No Room For Complacency: Q&A With Colombia’s Central Bank Governor Juan José Echavarría

Juan José Echavarría, Governor of the Central Bank of Colombia, talks about consumption, contagion and the outlook for regional economies through next year.

Global Finance: Colombia’s economy is expected to recover in the coming months. What are your forecasts? What should Colombia do to keep its public debt at bay?

Juan José Echavarría: Banco de la República’s technical staff projects GDP growth of 2.7% for 2018, but I am a little more optimistic and expect the Colombian economy to grow around 3.0% this year. Growth rates between 3.5% and 3.7% are expected for 2019, very close to the country’s long-term potential growth. These last rates are relatively satisfactory when compared to past growth rates, and with inflation under control, we can maintain (mildly) expansionary policies.

For the past few months we have seen better growth rates, in part because the world economy is expanding at fast rates, as well as because our terms of trade have been recovering (oil and coal prices have increased in international markets).

According to the latest information, GDP annual growth (seasonally adjusted and adjusted for calendar effects) was 2.5% in the second quarter of the year, very close to the projection made by the Bank’s staff. An important group of sectors is growing more than before, such as professional services, public administration, and commerce and industry. However, construction and housing continue to lag behind in most of the country’s regions.

Consumption has been recovering, especially public consumption, thanks not only to central government spending but also to regional public expenditure. Unfortunately, this dynamic may not be sustainable. What happens with private consumption will largely determine the dynamics of GDP, since this represents 65% to 70% of GDP. According to the Fedesarrollo [a Colombian think tank] survey, consumer confidence has improved in recent months.

Some international studies show that the size of the fiscal adjustment required to be near a sustainable debt level is small compared to other countries in the region. Furthermore, a fiscal rule was adopted some years ago. This will allow Colombia to have a countercyclical fiscal policy and will limit government total debt. Fiscal sustainability is one of the key variables monitored by the international financial markets and credit agencies.

GF: What are the economic prospects for Latin America through 2019?

Echavarría: Most projections are that Latin America will grow at rates close to 1.6% this year, and around 2.6% in 2019. We find three different groups of countries—the first led by Paraguay, Bolivia, Chile and Peru, with growth rates close to 4.0%; another group growing close to 3.0%, where we find Colombia; the third group shows low growth rates, and includes countries like Argentina, Ecuador, Brazil and Mexico. Venezuela’s GDP, in particular, fell by more than 40% during the past 4 years and will continue falling.

The improved performance of Latin America is due to more favorable commodity prices, but many countries in the region face large political uncertainty and could be hit by the recent volatility in the international financial markets.

GF: What keeps you up at night? What are the major risks at a global level?

Echavarría: The economy is doing surprisingly well these days: Inflation is close to our target, growth is coming back, the exchange rate has been very stable and we do not see financial shocks, even under stressed conditions. But economic authorities and central bankers should never be too complacent, especially because the [US] Federal Reserve will continue increasing rates, and there is much volatility in Turkey, Argentina, Mexico and Brazil. However, so far there has not been any contagion to Colombia, Chile or Peru, and we trust that the international financial markets will continue to favor countries—like Colombia—that have good monetary and fiscal policies.