## _cr0923

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### Executive Summary — Context and recent developments
- Global market turbulence affected Colombia’s growth prospects and financial markets; CDS spreads and equity prices moved broadly in line with the rest of Latin America, while EMBI and corporate bond spreads rose more.
- GDP growth slowed from 7¼ percent in the second half of 2007 (y/y) to 4 percent in the first half of 2008.
- For 2008 as a whole, economic growth is projected at 3½ percent.
- Inflation (y/y) stood at 7¾ percent in November, above the Banco de la República (BdR)’s end-year target range of 3½–4½ percent; BdR medium-term target is 2–4 percent; survey-based expectations for end-2009 inflation about 5¼ percent.
- Policy rate increased to 10 percent by mid-2008 (a 400 basis point increase since April 2006); BdR reduced reserve requirements (by the equivalent of 0.2 percent of GDP) and injected liquidity through open market operations.
- Exchange rate and FX intervention:
  - Peso appreciated about 15 percent in real effective terms between end-2007 and mid-June 2008, then weakened by an estimated 20 percent since mid-year.
  - March: US$150 million monthly options-based auctions introduced.
  - June: daily US$20 million purchases in the spot market replaced the options auctions.
  - Under the automatic rule, BdR places exchange rate options of US$180 million when the 20-day moving average of the bilateral exchange rate with the U.S. dollar changes by 5 percent or more.
  - Early October: BdR suspended daily purchases; automatic intervention rule reintroduced with a wider band (5 percent, compared with 2 percent).
- Capital controls timeline:
  - Controls on non-FDI inflows imposed mid-2007.
  - May 2008: minimum stay for FDI inflows and increase in unremunerated reserve requirement on portfolio inflows from 40 percent to 50 percent.
  - Controls loosened in early September and fully eliminated in October.
- Immediate authorities’ actions:
  - Secured financing from multilateral institutions (MDBs) for 2009 to meet external financing requirements without recourse to market sources.
  - Reaffirmed commitment to 2009 fiscal targets; arrangements for additional contingent MDB financing.
  - Secured multilateral financing for BANCOLDEX to provide loans to banks and corporates if external credit lines are disrupted.
- Recent financial market changes (change since September 12, 2008, in percent or basis points):
  - Equities -24
  - Nominal exchange rate (U.S. dollar) 2/-14-24 (negative denotes depreciation)
  - EMBI+ spread 344 (Colombia) vs 256 (Other Latin America 1/)
  - 5-year credit default swaps 220 (Colombia) vs 239 (Other Latin America 1/)
  - Corporate bond spread 557 (Colombia) vs 392 (Other Latin America 1/)

### Financial stability and banking sector soundness
- Financial soundness indicators remain solid despite slower growth and sharp asset price declines.
- Nonperforming loan ratios have risen—especially for consumer credit; consumer lending NPL reached 7 percent.
- Banks are well provisioned and profitable; expected default probabilities rising but remain very low.
- Structure and exposures:
  - Foreign-bank subsidiaries account for about 20 percent of banking system assets.
  - External credit lines account for 2½ percent of banking system liabilities.
  - Reliance on nondeposit funding about 25 percent.
- Liquidity and solvency assessments:
  - Liquidity ratios declining but short-term assets exceed short-term liabilities by a healthy margin.
  - Authorities’ stress tests: liquidity likely adequate under extreme deposit-run scenarios for institutions of systemic importance.
  - Combined stress tests (liquidity + credit shocks): banking system would remain solvent under a number of extreme scenarios, though with significant effects on liquidity and profitability.
- Exchange-rate risks are low: foreign currency liabilities are small and strict regulations limit net open foreign exchange positions.
- Financial soundness indicators (selected):
  - Consumer lending NPL (consumer lending NPL had reached) 7 percent.
  - Regulatory capital to risk-weighted assets: Sep-08 13.3; Oct-08 13.1.
  - Nonperforming loans to gross loans: Sep-08 4.1; Oct-08 4.1.
  - ROAA: Sep-08 4.0; Oct-08 4.3.
  - Liquid assets to total assets: Jun-08 12.2; Sep-08 12.7; Oct-08 12.3.

### Outlook and baseline projections
- Growth projections:
  - Staff projects growth will decline to 2 percent in 2009, before rebounding to about 4 percent in 2010.
  - Medium term: staff projects growth at 4½–5 percent, consistent with estimated potential.
- Inflation:
  - Projected to decline to under 5 percent by end-2009 and to gradually converge to medium-term target of 2–4 percent.
- Fiscal and external projections:
  - Budget deficits would average about 1 percent of GDP over the next 5 years (consistent with authorities’ medium-term fiscal projections).
  - Public debt would decline to 26 percent of GDP by 2013.
  - Current account deficit would rise slightly to about 3¼ percent of GDP in 2008–09, before declining over the medium term.
- Macroeconomic time series (based on authorities' policies, selected):
  - Real GDP growth (annual percentage change): 2006 6.8; 2007 7.7; 2008 3.5; 2009 2.0; 2010 4.0; 2011 4.8; 2012 5.0; 2013 5.0.
  - Inflation, eop: 2006 4.5; 2007 5.7; 2008 7.5; 2009 4.8; 2010 3.8; 2011 3.7; 2012 3.5; 2013 3.3.
  - Total public debt (percent of GDP): 2006 35.9; 2007 32.8; 2008 31.7; 2009 29.7; 2010 28.7; 2011 27.9; 2012 26.9; 2013 26.0.
  - External current account balance (percent of GDP): 2006 -1.8; 2007 -2.8; 2008 -3.2; 2009 -3.2; 2010 -2.7; 2011 -2.5; 2012 -2.2; 2013 -2.0.

### Risks to the outlook
- Growth risks weighted to the downside:
  - External environment shock would materially affect Colombia mainly through export growth.
  - A sharp deceleration in Venezuelan growth could have a significant impact given Venezuela’s 17 percent share of Colombian exports in 2007.
  - Further deepening of global financial turmoil could increase borrowing costs or disrupt credit markets, reducing growth.
- Inflation risks:
  - Upside: high inflation expectations and potential adverse minimum-wage negotiation outcomes.
  - Downside: faster-than-expected decline if economic activity or commodity prices fall below projections.
- External stability risks:
  - One-standard deviation shock to commodity prices would worsen the current account deficit by 2¼ percentage points of GDP (staff estimate).
  - One standard deviation negative shock to Venezuelan growth would reduce Colombian exports by ½–1 percentage point (text truncated in source).
- Vulnerability indicators (2008, percent of GDP or as noted):
  - Gross reserves in percent of short-term debt at remaining maturity: Colombia 176.6; Median, sample of 49 emerging market countries 143.7; Median of investment grade countries 109.0.
  - Total gross external debt: Colombia 22.7; Median (49 countries) 40.3; Median (investment grade) 40.9.
  - Current account balance: Colombia -3.2; Median -3.8; Investment grade -2.5.
  - Gross external financing requirement: Colombia 6.9; Median 14.8; Investment grade 16.1.
  - Public sector gross debt: Colombia 31.7; Median 39.2; Investment grade 29.3.
  - Non-performing loans (percent of total loans): Colombia 4.1; Median 3.0; Investment grade 2.5.
  - Return on average assets (percent): Colombia 4.0; Median 1.6; Investment grade 1.4.

