Colombia’s central bank governor holds his nerve

Q: What is your assessment of the current economic cycle in the country?

A: In 2017, GDP grew by 1.8%, and in 2018 we are expecting growth of between 2.7% and 3%. In 2019 we are expecting between 3% and 3.5%, which is about our long-term economic potential. This is good news considering we have suffered from major economic shocks in the past years: the slump in oil prices, a major devaluation of the peso [which has lost 70% against the US dollar since mid-2014], combined with the introduction of a value-added tax by the previous government, as well as the troubles from neighbouring countries Venezuela and Ecuador.

There are sectors such as exports, agriculture, manufacturing and trade that have started to react to these shocks. Exports took a long time to adjust to a devalued peso, but now they are growing at about 14% in dollar terms. Internal consumption is also growing, although public expenditure still makes up the bulk of it, whereas private consumption has yet to take off.

Q: The central bank sharply reduced interest rates to support growth. How has inflation reacted?

A: A couple of years ago inflation was at about 9%; now we are expecting it to come down to about 3% at the end of 2018. All the indicators are moving in the right direction as the upward pressure on prices from the shocks is gradually fading. We cut interest rates by 350 basis points. We bottomed, and the market is expecting stable rates until the end of 2018 – and [we may well achieve this], given today’s market environment. The market is also expecting rates to start growing again in 2019 and that depends largely on inflation.

Q: What are, in your view, the main challenges faced by the new government led by president Iván Duque?

A: The government has to carry out major fiscal and pension reforms. It needs to generate more fiscal revenues, but make the overall system friendlier [and less bureaucratic] for SMEs. On a different note, it has to deal with growing drug cultivation, which may have an impact on the internal security and hamper the country’s tremendous achievements of the past 20 years. 

Q: Monetary authorities in emerging markets such as Turkey and Argentina have been under tremendous pressure as their currencies plummeted in the currency markets. The Colombian peso contained the damage, losing 'only' about 7% since the beginning of 2018. How are you managing interest rates in this environment?

A: The risk here is losing credibility. Argentina is doing what Colombia is not. A devaluation of the peso in the market doesn’t necessarily translate into an interest [rate] hike. Monetary policy is a domestic issue, but when it is used to counter a devaluation, it becomes a foreign exchange issue. We are waiting to see how the devaluation is going to affect inflation and growth expectations, then we’ll adjust our strategy accordingly. 

Besides, we can still rely on an $11.5bn flexible credit line from the IMF, which will become available at any point should the peso come under extreme pressure. Overall, we can say I still feel relatively confident – but in a very volatile environment.