

0,47

0,49

0,51

0,53

0,55

0,57

1990s* 2000s* 2010-2016

Gini Coefficient

15,2%

12,8%

5,7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1990s 2000s 2010-2016

Poverty headcount ratio at $1.90 a day(% of population)

10

• Overall, the quality of life for households has improved through higher access to public services and lower violence levels.

*For the 1990’s: 1993 and 1997 surveys. For the 2000’s: 2003 and 2008 surveys.Source: DANE. Encuesta nacional de calidad de vida.

97,7%

88,6%

76,1%

59,3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Electricity Water supply Sewage Network Natural Gas

Access to Public Services(% of total households)

1990's* 2000's* 2010-2017

42,8

67,6

49,6

30,9

0

10

20

30

40

50

60

70

80

1980-1989 1990-1999 2000-2009 2010-2016

Homicide Rate(homicides by 100,000 people)

Source: Medicina Legal and World Bank

17/0

1/20

19

11

Co

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Long-term Trends in Colombia

Recent Developments in the Colombian Economy

Policy Responses and Challenges

Financial System

Dealing with Increased External Volatility

• The Colombian economy faced higher volatility in its terms of trade during the last year.

Source: U.S Energy Information Administration (EIA)

12

0

10

20

30

40

50

60

70

80

90

100

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Oil Prices (Brent, WTI)

WTI

Brent

USD

/Bar

rel

USD

/Bar

rel

20

30

40

50

60

70

80

90

100

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

WTI

Brent

USD

/Bar

rel

USD

/Bar

rel

• The Colombian economy faces higher volatility in its terms of trade.

Source: Bloomberg - Citigroup ToT Index

13

0

20

40

60

80

100

120

140

nov.-13 nov.-14 nov.-15 nov.-16 nov.-17 nov.-18

Terms of Trade (Jan2014 = 100)

Colombia Peru

Mexico Argentina

• Although Colombia’s credit risk remains at historically low levels, its volatility has increase recently.

Source: Bloomberg.

14

0

50

100

150

200

250

300

350

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

5-Year CDS

Peru Colombia Mexico Chile

0

50

100

150

200

250

Jan-18 Jul-18 Jan-19

• …Amid a global financial tightening.

Source: Bloomberg, calculations by Banco de la República 15

0%

1%

2%

3%

4%

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

Interest Rates in the United States

10-year yields

Federal Funds Target Range Upper Value

• While the growth of trading partners is expected to slowdown.

¹ USA, Euro area, China, Brazil, Ecuador, Peru, México, Chile. Weighted by non-traditional exports.

* Exports growth figure available up to 2013-Q3

Source: Banco de la República and Departamento Administrativo Nacional de Estadística - DANE

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2.8% 2.8%

2.5% 2.4%

1.6%

-5%

-2%

1%

4%

7%

10%

13%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2019

Average growth of Colombia’s main trading partners¹ and exports growth

Observed

September/2018 Forecast

Current Forecast

Exports Growth YoY

Source: IMF. For Colombia: Banco de la República

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• This more volatile external context finds the Colombian economy with some macroeconomic adjustment still remaining.

-6,4%

-3,4%

-3,6%

-7%

-5%

-3%

-1%

1%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(forecasts)

Current Account (% of GDP)

Chile

Colombia

Mexico

Peru

▪IMF’s Estimates¹:▫Maximum Long Term Potential Growth: 4,1% (A)▫Minimum Long Term Potential Growth: 2,8% (C)

1/ Lanau, Rodriguez-Delgado, and Roldós. Potential Growth in Colombia - Selected Issues Paper, April 2017

2/ Assumes 2% per capita GDP growth, population growth of 1% and productivity growth of 0,3%. It refers to a long run estimate in the absence of structural reforms.

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• And a negative output gap prevails.

▪ BanRep’s long term Estimate: 3,3%² (B)

Source: DANE. Methodology 2015. Seasonally adjusted series

2,6%

(A)

(C)(B)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

2010 2011 2012 2013 2014 2015 2016 2017 2018

GDP Growth – Annual Percentage Change(seasonally adjusted)

• On the other hand, inflation and inflation expectations have converged to the 3% target.