### Policy discussions and key recommendations
- Financial safety nets and bank resolution:
  - Clarify sequencing of actions and definition of responsibilities of different institutions regarding bank resolution.
  - Strengthen the deposit insurance system over the medium term; staff recommended expedited process for returning funds to depositors and elimination of the deductible.
  - Authorities intend to request Fund technical assistance on deposit insurance.
- Monetary policy:
  - Continue with a flexible monetary policy to maintain projected path toward a soft landing.
  - Closely monitor forward-looking indicators of economic activity and inflation expectations to determine pace of easing as headline inflation declines.
  - As inflation and inflation expectations decline, scope exists for gradual reduction in the policy rate or further reduction in reserve requirements.
- Fiscal policy:
  - Maintain fiscal targets currently envisaged for 2009 to keep financing needs low and public debt ratios on a declining path.
  - With revenues likely to be lower than budgeted, some expenditure reductions may be required, although the fiscal stance would remain expansionary.
  - Staff suggested exploring adoption of a fiscal rule to limit procyclicality; rule could set a floor for central government structural balance and focus on nonoil structural balance.
- Capital account and exchange rate policy:
  - Continue exchange rate flexibility to allow adjustment to external shocks.
  - Staff recommended greater stability in rules for FX intervention over the longer term; welcomed widening of the automatic intervention band from 2 percent to 5 percent.
  - Staff view on capital controls: limited effectiveness and adverse effects imply significant drawbacks; elimination in October 2008 viewed positively by staff.
  - Staff suggested examining pension fund minimum return regulations to reduce potential herd behavior in FX trading.
- Financial sector contingency planning:
  - Enhance capacity to respond to worsening global conditions by reducing reserve requirements, injecting liquidity via open market operations, and broadening assets eligible for repo operations.
  - Consider temporarily limiting bank dividend distributions to bolster cushions against unexpected losses.
  - Financial Surveillance Committee’s intensified activity welcomed; staff suggested clarifying circumstances under which emergency liquidity support would be forthcoming.
- Structural reforms:
  - Expand derivatives markets, improve regulatory framework, develop multi-tier pension system, strengthen creditor rights, increase independence of financial sector supervisors, improve tax efficiency, and tackle budget rigidities.
  - Government planned sales: sell stake in ISAGEN in 2009 and smaller regional electricity companies.
  - Staff encouraged rejuvenating fiscal reform agenda: phase out financial transactions tax, reduce exemptions and number of VAT rates, cut taxes on labor.

### Fiscal and external data highlights (selected figures)
- Population (millions), 2007: 47.5.
- GDP per capita (US$), 2007: 4,341.
- Unemployment rate, Apr. 2008 (percent): 11.0.
- Real GDP (percent change): 2004 4.7; 2005 5.7; 2006 6.8; 2007 7.7; 2008 3.5; 2009 2.0.
- Consumer prices (end of period): 2004 5.5; 2005 4.9; 2006 4.5; 2007 5.7; 2008 7.5; 2009 4.8.
- Exports (f.o.b., US$ millions): 2008 37,092; 2009 33,423.
  - Petroleum products (US$ millions): 2008 11,090; 2009 7,502.
  - Coal (US$ millions): 2008 4,990; 2009 5,389.
- Net official reserves (US$ millions): 2008 22,873; 2009 23,377.
- Current account (deficit - percent of GDP): 2008 -3.2; 2009 -3.2.
- Public debt (percent of GDP): 2008 31.7; 2009 29.7.
- Broad money (annual percent change): 2008 35.9; 2009 6.7.
- Credit to the private sector (annual percent change): 2008 17.5.
- Oil Price (Colombian mix): 2008 91.5; 2009 51.7.

### Debt sustainability, stress tests, and scenarios
- External debt (percent of GDP, baseline): 2008 22.7; 2009 21.3; 2010 21.3; 2011 20.1; 2012 18.8; 2013 17.7.
- Gross external financing need (US$ billions): 2008 19.0; 2009 19.6; 2010 20.8; 2011 20.3; 2012 21.2; 2013 21.2.
- Public sector debt (percent of GDP, baseline): 2008 31.7; 2009 29.7; 2010 28.7; 2011 27.9; 2012 26.9; 2013 26.0.
- Stress tests and alternative scenarios include:
  - A1. Key variables at historical averages in 2009-13.
  - A2. No policy change (constant primary balance) in 2009-13.
  - Bound tests: interest rate shocks, growth shocks, non-interest current account shocks, combined shocks, and one-time 30 percent real depreciation in 2009.
- Main Box 3 message: Fiscal policy’s ability to stabilize output depends on financing conditions; if financing is not an issue, allowing automatic stabilizers improves stability; if financing conditions deteriorate, accommodative fiscal policy could be ineffective.

### Institutional views and Board assessment
- Authorities broadly concurred with staff on importance of strong financial safety nets and on appropriate stance for monetary and fiscal policy.
- Executive Board (Article IV, Jan 14, 2009) assessment highlights:
  - Commendation for sound macroeconomic policies and wide-ranging structural reforms.
  - Affirmation that Colombia is well-placed to confront the global downturn, but flexible and timely policy responses remain necessary.
  - Support for some near-term fiscal relaxation while keeping public debt ratios on a declining path; consideration of a fiscal rule over the medium term encouraged.
  - Recommendation to extend stress-testing, monitor credit risk, strengthen crisis prevention frameworks, and clarify emergency liquidity support circumstances.
  - Welcome for elimination of capital controls in October 2008; some Directors viewed controls as a future toolkit option and urged removal of the hydrocarbons sector exchange restriction.

*Source: _cr0923 - Executive Summary*

### Executive Summary

### _cr0923 - Executive Summary

### Context and recent developments
- Global market turbulence has affected Colombia’s growth prospects and financial markets; CDS spreads and equity prices have moved broadly in line with the rest of Latin America, while EMBI and corporate bond spreads have risen more.
- GDP growth slowed from 7¼ percent in the second half of 2007 (y/y) to 4 percent in the first half of 2008.
- For 2008 as a whole, economic growth is projected at 3½ percent.
- Monetary tightening and under-execution of public investment contributed to the slowdown.
- Inflation (y/y) stood at 7¾ percent in November, above the Banco de la República (BdR)’s end-year target range of 3½–4½ percent.
- The BdR’s medium-term inflation target is 2–4 percent; survey-based data point to expectations for end-2009 inflation of about 5¼ percent.
- Policy rate increased to 10 percent by mid-2008 (a 400 basis point increase since April 2006), contributing to a slowdown in credit growth.
- The peso appreciated by about 15 percent in real effective terms between end-2007 and mid-June 2008, then weakened by an estimated 20 percent since mid-year.
- FX intervention and rules:
  - March: US$150 million monthly options-based auctions introduced.
  - June: daily US$20 million purchases in the spot market replaced the options auctions.
  - Under the automatic rule, the BdR places exchange rate options of US$180 million when the 20-day moving average of the bilateral exchange rate with the U.S. dollar changes by 5 percent or more.
  - In early October the BdR suspended daily purchases; the automatic intervention rule was reintroduced with a wider band (5 percent, compared with 2 percent).
- Capital controls:
  - Controls on non-FDI inflows imposed mid-2007.
  - In May 2008 a minimum stay for FDI inflows and an increase in the unremunerated reserve requirement on portfolio inflows from 40 percent to 50 percent were imposed.
  - Controls were loosened in early September and fully eliminated in October.
- Financial markets and external financing:
  - Since mid-September, CDS spreads and equity prices have generally tracked the region, but EMBI and corporate bond spreads increased more.
  - External trade credit lines to domestic banks affected only modestly; interest rates have risen and maturities shortened; interbank and debt markets continue to function normally.
  - Recent financial market changes (change since September 12, 2008, in percent or basis points): Equities -24; Nominal exchange rate (U.S. dollar) 2/-14-24 (negative denotes depreciation); EMBI+ spread 344 (Colombia) vs 256 (Other Latin America 1/); 5-year credit default swaps 220 (Colombia) vs 239 (Other Latin America 1/); Corporate bond spread 557 (Colombia) vs 392 (Other Latin America 1/).
- Authorities’ immediate actions:
  - Secured financing from multilateral institutions (MDBs) for 2009 to meet external financing requirements without recourse to market sources.
  - Reaffirmed commitment to 2009 fiscal targets to limit financing needs; arrangements being made for additional contingent MDB financing.
  - Secured multilateral financing for BANCOLDEX to provide loans to banks and corporates if external credit lines are disrupted.
  - BdR reduced reserve requirements (by the equivalent of 0.2 percent of GDP) and injected liquidity through open market operations; monitoring of liquidity by the Financial Sector Superintendency intensified.
- Fiscal developments:
  - Despite a mid-year decision to cut government outlays by about ¼ percent of GDP relative to the original budget, the structural balance in 2008 weakened owing partly to strong growth in primary current expenditures.
  - Public debt ratios have declined steadily; composition of public debt improved with reduced exposure to exchange rate and rollover risks.
- External accounts and capital flows:
  - External debt has fallen substantially; international reserves increased sharply.
  - FDI has risen briskly; net portfolio inflows have turned negative despite rising interest rate differentials.

### Key policy recommendations
- Further strengthen financial safety nets:
  - Clarify sequencing of actions and definition of responsibilities of different institutions regarding bank resolution.
  - Strengthen the deposit insurance system over the medium term.
- Continue with a flexible monetary policy to maintain the projected path toward a soft landing:
  - Closely monitor forward-looking indicators of economic activity and inflation expectations to determine the pace at which monetary policy can ease as headline inflation declines.
- Maintain the fiscal targets currently envisaged for 2009:
  - This will help keep financing needs low and public debt ratios on a declining path, bolstering confidence.
  - With revenues likely to be lower than budgeted, some expenditure reductions may be required, although the fiscal stance would remain expansionary.

