Oil prices, reforms to hasten Colombia recovery

Rebounding oil prices and a pro-market reform agenda will underpin an ongoing economic recovery in Colombia despite looming capital flow risks, according to a report by the Institute of International Finance (IFF).

The Washington-based body projected GDP growth in the Andean country of 2.8% this year and 3.5% in 2019. The economy expanded by 1.8% in 2017, its lowest growth rate in eight years.

"With tailwinds from rising oil prices, the peso outperformed peers in the region as emerging markets came under pressure," IFF said in its latest Colombia country report.

IIF added that a flexible exchange rate, narrowing current account deficit and an US$11.4bn IMF flexible credit line have protected Colombia from a global trend of large-scale asset sales in emerging markets.

Higher consumer confidence, lower inflation, rising capital goods imports and falling interest rates should also lead to a recovery in private investment next year, it said.

But IFF warned of the country's increased exposure to shifts in investor sentiment resulting from the high participation of non-residents in the local-currency sovereign bond market.

"In this context, the central bank has initiated a reserve accumulation program to prepare for a possible termination of the flexible credit line arrangement in 2020," it said.

The report predicted that fiscal and pension reforms proposed by President Iván Duque, who was sworn in two months ago, would reduce the corporate sector's tax burden and "ensure financial sustainability of the system".

"A downside risk to the outlook is continued delays in infrastructure construction given several road projects have not yet obtained financial closure. Tax reform could weigh moderately on consumer confidence, especially if focused on widening the VAT base, partially limiting the recovery in 2019," it added.