Source: Banco de la República – Monthly Survey of Economic Expectations

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3,50%3.26%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

CPI Inflation and its Expectations

Average of 1-Year Ahead Expectations

Average of 2-Years Ahead Expectations

Headline Inflation

3.18%

17/0

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19

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Co

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Long-term Trends in Colombia

Recent Developments in the Colombian Economy

Policy Responses and Challenges

Financial System

Dealing with Increased External Volatility

Source: Banco de la República.

21

• Monetary policy has remained moderately expansionary…

… as inflation has converged to target and a negative output gap remains.

4,50%

7,75%

4,25%

0%

2%

4%

6%

8%

10%

12%

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

Policy Rate

Source: Banco de la República.

¹ The range of estimates represents the averages obtained by applying different methodologies, disregarding the uncertainty related to any particular methodology by itself. The mean presented is calculated as the average of the average estimate produced by each methodology alone. The methodologies used are presented in Box 2 of the September 2018 Inflation Report.

-2%

-1%

0%

1%

2%

3%

4%

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18

Real Interest Rate and Estimates for the Neutral Interest Rate¹

Range of Estimates

Average of the netural interest rate estimates

Real Interbank RateReal Interbank Interest Rate

Source: Departamento Administrativo Nacional de Estadísticas - DANE

22

• Growth is expected to increase in 2019…

• …this would lead to a gradual normalization of monetary policy.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0%

1%

2%

3%

4%

5%

6%

7%

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

2014 2015 2016 2017 2018 2019

GDP and Investment Growth

GDP

Investment (RHS)

Source: Superintendencia Financiera 23

• This outlook is nonetheless uncertain, due to the risks stemming from external volatility which could affect both growth and inflation expectations.

Period COP Depreciation

2014-2017 54%

2018 8.9%

2018-Q4 6.4%

2019-YTD -3.3%

$ 3.092,65

$ 2.705,64

$ 3.289,69

$ 2.500

$ 2.600

$ 2.700

$ 2.800

$ 2.900

$ 3.000

$ 3.100

$ 3.200

$ 3.300

$ 3.400

$ 3.500

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

Exchange Rate - USD/COP

Source: Ministry of Finance

• Additionally, fiscal policy is geared towards fulfilling the decreasing structural deficit targets set by the fiscal rule.

24

-4,1

-3,9

-2,8

-2,3 -2,3

-2,4

-3

-4

-3,6

-3,1

-2,4

-2,2

-1,8

-1,4-1,3 -1,2

-1,1 -1,1 -1,0

-2,3 -2,3

-2,3-2,2

-2,2

-1,9 -1,9-1,8

-1,7

-1,3

-1,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Deficit Allowed by the Fiscal Rule (%GDP)

Government Balance

Structural Balance

Start of the Fiscal Rule

Set by the Fiscal Rule Committee

Set by the Government

25

• A tax reform was recently approved, maintaining the fiscal rule and with the objective of reducing taxes for firms and promoting investment, particularly in innovative sectors.

• To fulfill that objective the reform included changes for various agents:– Firms:

– Individuals:• The creation of new tax brackets.

• An increase in the tax rate for dividends to 15%.

– Non-resident investors:• A significant reduction of the tax rate for investments in government bonds by non-residents, from 14% to 5%.

¹Approximately USD 320 million.

• A reduction of the corporate tax rate from 33% in 2019, to 32% in 2022, 31% in 2021 and 30% in 2022.

• The creation of a special regime for small companies to simplify their taxation.

• Firms will now be allowed to deduct the VAT paid on capital goods from their income tax.

• Companies will be allowed to deduct 50% of the amount paid on industry and trade tax -“ICA” from their income tax.

• The creation of a special status for new investment of over COP 1,02 trillion¹ with a tax rate of 27%.

Source: Ministry of Finance – Medium Term Fiscal Framework

• Compliance with the fiscal rule in the future remains a challenge, despite the expecteddecreasing path for the Government Net Debt.