### Authorities’ views
- The authorities concurred with staff on the importance of strong financial safety nets.
- There was broad agreement on the appropriate stance for monetary and fiscal policy.

*Source: _cr0923 - Executive Summary*

### 10.      Despite the slowdown in economic growth and sharp downward movement of asset

### _cr0923 - 10.      Despite the slowdown in economic growth and sharp downward movement of asset

### Financial stability and banking sector soundness
- Financial soundness indicators remain solid despite slower economic growth and sharp downward movement of asset prices.
- Nonperforming loan ratios (NPLs) have risen—especially for consumer credit; consumer lending NPL had reached 7 percent.
- Banks are well provisioned and profitable; expected default probabilities, while rising, remain very low (Creditedge/Moody’s-KMV EDF series shown for Brazil, Colombia, Chile).
- Foreign-bank subsidiaries account for about 20 percent of banking system assets (compared with 30 percent for the region as a whole).
- External credit lines account for 2½ percent of banking system liabilities.
- Reliance on nondeposit funding is about 25 percent.
- Liquidity and solvency assessments:
  - Liquidity ratios declining but short-term assets exceed short-term liabilities by a healthy margin.
  - Authorities’ stress tests indicate liquidity would likely remain adequate in all institutions of systemic importance under extreme deposit-run scenarios.
  - Combined stress tests (liquidity + credit shocks) suggest the banking system would remain solvent under a number of extreme scenarios, though with significant effects on liquidity and profitability.
- Exchange-rate risks are low: foreign currency liabilities are small and strict regulations limit net open foreign exchange positions.

### Outlook for 2009 and the medium term
- Growth projections:
  - Staff projects growth will decline to 2 percent in 2009, before rebounding to about 4 percent in 2010.
  - Over the medium term, staff projects growth at 4½–5 percent, consistent with estimated potential growth.
- Inflation and targets:
  - Inflation is projected to decline to under 5 percent by end-2009.
  - Inflation is expected to gradually converge to the medium-term target of 2–4 percent.
- Fiscal and external projections:
  - Budget deficits would average about 1 percent of GDP over the next 5 years (consistent with authorities’ medium-term fiscal projections).
  - Public debt would decline to 26 percent of GDP by 2013.
  - The current account deficit would rise slightly to about 3¼ percent of GDP in 2008–09, before declining over the medium term as nontraditional exports recover.

- Macroeconomic Outlook (Based on Authorities' Policies)
  - Real GDP growth (annual percentage change):
    - 2006: 6.8
    - 2007: 7.7
    - 2008: 3.5
    - 2009: 2.0
    - 2010: 4.0
    - 2011: 4.8
    - 2012: 5.0
    - 2013: 5.0
  - Inflation, eop:
    - 2006: 4.5
    - 2007: 5.7
    - 2008: 7.5
    - 2009: 4.8
    - 2010: 3.8
    - 2011: 3.7
    - 2012: 3.5
    - 2013: 3.3
  - Structural primary balances (percent of GDP):
    - Central government: 2006: 0.0; 2007: 0.6; 2008: -0.1; 2009: 0.4; 2010: 0.7; 2011: 0.6; 2012: 0.5; 2013: 0.4
    - NFPS: 2006: 2.8; 2007: 2.6; 2008: 2.2; 2009: 1.8; 2010: 1.9; 2011: 1.7; 2012: 1.9; 2013: 1.6
  - Combined public sector balance (percent of GDP): 2006: -0.7; 2007: -0.6; 2008: -0.8; 2009: -1.2; 2010: -1.1; 2011: -1.0; 2012: -0.9; 2013: -0.9
  - Total public debt (percent of GDP): 2006: 35.9; 2007: 32.8; 2008: 31.7; 2009: 29.7; 2010: 28.7; 2011: 27.9; 2012: 26.9; 2013: 26.0
  - External current account balance (percent of GDP): 2006: -1.8; 2007: -2.8; 2008: -3.2; 2009: -3.2; 2010: -2.7; 2011: -2.5; 2012: -2.2; 2013: -2.0
  - Financial account inflows (percent of GDP): 2006: 1.8; 2007: 5.0; 2008: 4.0; 2009: 3.6; 2010: 3.1; 2011: 2.9; 2012: 2.6; 2013: 2.3
  - Of which: FDI (percent of GDP): 2006: 3.4; 2007: 3.9; 2008: 3.5; 2009: 3.4; 2010: 3.1; 2011: 3.0; 2012: 2.8; 2013: 2.6
  - Sources: Colombian authorities; and Fund staff estimates and projections.

### Risks to the outlook
- Growth risks are weighted to the downside:
  - External environment poses important risks; staff analysis indicates a shock to global growth would significantly affect Colombia mainly through export growth.
  - A sharp deceleration in Venezuelan growth could have a significant impact given Venezuela’s 17 percent share of Colombian exports in 2007.
  - Further deepening of global financial turmoil could increase borrowing costs or disrupt credit markets, reducing growth.
- Inflation risks:
  - Upside: high inflation expectations and potential adverse minimum-wage negotiation outcomes.
  - Downside: inflation could fall faster than expected if economic activity or commodity prices fall below staff projections.
- External stability risks:
  - Staff estimates a one-standard deviation shock to commodity prices would worsen the current account deficit by 2¼ percentage points of GDP.
  - A one standard deviation negative shock to Venezuelan growth would reduce Colombian exports by ½–1 percentage point (text truncated in source).
- Vulnerability indicators (2008, percent of GDP or as noted):
  - Gross reserves in percent of short-term debt at remaining maturity: Colombia 176.6; Median, sample of 49 emerging market countries 143.7; Median of investment grade countries 109.0
  - Total gross external debt: Colombia 22.7; Median (49 countries) 40.3; Median (investment grade) 40.9
  - Current account balance: Colombia -3.2; Median -3.8; Investment grade -2.5
  - Foreign direct investment: Colombia 3.5; Median 3.7; Investment grade 3.4
  - Gross external financing requirement: Colombia 6.9; Median 14.8; Investment grade 16.1
  - Public sector overall balance: Colombia -0.8; Median -1.6; Investment grade -1.4
  - Public sector gross debt: Colombia 31.7; Median 39.2; Investment grade 29.3
  - Public sector exposed to exchange rate risk (percent): Colombia 12.5; Median 16.4; Investment grade 4.9
  - Public sector exposed to rollover risk (ST debt, residual maturity): Colombia 3.3; Median 4.9; Investment grade 5.1
  - Financial system capital adequacy ratio (June 2008 data except Colombia September): Colombia 13.3; Median 13.6; Investment grade 12.2
  - Non-performing loans (percent of total loans): Colombia 4.1; Median 3.0; Investment grade 2.5
  - Return on average assets (percent): Colombia 4.0; Median 1.6; Investment grade 1.4
  - Change in credit-to-GDP ratio (percentage points): Colombia 1.3; Median 4.1; Investment grade 5.2
  - Source: Fund staff estimates.

### Policy discussions and recommendations
- Financial sector risk management and contingency planning:
  - Authorities plan to enhance capacity to respond to worsening global conditions by reducing reserve requirements, injecting liquidity via open market operations, and broadening assets eligible for repo operations.
  - Authorities are considering temporarily limiting bank dividend distributions to provide additional cushions against unexpected losses.
  - Financial Surveillance Committee’s intensified activity welcomed; Committee coordinates the superintendency, ministry of finance, BdR, and FOGAFIN to assess adverse scenarios and develop contingency plans.
  - Staff suggested clarifying circumstances under which emergency liquidity support would be forthcoming to assist contingency planning.
- Financial safety nets and resolution framework:
  - Framework for bank resolution is well established but needs greater clarity on sequencing of actions and institutional responsibilities to ensure timely resolution.
  - Deposit insurance: staff recommended a more expedited process for returning funds to depositors and elimination of the deductible; a longer-term review of deposit insurance coverage could be considered.
  - Authorities intend to request Fund technical assistance on deposit insurance.
- Data and transparency:
  - Staff recommended wider dissemination of BdR’s daily on-shore derivatives data for financial and corporate sectors; authorities welcomed including these data in BdR’s financial stability reports.
  - Authorities have initiated a quarterly survey of credit conditions and assessed financial risks related to developments in Venezuela and the United States.
- Financial sector reforms:
  - Government’s reform program under consideration by congress envisages development of a multi-tier pension system.
  - Staff recommended broadening reforms to improve creditor rights and strengthen independence of the financial sector superintendent; authorities noted proposed measures for increased autonomy of the Superintendent and later plans to strengthen creditor rights.
- Other actions:
  - Authorities closed major fraudulent pyramid schemes in mid-November, began asset liquidation to return recovered funds to investors; early estimates suggest assets controlled by the schemes were less than ½ percent of GDP.
  - Closing of schemes had no systemic effect on the financial system; authorities reallocated funds in the 2008 budget toward targeted social spending and indicated investors in the schemes will not be bailed out.
- Derivatives market developments:
  - Interest rate derivatives for five-year government bonds were introduced in mid-year.
  - Legal framework governing regulation and taxation of derivatives has been strengthened.
  - A reference interest rate has been established to support further development of derivatives markets.

