During the first half of 2023, the Colombian economy navigated through a period of public discontent and political turbulence. Chaotic executive decisions, ministerial disunity and political scandals have stirred uncertainty among investors and citizens. However, market confidence has surprisingly risen due to Colombia’s strong institutional framework.
In the wake of the relatively easy approval of the tax reform last year, President Petro is doubling down on his ambitious reform agenda, but faced limited success during the first half of 2023; inflationary pressures on the supply side have diminished. Upcoming regional elections taking place in October will be crucial for the rekindling of his leadership but voting preferences in key cities (Medellín, Cali, and Bogotá) suggest potential obstacles for his political agenda.
On the fiscal front, government total revenue increased 18% compared to March of 2022 which is good news for social expenditure programs. Although doubts linger about adherence to the fiscal rule, we believe deviating from it would be very costly; hence, many campaign promises will probably remain unfulfilled. The private sector has benefited from government weakness, yet consumption has been impacted, especially in durable goods.
GDP growth performance has been mixed, with unexpected contributions from underestimated sectors such as financial services and the arts. The construction sector has faced challenges due to inflation and an underperforming infrastructure investment. In the short run, the economy grew by 0.65% YOY in May.
Economic growth prospects are mixed; Finance Ministry and the Interamerican Development Bank have increased their growth expectations to around 2%, up from April’s figure, whereas the Central Bank has been more pessimistic.
On the external front, the exchange rate has strengthened reaching a minimum of COP 3,950 per USD in July. Foreign Direct Investment improved. On the flip side, exports have been affected by the global economic slowdown and imports declined in line with the domestic demand losing momentum; exports, however, have contracted less rapidly due to high commodity prices.
Altogether, Colombia faces political and economic challenges, including an accelerated president-driven energy transition and the looming threat of El Niño on inflation and the national grid’s capacity to withstand spikes in electricity demand. At the same time, the government seeks to boost its popularity in the back of more generous subsidies.