26

24,7 25,523 22,7 23,2 23,9 25,4

28 28,6

10,9 10,4

9,9 8,8 8,8 8,79

9,1 8,50,5 2,7

6,45,4 6

35,6 35,9

32,931,5 32,5

35,3

40,842,5 43,1

2009 2010 2011 2012 2013 2014 2015 2016 2017

Government's Net Debt (%GDP)

LocalCurrency

ForeignCurrency

Depreciation Effect since 2012

25%

27%

29%

31%

33%

35%

37%

39%

41%

43%

45%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Government’s Net Debt Forecasts

Central Forecast

GDP +1%

GDP -1%

Source: Ministry of Finance – Medium Term Fiscal Framework

Source: Bloomberg. Calculations by Banco de la República. 27

B

BB

BBB

A

AA

ARG

TUR

MLY

BRAZAR

PER

COL

THL

MEX

CHLRUS

-50%

0%

50%

100%

150%

200%

250%

300%

-120% -100% -80% -60% -40% -20% 0% 20%

Ch

ange

in 5

-year C

DS

Change in Local Currency vs. USD

5-year CDS and depreciation in 2018

• An appropriate macro policy mix is essential to limit vulnerability in a more volatile world. So far, markets have acknowledged Colombia’s strong macroeconomic policy framework.

-120% -100% -80% -60% -40% -20% 0%

Czech Republic

Chile

Poland

Malaysia

Thailand

Mexico

Peru

Philippines

Colombia

India

Russia

Brazil

South Africa

Turkey

Argentina

Local currency against USD in 2018

CreditRating

FCL = IMF’s Flexible Credit Line. Source: IMF. Calculations by Banco de la República

28

• Other policy fronts are also considered to preserve the macro-financial strength.

0% 100% 200% 300% 400% 500% 600% 700%

Argentina

Turkey

Malaysia

South Africa

Chile

Poland

Mexico

Colombia (without FCL)

India

Colombia (with FCL)

Indonesia

Brazil

China

Philippines

Peru

Korea

International Reserves to Short-term Debt and Current Account Balance

• The country’s external liquidity position is strong, to maintain it in a more volatile external environment BanRep began a gradual international reserves accumulation program.

• Current reserve accumulation is undertaken by means of put options, to minimize the impact on the FX market.

Source: Banco de la República

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0

50

100

150

200

250

300

350

400

$2.700

$2.800

$2.900

$3.000

$3.100

$3.200

$3.300

$3.400

Títu

lo

Exchange Rate and BR’s USD purchases

Amount exercised (RHS) Exchange Rate 20-Day Simple Moving Average

Start of the reserve accumulation program

17/0

1/20

19

30

Co

nte

nts

Long-term Trends in Colombia

Recent Developments in the Colombian Economy

Policy Responses and Challenges

Financial System

Dealing with Increased External Volatility

¹ 30-Day LCR is the ratio of high quality liquid assets to total net cash outflows over the next 30 calendar days.Source: Superintendencia Financiera de Colombia. Calculations by Banco de la República.

31

• The financial system remains liquid, profitable and well capitalized.• Convergence to the Basel III standard is underway.

302,7%

80%

120%

160%

200%

240%

280%

320%

360%

400%

Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

30-Day Liquidity Coverage Ratio¹ (LCR)

Depository Institutions' LCR

Minimum Requirement

15,8%

16,6%

8%

10%

12%

14%

16%

18%

20%

Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Feb-16 Oct-16 Jun-17 Feb-18 Oct-18

Total Solvency Ratio (Tier II)

Banks

Total Depository Institutions

Minimum Requirement

• While currency mismatches remain low in both the real and financial sector.

32*FX Market intermediaries: Includes credit establishments and brokerage firms.

Source: Banco de la República.

-700

0

700

1.400

2.100

2.800

-5%

-2%

1%

4%

7%

10%

13%

16%

19%

22%

Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

FX Proprietary Position (Assets minus liabilities in foreign currency) of the Financial Sector*

Proprietary Position (% Technical Capital)

Proprietary Position in Foreign Currency (RHS)

% o

f Te

chn

ical

Cap

ital

USD

Millio

n

Upper regulatory limit

Lower regulatory limit

32,4%

4,7%

2,4%

3,1%

1,5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010 2011 2012 2013 2014 2015 2016 2017

Debt of the Corporate Private Sector by currency and hedge(% of GDP)

Non-exporters Debt (unhedged) Non-exporters Debt with FDI (unhedged)

Non-exporters Debt (hedged) Exporters Debt

Local Currency Debt

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Thank you