*Source: Excerpt from IMF staff report (Creditedge (Moody's-KMV) and Fund staff estimates cited in text).*

### 26.      There continue to be risks to the capital account. FDI has tended to follow a

### _cr0923 - 26.      There continue to be risks to the capital account. FDI has tended to follow a

### Risks to the capital account and FDI
- FDI has tended to follow a procyclical pattern; weaker world and domestic growth could lead to a more pronounced reduction in inflows than projected.
- In recent years, the energy and mining sectors have accounted for about half of Colombia’s FDI.
- Authorities judged the risk of a sizable and immediate decline of FDI in energy and mining as low, citing still-attractive prices and contractual commitments of foreign firms to execute specific investment projects.
- Non-FDI outflows could be higher than expected if risk aversion toward emerging market assets increases.
- Offsetting factors: small foreign participation in financial markets and a cautious baseline forecast that already assumes a net outflow.

### Channels of adverse global impact and buffers
- Key channels: developments in commodity prices and world growth.
- A sharp drop in commodity prices and world activity would reduce growth and place pressure on banking system health.
- Buffers cited:
  - Sizable foreign exchange reserves.
  - Mobilization of additional multilateral financing under the authorities’ contingency plan.

### Monetary and exchange rate policies
- Policy stance:
  - Mission supported monetary policy oriented toward guiding the economy to a soft landing.
  - BdR should closely watch forward-looking indicators of activity and inflation expectations to guide policy.
- Policy space:
  - As inflation and inflation expectations decline, scope exists for a gradual reduction in the policy rate or further reduction in reserve requirements.
  - With substantially weaker commodity prices and global growth, demand pressures expected to diminish, providing room for monetary easing provided inflation targets are not put at risk.
- Exchange rate:
  - Continued exchange rate flexibility is important to allow adjustment to external shocks.
  - Staff recommended greater stability in rules for FX intervention over the longer term.
  - Observation: frequent changes in reserve accumulation targets and rules for exchange rate intervention during 2008 may have contributed to uncertainty and to high exchange rate volatility (Colombia’s volatility exceeded the Latin American average over the past two years).
  - Staff welcomed widening of the band for the automatic intervention rule from 2 percent to 5 percent; with the wider band, intervention should be triggered only infrequently.
  - Role for discretionary intervention exists to address disorderly conditions.
- Pension fund regulations:
  - Pension funds are active in daily FX trading; existing regulations require minimum returns over a short time period and may encourage herd behavior.
  - Staff suggested examining minimum return regulations, including lengthening the time period used to estimate minimum return, to reduce sudden movements between peso- and foreign-currency assets.
  - Authorities noted actual returns typically far from those required, making it unlikely these rules drove volatility.

### Capital controls and exchange measures
- Capital controls (May 2007 through October 2008):
  - Staff’s econometric analysis suggested controls had a statistically significant effect on foreign borrowing.
  - These inflows had been modest in the pre-controls era relative to other capital flows.
  - Controls had no significant effect on other non-FDI inflows, and no robust evidence they reduced exchange rate sensitivity to interest rate differentials.
  - Large share of capital flows excluded from controls (including portfolio investment by pension funds), which may have limited impact.
  - Controls were associated with a significant increase in exchange rate volatility.
  - Staff view: limited effectiveness and adverse effects imply significant drawbacks to controls.
  - Authorities’ view: controls helped protect financial stability by preventing large build-up of foreign-currency debt by the private sector and could be used again if circumstances require.
- Article VIII exchange measures:
  - Colombia maintains two exchange measures subject to Article VIII:
    - A tax on remittances abroad of nonresident profits earned before 2007 and retained in the country for less than five years (retention approved by the Board until April 15, 2009).
    - An exchange restriction arising from the special regime for the hydrocarbons sector.

### Fiscal policy: targets, risks, and recommendations
- Medium-term fiscal plan:
  - Mission endorsed authorities’ commitment to maintain fiscal targets in the medium-term plan.
  - Plan envisages some fiscal stimulus in 2009, and a broadly neutral stance in 2010 onward.
  - Maintaining 2009 deficit targets likely requires some reduction in expenditure growth relative to the budget because revenues likely lower due to weaker growth and lower commodity prices.
  - Authorities noted increased budget deficit in 2009 and increase in long-term government bond rates tightened domestic financing conditions, limiting scope for more expansionary near-term policy.
  - Agreement: adhering to deficit target would assure markets that public debt would continue to decline as a percent of GDP and that financing needs remain modest.
- Fiscal stance under adverse scenarios:
  - Under a more adverse growth scenario, financing conditions would be key in determining fiscal stance.
  - Staff analytical work (Box 3) indicates effects of fiscal stance on output are heavily influenced by the impact of fiscal easing on expectations and domestic interest rates.
  - While fiscal stimulus is not ruled out, staff agreed a cautious approach remains appropriate.
- Medium-term fiscal risks:
  - Health system reforms following recent constitutional court rulings could have substantial fiscal costs from 2010 onward.
  - Likely expansion of special tax zones (zonas francas) could lead to significant revenue loss over time.
  - Staff recommended careful assessment of these risks and consideration of policy responses to offset potential public finance impact.
  - Authorities remain committed to medium-term targets and indicated they would adopt measures if necessary.
- Fiscal rule and procyclicality:
  - Authorities concurred with staff suggestion to explore adoption of a fiscal rule to limit procyclicality; rule would set a floor for the central government structural balance and could focus on the nonoil structural balance given oil revenue uncertainties.
- Royalties and local government spending:
  - Staff welcomed proposal to create a “rainy day fund” for a share of hydrocarbons and mining royalties to control procyclicality of local government spending.
- Structural fiscal reforms:
  - Planned sales: government plans to sell its stake in ISAGEN in 2009 and smaller regional electricity companies.
  - Strengthening tax administration expected to reduce evasion and boost revenues.
  - Staff encouraged rejuvenating fiscal reform agenda: phase out the financial transactions tax, reduce exemptions and number of VAT rates, cut taxes on labor.
  - Authorities agreed on desirability but saw no political scope for additional tax reform during the remainder of the current administration.
  - On expenditure side, staff urged reducing budget rigidities such as revenue earmarking; authorities noted earlier pensions and intergovernmental transfer reforms had increased budget flexibility.

### Box 3 — Financing Conditions and the Impact of Fiscal Policy (summary)
- Main point: Fiscal policy’s ability to stabilize output in face of external shocks depends on financing conditions.
- GIMF model simulations for Colombia show:
  - If financing is not an issue, a cyclically neutral policy that allows automatic stabilizers to work improves stability of output and consumption compared to a constant deficit rule.
  - If financing conditions deteriorate (e.g., increase in interest rate risk premia triggered by expectations of a higher deficit), accommodative fiscal policy could be ineffective in stabilizing output and consumption.

