March 16, 2011 / 11:45 PM / in 6 years

FACTBOX-Colombia's economy, growth and challenges

5 Min Read

BOGOTA, March 16 (Reuters) - Standard & Poor's rating agency on Wednesday raised Colombia to investment grade, citing the economy's growing resilience to external shocks and its favorable growth prospects. [ID:nN11250209]

The decision will attract new investors to Colombia, lower government borrowing costs, spur investment and support economic expansion in the country, Latin America's No. 4 oil producer.

Here are some facts about the Andean nation's economy:

Economic Growth

Latin America's fifth-largest economy is enjoying an economic recovery, with above 4 percent growth in 2010, up from a limp 0.8 percent the year before, when it was hit by the global economic crisis. Such resilience to external shocks was a factor cited by S&P in its decision to upgrade.

After the upgrade, Finance Minister Juan Carlos Echeverry said he expected the economy to grow 5 percent to 6 percent this year, higher than a previous estimate of 4.5 percent.

Colombia's quick recovery from the global recession was driven by consumption, internal demand and low interest rates as well as by investment in the oil and mining sectors, which are enjoying a boom as rebel violence eases.

Colombia is largely self-sufficient in oil though it does import petroleum products so its exposure to a recent spike in oil prices is less than some other emerging markets.

Fiscal Deficit

Colombia's consolidated public sector fiscal deficit was 3 percent in 2010, while its national central government deficit was 3.9 percent, the finance ministry says.

President Juan Manuel Santos has proposed an ambitious reform agenda to Congress ranging from changing the management of oil and mining royalties to overhauling the health system. He hopes to bring the fiscal deficit down to 0.5 percent of gross domestic product (GDP) by 2014.

Investors will keep a close eye on the royalties reform, which has faced resistance from pro-government lawmakers who represent oil-producing regions. [ID:nN31245717]

The government forecasts a central government deficit this year of around 4 percent of GDP, slightly less than the 4.1 percent that the government previously announced.

Colombia was battered by heavy rains and floods last year, and Santos said in January that Colombia would finance flood reconstruction efforts via higher taxes and divestment of state companies rather than seeking external funding. That would avoid a repeat of a 1999 crisis when reconstruction efforts after an earthquake caused the central government's deficit to soar.

Inflation and Rates

Inflation expectations led last month to the first round of monetary policy tightening in 2 1/2 years, outweighing concerns that higher rates will further strengthen the peso currency.

The central bank raised its benchmark interest rate in February and is likely to keep tightening in the first half of the year to combat rising inflation expectations and credit growth, analysts say.

The next bank policy meeting is on Friday. A Reuters poll of 40 analysts forecast another 25 point rise.

Peso Currency

The monetary authority said last month that it would extend its dollar purchasing program of at least $20 million daily to mid-June from a previous cut-off date in March as it seeks to control the peso's strength.

Colombia's peso COP=RR rose 1.2 percent to 1,870 pesos to the dollar in next-day trading after the announcement of the credit upgrade. The currency has firmed more than 6 percent over the last 365 days.

After S&P's decision, Echeverry said Colombia is well-prepared to handle any resulting influx of dollars and its impact on the peso.

Currency pressures, however, will be a challenge. Before the upgrade, Nomura Securities on Friday recommended that investors take a long position in the peso against a short position in the Chilean peso over a three-month time horizon, citing commodity market dynamics pointed to Colombia peso outperformance.

Public Debt

Colombia's total public debt represents close to 40 percent of GDP, according to the finance ministry. Foreign debt represented 14 percent of GDP, or $39 million in November last year, up slightly from a year earlier. (Reporting by Bogota Newsroom; Writing by Frank Jack Daniel; Editing by Steve Orlofsky)

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