### Staff appraisal — key conclusions
- Colombia performed well in recent years but faces harsher external conditions; growth led by private investment exceeded Latin America average in 2005–07.
- Public debt has declined sharply as a percent of GDP aided by high growth and prudent fiscal policies.
- Flexible approach required to maintain macroeconomic stability near term.
- Crisis prevention framework:
  - Review and strengthening important given global market turmoil.
  - Financial safety nets generally sound, but scope to strengthen bank resolution process, deposit insurance, and clarify emergency liquidity support circumstances.
  - Extend stress testing to a broader range of macroeconomic and global financial scenarios.
- Inflation:
  - Inflation rose and remains a policy challenge; projected to exceed the target in 2008, with inflation expectations above the medium-term target.
  - Reducing inflation is essential for sustainable investment and growth.
- Monetary policy:
  - Banco de la República’s management steering economy toward a soft landing; substantial tightening over past 2½ years consistent with reduction of inflation toward medium-term target.
  - Continued close monitoring needed to determine pace of easing as headline inflation declines.
- Exchange rate and capital controls:
  - Flexible exchange rate regime helped maintain external stability; real exchange rate consistent with fundamentals.
  - Recommend continued flexibility and greater stability in intervention practices; reintroduction of volatility rule with a wider band is welcome.
  - Elimination of capital controls is positive given their potentially negative effects on financial sector development and exchange rate volatility.
- Fiscal policy:
  - Maintaining fiscal targets in medium-term plan will underpin confidence during global turbulence; plan incorporates some stimulus in 2009 and broadly neutral stance from 2010 onward.
  - Financing conditions would determine scope for easing if growth much lower than expected.
  - Consideration could be given over the medium-term to adopting a fiscal rule to strengthen the framework.
- Structural reforms:
  - Scope to strengthen reforms: expand derivatives markets, improve regulatory framework, develop multi-tier pension system, strengthen creditor rights, increase independence for financial sector supervisors, improve tax efficiency, and tackle budget rigidities.
- Article IV exchange measures:
  - No changes in Colombia’s exchange measures since last consultation.
  - Staff recommends approval of retention of restriction and multiple currency practice arising from taxing remittances of nonresident profits earned prior to 2007 (temporary, maintained for balance of payments reasons, non-discriminatory).
  - Staff does not recommend approval of retention of restriction derived from special regime in the hydrocarbons sector, since there is no timetable for its removal.

*Source: IMF staff report text as provided.*

### 50.      It is recommended that the next Article IV consultation be held on the 12-month

### _cr0923 - 50.      It is recommended that the next Article IV consultation be held on the 12-month

### Recommendation
- It is recommended that the next Article IV consultation be held on the 12-month cycle.

### Social and demographic context
- Population (millions), 2007: 47.5
- GDP per capita (US$), 2007: 4,341
- GDP (billions of Col$), 2007: 428,301
- GDP (billions of US$), 2007: 206.3
- Life expectancy at birth (years) (HDI), 2000-05: 72.2
- Adult illiteracy rate (percent ages 15 and older), 2004: 7.2
- Sustainable access to safe water (percent of population), 2004: 93.0
- Gini index, 2003: 58.6
- Inequality (ratio of richest 20% to poorest 20%), 2003: 25.3
- Poverty rate, 2006: 45.1
- Extreme poverty rate, 2006: 12.0
- Physicians (per 100,000 people), 1990-2004: 135.0
- Under 5 mortality rate (per 1,000 live births), 2005: 21.4
- Unemployment rate, Apr. 2008 (percent): 11.0

### Real economy and inflation (selected annual changes)
- Real GDP (percent change): 2004: 4.7; 2005: 5.7; 2006: 6.8; 2007: 7.7; 2008: 3.5; 2009: 2.0
- GDP deflator (percent change): 2004: 8.3; 2005: 6.1; 2006: 6.8; 2007: 3.9; 2008: 8.7; 2009: 4.6
- Consumer prices (average): 2004: 5.9; 2005: 5.0; 2006: 4.3; 2007: 5.5; 2008: 7.0; 2009: 5.7
- Consumer prices (end of period): 2004: 5.5; 2005: 4.9; 2006: 4.5; 2007: 5.7; 2008: 7.5; 2009: 4.8

### External sector (selected)
- Exports (f.o.b., percent change): 2004: 24.7; 2005: 26.2; 2006: 15.9; 2007: 21.4; 2008: 21.3; 2009: -9.9
- Imports (f.o.b., percent change): 2004: 19.8; 2005: 26.8; 2006: 23.5; 2007: 25.4; 2008: 18.4; 2009: -5.4
- Terms of trade (deterioration -): 2004: 8.1; 2005: 12.6; 2006: 2.8; 2007: 3.5; 2008: 5.8; 2009: -13.1
- Real effective exchange rate (depreciation -): 2004: 13.4; 2005: 11.6; 2006: -1.9; 2007: 8.2

### Fiscal indicators (central government and public sector; percent of GDP)
- Central government revenue (selected years): 2004: 31.2; 2005: 14.8; 2006: 22.8; 2007: 14.8; 2008: 17.4; 2009: 17.4
- Central government expenditure (selected years): 2004: 32.7; 2005: 10.3; 2006: 16.8; 2007: 9.9; 2008: 15.9; 2009: 15.5
- Central government balance (percent of GDP): 2004: -4.7; 2005: -4.1; 2006: -3.4; 2007: -2.7; 2008: -2.6; 2009: -2.5
- Nonfinancial public sector balance (percent of GDP): 2004: -1.3; 2005: 0.0; 2006: -1.0; 2007: -0.8; 2008: -0.9; 2009: -1.5
- NFPS primary balance (percent of GDP): 2004: 2.8; 2005: 3.4; 2006: 2.9; 2007: 3.3; 2008: 2.6; 2009: 1.7
- Combined public sector balance (percent of GDP): 2004: -1.1; 2005: 0.0; 2006: -0.7; 2007: -0.6; 2008: -0.8; 2009: -1.2
- Public debt (percent of GDP): 2004: 42.4; 2005: 38.8; 2006: 35.9; 2007: 32.8; 2008: 31.7; 2009: 29.7

### Fiscal projections (selected percent of GDP)
- Total revenue (2004–2013 projections): 2004: 25.9; 2005: 26.1; 2006: 27.7; 2007: 28.0; 2008: 26.2; 2009: 27.5; 2010: 25.3; 2011: 24.8; 2012: 24.5; 2013: 24.4
- Tax revenue (2004–2013 projections): 2004: 14.6; 2005: 14.9; 2006: 19.5; 2007: 19.8; 2008: 20.1; 2009: 20.3; 2010: 19.4; 2011: 18.9; 2012: 18.6; 2013: 18.4
- Total expenditure and net lending (2004–2013 projections): 2004: 26.9; 2005: 26.2; 2006: 28.6; 2007: 29.0; 2008: 27.1; 2009: 29.0; 2010: 26.7; 2011: 26.1; 2012: 25.7; 2013: 25.6
- NFPS primary balance (2004–2013 projections): 2004: 2.8; 2005: 3.4; 2006: 2.9; 2007: 3.3; 2008: 2.6; 2009: 1.7; 2010: 1.4; 2011: 1.4; 2012: 1.3; 2013: 1.4
- Combined public sector balance (2004–2013 projections): 2004: -1.1; 2005: 0.0; 2006: -0.7; 2007: -0.6; 2008: -0.8; 2009: -1.2; 2010: -1.1; 2011: -1.0; 2012: -0.9; 2013: -0.9

### Monetary and liquidity indicators (selected)
- Broad money (annual percent change): 2004: 19.2; 2005: 17.6; 2006: 18.0; 2007: 17.4; 2008: 35.9; 2009: 6.7
- Credit to the private sector (annual percent change): 2004: 29.8; 2005: 11.3; 2006: 38.5; 2007: 23.5; 2008: 17.5
- Interest rate (90-day time deposits; nominal, percent per year) — Data for 2008 refer to June: Nominal: 2004: 7.8; 2005: 6.3; 2006: 6.8; 2007: 9.2; 2008: 9.9
- Nominal GDP (COP billions): 2004: 263,888; 2005: 299,067; 2006: 335,547; 2007: 382,818; 2008: 428,301; 2009: 468,305

### Balance of payments and reserves (selected)
- Current account (deficit - percent of GDP): 2004: -0.8; 2005: -1.3; 2006: -1.8; 2007: -2.8; 2008: -3.2; 2009: -3.2
- Exports (f.o.b., US$ millions): 2004: 17,224; 2005: 21,729; 2006: 25,181; 2007: 30,577; 2008: 37,092; 2009: 33,423
  - Petroleum products (US$ millions): 2004: 4,227; 2005: 5,559; 2006: 6,328; 2007: 7,318; 2008: 11,090; 2009: 7,502
  - Coal (US$ millions): 2004: 1,854; 2005: 2,598; 2006: 2,913; 2007: 3,495; 2008: 4,990; 2009: 5,389
  - Coffee (US$ millions): 2004: 949; 2005: 1,471; 2006: 1,461; 2007: 1,714; 2008: 2,025; 2009: 1,757
- Imports (f.o.b., US$ millions): 2004: 15,660; 2005: 19,746; 2006: 24,319; 2007: 30,136; 2008: 34,902; 2009: 34,902 (table shows broader series)
- Net official reserves (US$ millions): 2004: 13,197; 2005: 14,721; 2006: 15,127; 2007: 20,244; 2008: 22,873; 2009: 23,377
- Net official reserves (in months of imports of goods and services): 2004: 6.4; 2005: 5.8; 2006: 4.9; 2007: 5.5; 2008: 6.3; 2009: 6.0
- Overall balance of payments (US$ millions): 2004: 2,541.1; 2005: 1,728.7; 2006: 22.8; 2007: 4,710.8; 2008: 2,044.2; 2009: 954.8

### Summary balance of payments projections (US$ millions; selected)
- Current account balance: 2005: -1,881; 2006: -2,982; 2007: -5,859; 2008: -7,665; 2009: -6,964; 2010: -6,569; 2011: -6,360
- Trade balance: 2005: 1,595; 2006: 322; 2007: -596; 2008: 193; 2009: -1,479; 2010: -142; 2011: 854
- Services (net): 2005: -2,102; 2006: -2,119; 2007: -2,607; 2008: -2,587; 2009: -2,641
- Income (net): 2005: -5,456; 2006: -5,929; 2007: -7,886; 2008: -10,683; 2009: -8,263
- Financial account balance: 2005: 3,240; 2006: 2,944; 2007: 10,343; 2008: 9,671; 2009: 7,769
- Gross international reserves (months of imports of G&S): 2005: 5.9; 2006: 5.0; 2007: 5.8; 2008: 6.9; 2009: 6.5
- Oil Price (Colombian mix): 2005: 49.8; 2006: 58.3; 2007: 66.2; 2008: 91.5; 2009: 51.7; 2010: 61.2; 2011: 65.0

### Financial soundness indicators (selected; end-of-period)
- Regulatory capital to risk-weighted assets: 2002: 12.2; 2003: 13.0; 2004: 14.2; 2005: 14.7; 2006: 13.1; 2007: 13.6; Jun-08: 13.9; Sep-08: 13.3; Oct-08: 13.1
- Nonperforming loans to gross loans: 2002: 8.7; 2003: 6.8; 2004: 3.3; 2005: 2.7; 2006: 2.6; 2007: 3.3; Jun-08: 3.9; Sep-08: 4.1; Oct-08: 4.1
- ROAA: 2002: 1.1; 2003: 1.9; 2004: 2.7; 2005: 2.7; 2006: 2.5; 2007: 2.4; Jun-08: 2.5; Sep-08: 4.0; Oct-08: 4.3
- Liquid assets to total assets: 2002: 19.7; 2003: 18.7; 2004: 20.6; 2005: 20.8; 2006: 14.0; 2007: 13.0; Jun-08: 12.2; Sep-08: 12.7; Oct-08: 12.3

### Medium-term outlook and debt dynamics (baseline and key projections)
- Real GDP growth (baseline projections, annual percent): 2008: 3.5; 2009: 2.0; 2010: 4.0; 2011: 4.8; 2012: 5.0; 2013: 5.0
- Consumer prices (end of period, baseline): 2008: 7.5; 2009: 4.8; 2010: 3.8; 2011: 3.7; 2012: 3.5; 2013: 3.3
- Gross national savings (percent of GDP): 2004: 19.3; 2005: 20.3; 2006: 22.5; 2007: 22.0; 2008: 21.2; 2009: 19.0; 2010: 19.6; 2011: 20.2; 2012: 20.6; 2013: 20.7
- Gross domestic investment (percent of GDP): 2004: 20.1; 2005: 21.6; 2006: 24.3; 2007: 24.9; 2008: 24.3; 2009: 22.1
- External current account balance (percent of GDP): 2004: -0.8; 2005: -1.3; 2006: -1.8; 2007: -2.8; 2008: -3.2; 2009: -3.2; 2010: -2.7; 2011: -2.5; 2012: -2.2; 2013: -2.0

### External debt sustainability (selected metrics and stress tests)
- External debt (percent of GDP, baseline): 2003: 40.0; 2004: 31.5; 2005: 26.2; 2006: 23.5; 2007: 20.8; 2008: 22.7; 2009: 21.3; 2010: 21.3; 2011: 20.1; 2012: 18.8; 2013: 17.7
- External debt-to-exports ratio (percent): 2003: 241.6; 2004: 202.5; 2005: 157.7; 2006: 140.6; 2007: 129.2; 2008: 113.7; 2009: 126.3; 2010: 118.6; 2011: 112.9; 2012: 104.9; 2013: 99.2
- Gross external financing need (US$ billions): 2003: 10.9; 2004: 10.9; 2005: 15.8; 2006: 13.7; 2007: 15.0; 2008: 19.0; 2009: 19.6; 2010: 20.8; 2011: 20.3; 2012: 21.2; 2013: 21.2
- Key macro assumptions (baseline): nominal external interest rate (percent): 6.3–7.3 (historical 2003–07); GDP deflator in US$ (change in percent): various including 2008: -2.9; growth of exports (US$ terms, percent): 2008: 9.9; growth of imports (US$ terms, percent): 2008: 16.2
- External debt dynamics drivers (selected): Contribution from nominal interest rate and real GDP growth and price/exchange rate changes are detailed in the debt sustainability tables and footnotes; automatic debt dynamics include positive and negative contributions across years (see tables for exact decompositions).

### Public sector debt sustainability (selected)
- Public sector debt (percent of GDP, baseline): 2003: 46.2; 2004: 42.4; 2005: 38.8; 2006: 35.9; 2007: 32.8; 2008: 31.7; 2009: 29.7; 2010: 28.7; 2011: 27.9; 2012: 26.9; 2013: 26.0
- Change in public sector debt (percent of GDP): 2003: -3.6; 2004: -3.8; 2005: -3.6; 2006: -3.0; 2007: -3.0; 2008: -1.1; 2009: -2.0; 2010: -1.0; 2011: -0.8; 2012: -0.9; 2013: -0.9
- Primary balance (percent of GDP): 2003: -1.9; 2004: -3.0; 2005: -3.2; 2006: -2.9; 2007: -2.9; 2008: -1.4; 2009: 1.8; 2010: -2.6; 2011: -1.7; 2012: -1.8; 2013: -1.6
- Debt-stabilizing primary balance (percent of GDP) is reported in the Public Sector Debt Sustainability Framework and varies by scenario (see table for exact values).

### Stress tests and alternative scenarios (summary)
- Multiple bound tests presented for external and public debt: interest rate shocks, growth shocks, non-interest current account shocks, combined shocks, and one-time 30 percent real depreciation scenarios.
- Alternative scenarios include:
  - A1. Key variables at historical averages in 2009-13
  - A2. No policy change (constant primary balance) in 2009-13
- Bound tests (examples): B1. Real interest rate at historical average plus one-half standard deviation; B2. Real GDP growth at historical average minus one-half standard deviation; B5. One-time 30 percent real depreciation in 2009.
- Stress test outputs show increases in debt ratios under adverse shocks; detailed numeric results are provided in the debt sustainability tables and figures.

*Sources: Colombian authorities; UNDP Human Development Report 2007/08; World Development Indicators; Banco de la República; Ministry of Finance; Superintendencia Financiera; Creditedge (Moody's-KMV); and Fund staff estimates and projections.*

### Appendix I. Estimating the Underlying External

### Appendix I. Estimating the Underlying External Current Account Balance for Colombia

### Definition and overall result
- Under the 2007 Surveillance Decision, the underlying current balance is defined as the medium-term level of the current account, stripped of temporary factors influencing the trade and income balances.
- The adjustments imply an estimated underlying current account deficit of -2.9 percent of GDP for 2008, compared to a projection of -3.2 percent of GDP for 2008.

### Adjustment factors and conceptual explanations
- -3.2 — 2008 current account (projection)
- 0.1 — Output gap: Adjustment for effect of economic cycle on trade in Colombia and its partners. Domestic output is estimated to be below potential; closing the output gap results in higher imports, negatively affecting the trade and current account balances.
- 0.9 — Real exchange rate (REER): REER more appreciated than its long-term average due to economic cycle; affects imports and exports.
- -2.1 — Export prices: Prices of commodities above 2013 price levels. Prices for oil and mineral products (Colombia’s major export commodities) are estimated to be above their medium-term levels, implying a negative adjustment on the trade and current account balances.
- 0.4 — Profit transfers: Profit transfers above long-term average due to economic cycle and high oil prices. High oil prices and the appreciation of the peso in the first half of 2008 resulted in a high amount of repatriated profits from foreign investment.
- 1.1 — Non-traditional exports: Non-traditional exports are assessed as being temporarily below their long-term level, in part due to temporary trade disruptions with Venezuela.

### Net estimated underlying current account
- -2.9 — Estimated underlying current account (2008) after applying the listed adjustment factors.

### Additional methodological notes (as presented)
- Domestic output gap: closing raises imports, directly worsening trade/current account.
- Trading partners’ output gap: foreign demand in key trading partners estimated below potential due to global financial turmoil; closing that gap would increase exports and improve trade/current account relative to cyclically-unadjusted balance.
- Exports adjusted for commodity prices and global slowdown: commodity prices (oil and minerals) above medium-term levels; non-traditional exports adjusted downward due to temporary disruptions.
- Exchange rate: average real effective exchange rate for 2008 is more appreciated than its long-term level.
- Income account: elevated repatriated profits in 2008 driven by high oil prices and peso appreciation.

*Source: Staff estimates.*

### 1998. Balance of payment statistics have been extended to cover transactions in the free trade

### 1998. Balance of payment statistics have been extended to cover transactions in the free trade zones

### Balance of payments and external statistics improvements
- Balance of payment statistics extended to cover transactions in the free trade zones.
- Improved surveys, particularly in the service sector, have enhanced coverage and consistency.
- Financial account data are now based on actual disbursement rather than registers.
- The 2005 data ROSC mission recommended that the Banco de la República (BdR), in consultation with the DANE, develop a methodology to include unrecorded trade in the balance of payments on a timely basis.
- ROSC recommendations for BdR classification and recording:
  - Reclassify FDI intercompany debt transactions from “other investment” to FDI.
  - Reclassify some FDI equity transactions to portfolio equity.
  - Adjust the related investment income series accordingly.
  - Continue efforts to identify government bonds issued abroad and purchased by residents as well as those purchased by residents on the secondary market.
- BdR compiles and disseminates:
  - International Investment Position statistics,
  - External Debt statistics,
  - Data Template on International Reserves and Foreign Currency Liquidity.

### Data coverage, frequency, and quality (as of December 3, 2008)
- Exchange Rates: Date of latest observation Oct. 2008; Date received 11/18/08; Frequency of Data D; Frequency of Reporting W; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Oct. 2008; 11/18/08; M; M; M.
- Reserve/Base Money: Aug. 2008; 11/18/08; D; W; W.
- Broad Money: Jul. 2008; 11/18/08; D; W; W.
- Central Bank Balance Sheet: Aug. 2008; 11/18/08; M; M; M.
- Consolidated Balance Sheet of the Banking System: Aug. 2008; 11/18/08; M; M; M.
- Interest Rates: Oct. 2008; 11/18/08; D; W; D.
- Consumer Price Index: Oct. 2008; 11/18/08; M; M; M.
- Revenue, Expenditure, Balance and Financing Composition – General Government (GG): Q2 2008; Oct. 2008; Q; Q; Q.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Q2 2008; Oct. 2008; M; M; M.
- Stocks of Central Government and Central Government-Guaranteed Debt: June 2008; Oct. 2008; Q; Q; Q.
- External Current Account Balance: Q2 2008; Oct. 2008; Q; Q; Q.
- Exports and Imports of Goods and Services: Q2 2008; Oct. 2008; Q; Q; Q.
- GDP/GNP: Q2 2008; Oct. 2008; Q; Q; Q.
- Gross External Debt: Aug. 2008; Oct. 08; M; M; M.
- International Investment Position: Q2 2008; Oct. 2008; Q; Q; Q.
- Data Quality assessments (Methodological soundness / Accuracy and reliability): examples include values LO, O, NO as indicated in the table (see source for row-specific assessments).

### Executive Board assessment (Article IV, Jan 14, 2009)
- Commendations and outlook:
  - Directors commended authorities for sound macroeconomic policies and wide-ranging structural reforms.
  - With improved fundamentals and a healthy banking system, Colombia is considered well-placed to confront the global downturn, though flexible and timely policy responses remain necessary.
- Fiscal policy:
  - Fiscal policy appropriately allows for some near-term relaxation in the budget deficit while keeping public debt ratios on a declining path.
  - Importance of adhering to fiscal targets in the medium-term fiscal plan to reassure markets.
  - Consideration suggested for adoption of a fiscal rule over the medium term.
  - Encourage improvement in tax system efficiency and reduction of budget rigidities.
- Monetary and exchange rate policy:
  - Monetary policy should aim to steer the economy toward a soft landing; welcomed efforts to reduce inflation to the medium-term target.
  - Recent interest rate reduction deemed appropriate.
  - Continued close monitoring of forward-looking indicators and inflation expectations recommended.
  - Flexible exchange rate regime has helped maintain external stability; greater stability in intervention practices would strengthen the framework.
  - Welcome for wider band for the automatic intervention rule; elimination in October 2008 of capital controls noted positively.
  - Some Directors view capital controls as a future toolkit option; a few Directors urged removal of the exchange restriction from the hydrocarbons sector special regime.
- Financial sector:
  - Financial sector buffers are significant; stress-testing suggests solvency under a number of extreme scenarios.
  - Suggested extending stress-testing to a broader range of macroeconomic and global financial scenarios.
  - Credit risk should be closely monitored given rising nonperforming loan ratios.
  - Welcomed efforts to strengthen crisis prevention, monitoring, financial safety nets, and measures to prevent liquidity problems.
  - Scope for further strengthening bank resolution process and deposit insurance system, with IMF technical assistance.
  - Greater clarity needed on circumstances for emergency liquidity support.
- Structural reforms:
  - Encouraged to progress regulatory improvements for derivatives and development of a multi-tier pension system.
  - Strengthening creditor rights and greater independence for financial sector supervisors remain priorities.

### Macroeconomic developments and indicators (selected)
- Recent performance and risks:
  - GDP growth slowed to about 4 percent (y/y) in January-September 2008.
  - Colombian financial markets affected by global turbulence; debt and interbank markets continued to function normally.
  - Since mid-September 2008, CDS spreads and equity prices generally moved with the region; EMBI and corporate bond spreads have risen more.
  - External trade credit lines to domestic banks affected modestly; interest rates have risen.
- Policy responses and measures:
  - Authorities secured financing from multilateral institutions and private capital markets for 2009 to help meet public sector external financing requirements.
  - BdR reduced reserve requirements and injected liquidity through open market operations.
  - BdR increased FX intervention in June, replacing monthly US$150 million options-based auctions with daily US$20 million spot purchases; suspended daily purchases in early October; reinstated automatic FX intervention rule.
  - Capital controls tightened at mid-year were eliminated in October.
  - Monetary policy: BdR raised policy rate by 400 basis points (to 10 percent) between April 2006 and July 2008; credit growth (y/y) slowed from about 35 percent in early 2007 to about 20 percent by September 2008. Policy rate lowered by 50 basis points in December 2008.
- Inflation and exchange rates:
  - Inflation increased, driven mainly by higher food and fuel prices and overheating pressures; nontraded goods inflation rose in the first half of the year.
  - Inflation expectations outside BdR’s medium-term target of 2–4 percent.
  - Peso appreciated by about 15 percent in real effective terms between end-2007 and mid-June; weakened thereafter.
- Financial soundness:
  - NPLs have risen—especially for consumer credit—but banks are well provisioned and profitable; expected default probabilities remain low.
  - No evidence of extraordinary reductions of activity by subsidiaries of foreign banks.
  - External credit lines account for a small share of banking system liabilities; reliance on wholesale (nondeposit) financing is moderate.

### Colombia: Selected economic indicators (selected figures)
- Real GDP: 2004 4.7; 2005 5.7; 2006 6.8; 2007 7.7; 2008 3.5.
- Consumer prices (end of period) 1/: 2004 5.5; 2005 4.9; 2006 4.5; 2007 5.7; 2008 7.7.
- Nominal exchange rate (depreciation+, end-of-period) 1/: 2004 -14.0; 2005 -4.4; 2006 -2.0; 2007 -10.0; 2008 11.6.
- Real effective exchange rate (depreciation +): 2004 -13.4; 2005 -11.6; 2006 1.9; 2007 -8.2; 2008 ...
- Broad money: 2004 19.2; 2005 17.6; 2006 18.0; 2007 17.4; 2008 35.9.
- Credit to the private sector: 2004 29.8; 2005 11.3; 2006 38.5; 2007 23.5; 2008 17.5.
- Real interest rate (90-day time deposits; percent per year): 2004 2.3; 2005 1.4; 2006 2.3; 2007 3.5; 2008 ...
- Current account (deficit -) (percent of GDP): 2004 -0.8; 2005 -1.3; 2006 -1.8; 2007 -2.8; 2008 -3.6.
- External debt (percent of GDP): 2004 31.5; 2005 26.2; 2006 23.4; 2007 20.9; 2008 22.7.
  - Of which: public sector: 2004 20.6; 2005 16.4; 2006 15.3; 2007 13.5; 2008 14.6.
- Net official reserves (in months of imports of goods and services): 2004 6.4; 2005 5.8; 2006 4.9; 2007 5.4; 2008 6.1.
- Gross domestic investment (percent of GDP): 2004 20.1; 2005 21.6; 2006 24.3; 2007 24.9; 2008 24.3.
- Gross national savings (percent of GDP): 2004 19.3; 2005 20.3; 2006 22.5; 2007 22.0; 2008 21.2.
- Combined public sector balance (percent of GDP): 2004 -1.1; 2005 0.0; 2006 -0.7; 2007 -0.6; 2008 -0.8.
- Nonfinancial public sector balance (percent of GDP): 2004 -1.3; 2005 0.0; 2006 -1.0; 2007 -0.8; 2008 -0.9.
- Central government balance (percent of GDP): 2004 -4.7; 2005 -4.1; 2006 -3.4; 2007 -2.7; 2008 -2.6.
- Public debt 2/ (percent of GDP): 2004 42.4; 2005 38.8; 2006 35.9; 2007 32.8; 2008 31.7.
  - 1/ Actual figure for 2008.
  - 2/ Includes bonds issued to recapitalize financial institutions.

### IMF staff update and projections (Statement by IMF Staff Representative, Jan 14, 2009)
- Recent developments:
  - Real GDP growth declined to 3.1 percent (y/y) in the third quarter.
  - Headline inflation was 7.7 percent (y/y) in December.
- External accounts:
  - Declining oil prices widening the external current account deficit.
  - Current account deficit expected to be 3½ percent of GDP in 2008 and 3½–4 percent of GDP in 2009.
  - Additional public sector external borrowing expected to help finance the larger deficit in 2009.
- Monetary policy:
  - BdR reduced its policy rate by 50 basis points (to 9.5 percent) in late December.
- Fiscal policy:
  - Authorities indicated allowance for some further easing of fiscal policy in 2009.
  - Target for the overall deficit of the combined public sector will be about ½ percent of GDP higher than envisaged in the budget.
  - Authorities reiterated commitment to medium-term fiscal targets; staff projects public debt will decline steadily as a ratio of GDP.

_Italic: IMF Public Information Notice (PIN) No. 09/08 and associated staff documents (January 26, 2009) as provided in the source content._

### 6.  Colombia has taken advantage of improved global financial conditions to tap

### 6.  Colombia has taken advantage of improved global financial conditions to tap international capital markets

### International capital market access and domestic financial conditions
- Early January the government placed US$1 billion (½ percent of GDP) in 10-year bonds, at a yield of 7½ percent.
- Long-term government bond rates in domestic markets declined by about 250 basis points between early November 2008 and early January.
- International markets are described as "still open" and Colombia "successfully issued a new bond for one billion dollars during the first week of this year."

### Statement context and authorities’ view
- Statement by María Inés Agudelo on Colombia, January 14, 2009.
- Authorities appreciate staff advice, take recommendations seriously, and value the in-depth analysis.
- Several years of strong economic performance, structural reforms, and improved security provide support to face the international financial and economic crisis.
- Staff and authorities generally coincide on the medium-term outlook, policy options, identified risks, and associated restrictions.

### Recent economic dynamics and outlook
- One year ago concerns were risks from economic activity considered above potential; policies were aimed at a soft landing.
- For the medium term, economic growth is expected to be more at the 5-5.5 percent range.
- After a record year of economic growth in 2007 of almost 8 percent, economic activity dropped to just 3 ½ percent in 2008 and "it is expected to be below that this year."
- Domestic demand pressured by tight monetary policy, reduced disposable income from fuel and food price increases, low public investment, and lower exports of goods and services to Venezuela.
- Supply side: nearly every economic activity affected; industrial production in the negative side and weak commercial activity.

### Fiscal policy: outcomes, constraints, and considerations
- The 2008 fiscal deficit is expected to remain at 0.8 percent of GDP, the initial target set by the government.
- Income revenues were significantly lower than planned; the government announced mid-year expenditure cuts, committing to Medium-Term Fiscal Framework targets and keeping public debt in a downward trend.
- Gross public debt was reduced to just above 30 percent of GDP from over 40 percent five years ago.
- Budget discussions aimed at reducing public debt further and keeping fiscal deficit at about 1.2 percent of GDP.
- Facing a significant reduction of revenues due to lower economic activity, the government announced a further cut in expenditures to partially compensate revenue loss.
- Authorities agree with staff that under a more adverse growth scenario, financing conditions would be determinant to allow for a larger fiscal deficit.
- The government emphasizes a well-functioning domestic public debt market, attention to interest rate dynamics, and avoidance of crowding out the private sector; they do not want to put pressure on scarce financial sector resources or encourage banks to finance the public sector over the private sector.
- As a result of the bond issuance, "the fiscal deficit will increase by ½ percentage point of GDP financed externally."
- The possibility of a "fiscal package" is limited: with lower than expected economic growth the government must concentrate on finding resources to fill revenue gaps, leaving no room for active public expenditure; "only automatic stabilizers can operate and only up to a point."
- Box 3 of the staff report is cited as supporting the view that only when financing is not an issue can fiscal policy contribute to stabilize the economy; liquidity restrictions and lack of resources in global markets may limit active anti-cyclical fiscal policy.

### Monetary and exchange rate policies
- Monetary authorities agree with staff assessment and recommendations on monetary policy.
- After a long period of monetary tightening during which the central bank increased its interest rate by 400 basis points, at the December meeting the rate was reduced by 50 basis points.
- Since April 2006, tightening aimed to reduce pressures from domestic demand, reduce credit growth, and limit second-round effects of food and fuel prices.
- Current and expected external and domestic conditions provide room for relaxation of monetary policy and a change in policy stance: global inflation is coming down; domestic and external demand are weak; long-term interest rates and expectations are lower.
- The central bank accumulated international reserves in recent years; "today the country has a comfortable level of international reserves at 10 percent of GDP."
- Capital controls: at the Board discussion last year, capital controls were agreed to be temporary; during 2008, capital controls were removed.
- Authorities express reservations with staff conclusions on capital controls: while evidence suggests capital controls did not successfully affect capital flows nor the level of the exchange rate (even if they reduced inflows of foreign borrowing), the association with an increase in volatility is not clear and evidence supporting that conclusion is considered weak.
- Exchange rate volatility is noted as higher in Colombia than in any other country in Latin America, "even during the very recent period of depreciation and appreciation of the exchange rate when capital controls where not in place."
- Measures to limit capital inflows were part of a larger package aimed at securing financial stability and reducing vulnerabilities to foreign exchange risks; limits on derivative positions and increases in reserve requirements on bank deposits were included.
- Authorities state that reducing balance sheet effects from exposure to foreign currencies was one objective of the whole package; the observed reduction of external debt provided comfort and reduced vulnerability of the banking and corporate sectors to external market illiquidity.
- Under large capital inflows, there was a need to increase the effectiveness of monetary policy; staff paper evidence might suggest this objective was achieved.

### Financial sector assessment and reforms
- Authorities share staff assessment: Colombian financial sector has sound indicators and stress tests indicate adequacy even under extreme circumstances.
- Inter-bank market liquidity has been working steadily without interruptions and deposits keep growing.
- Authorities concur with main recommendations for further financial sector reforms and are discussing some issues with Congress.

### Risks and policy stance
- With strong financial markets and correct macroeconomic policies, Colombia should be well placed to weather current global difficulties.
- External risks are important and may challenge current solidity: concerns include expectations on economic growth of main commercial partners (US, Venezuela and Ecuador) and effects of reduced oil prices on neighbors’ economies.
- Baseline scenario already introduces harder external conditions.
- Authorities are ready to adjust economic policies according to evolving circumstances while remaining committed to long-term sustainability.

*Source: Statement by María Inés Agudelo on Colombia, January 14, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0923.pdf_