Monetary policy challenges in Colombia - Ana Fernanda Maiguashca* Board Member Santander - 9th Annual Latin America European Forum. September 9th ...
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Monetary policy challenges in
Colombia
Ana Fernanda Maiguashca*
Board Member
Santander - 9th Annual Latin America European Forum. September 9th 2020
1
*The opinions presented here do not represent the position of the Board of DirectorsTHE SHOCKS
Content POLICY RESPONSES AND RESULTS
ECONOMIC FORECASTS
POLICY CHALLENGES• The Colombian economy is facing an unprecedented shock because of
containment measures and the drop of international commodity prices
Google Mobility Trend – Colombia Commodity prices
(percental change from baseline) (January 2020 = 100)
20 140
120
0
Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
100
-20
80
-40
60
-60
40 Coal
Carbón
-80 Coffee
Café
20
Entertainment and retail
Oil
Petróleo
Grocery and Pharmacy 0
-100
Workplaces Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
Source: Bloomberg y Google
3• Colombia and Latam will suffer a severe recession. A contraction of real GDP
of more than 7,4% is expected.
% Real GDP
15 (annual growth)
10 8,7
3,3 4,2
4,9 5,2 4,4 4,1 4,2
5 3,4 3,7 3,0
1,1 2,2 2,2
1,1 0,2 0,1
0
-0,3 0,0
-5 -2,2 -2,8 -2,3
-3,9
-6,1 -6,6 -5,8 -5,8
-10 -8,6
-9,3
-11,3 -11,7
-15
-20
-25 -21,9
2019 2020 2021
-30
-30,6
-35
Chile Mexico Argentina Brazil Paraguay Uruguay Venezuela Bolivia Colombia Ecuador Peru
Source: Latin American Consensus Forecast- August 2020
4• Major effects on the labor market. The economic rebound expected for 2021 won’t
be enough to recover the employment levels observed in 2019
Unemployment Rate
20
18 17,3
16 14,6 14,013,6 13,5
14 12,5
11,9 11,3
12 11,2 11,2
10,5
9,8 9,4 9,9 9,5 9,4 9,2
10 9,1 8,9
%
7,2
7,8
8 6,6
5,7 6,0
6 5,4
3,8 3,5
4
2
0
Colombia Brazil Argentina Peru Chile Uruguay Paraguay Ecuador Mexico
2019 2020 2021
Source: Latin American Consensus Forecast- July 2020
5• The monetary policy and other institutional frameworks in
the Colombian economy provided a strong base to
confront this crisis:
1. The Colombian economy has a fully-fledged inflation targeting regime
with exchange rate flexibility with high credibility
2. Fiscal policy is anchored in the medium term
3. Adequate level of external buffers
4. Adequate financial supervision
5. Contained currency mismatches
6THE SHOCKS
Content POLICY RESPONSES AND RESULTS
ECONOMIC FORECASTS
POLICY CHALLENGESThe central bank is using its toolbox to support the economy by:
• Providing liquidity to avoid disruptions in the payment systems and
contribute to the credit supply by financial institutions
• Helping stabilize key financial markets suffering liquidity problems
• Maintaining external buffers to facilitate external payments of the
economy
• Supporting the economy through interest rates
• No QE in Colombia. Liquidity measures had the purpose of
improving the conditions of key financial markets
8Central Bank Response
Protecting the Preserve the Stabilizing key Provide an
Objectives payments supply of credit financial economic
Actions system markets stimulus
Temporary liquidity
(repo operations):
Increase in the allotment X X X
counterparties, collaterals and
maturities
Outright purchases of public and
private securities X X X
Reduction of banks’ reserve
requirements X X X
Auction of FX Non-delivery
forwards X
Auction of FX swaps
X X X
Reduction of the interest rates
X X 9• These policies improved conditions in local financial markets.
Bid-Ask Spread for the Colombian peso Bid-Ask Spread for 10-year sovereigns in local currency*
14 (basis points, 10-day moving average)
12 40
Mexico
35
10 Brazil
30
Colombia
Colombian pesos
8 25
6 20
15
4
10
2
5
0 0
3-Jul 3-Aug 3-Sep 3-Oct 3-Nov 3-Dec 3-Jan 3-Feb 3-Mar 3-Apr 3-May 3-Jun
Source: Banco de la República. *For Colombia TES 2028, Brazil 2029 and Mexico 2029.
10• Reductions in the monetary policy rate will contribute to relieve the financial
burden of debtors and reduce the cost of credit. However transmission channels
have been affected.
Policy Rate
10%
9%
8% 7,75%
7%
6%
5% 4,50% 4,25%
4%
3%
2%
1% 2,00%
0%
11
Source: Banco de la RepúblicaTHE SHOCKS
Content POLICY RESPONSES AND RESULTS
ECONOMIC FORECASTS
POLICY CHALLENGES• The staff estimates a contraction of between 6% and 10% this year,
consistent with a more negative output gap.
% Annual GDP growth Annual Output Gap
9 2
8%
6
0
3 3%
0 -2 -2
%
-3
-4
-6 -5 -5
-6%
-6
-9
-10%
-7
-12 -8
2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021
13
Source: Banco de la República – Monetary Policy Report. *Difference between the observed GDP and the potential GDP obtained from the 4GM model.• Headline inflation will most probably close the year below target.
Headline Inflation
7
6
5
4
%
3 3%
2
2% 2%
1
1%
0
2015 2016 2017 2018 2019 2020 2021
14
Source: Banco de la República – Monetary Policy Report• The future of the external deficit is highly uncertain, but a contraction is expected. CB´s
estimate is that the domestic demand contraction effect will prevail over the ToT shock, and
we will see a lower CAD. The number for Q2 (3%) indicates this will be the case.
Current Account
% (% of GDP)
0
-1
-2,0 -2,0
-2
-3
-4 -3,3 -3,3
-3,9 -3,7 -3,8
-5 -4,2 -4,3
-5,0
-6 -5,2 -5,5
-7 -6,3
2013 2014 2015 2016 2017 2018 2019 (pr) 2020 2021
(proy) (proy)
(pr): preliminary.
(proy): proyection 15
Source: Banco de la República – Monetary Policy Report• A slow normalization of employment is expected. The rigidities in the labor market
partially explain the speed of the adjustment. The gender gap has widened to highly
concerning levels.
Simulations for the National Unemployment Rate
%
Observed Lower Intermediate Higher
16
Note: seasonally adjusted series
Source: DANE. Calculations by Banco de la RepúblicaTHE SHOCKS
Content POLICY RESPONSE AND RESULTS
ECONOMIC FORECASTS
POLICY CHALLENGES• Inflation expectations remain close to the target, and the rate of reduction of expectations
seems be declining. Transmission mechanisms have been affected and there is still high
uncertainty about how they will evolve, stemming from the evolution of the pandemic itself.
10% Headline inflation and inflation expectations
9%
1-year ahead inflation expectations
8%
2-year ahead inflation expectations
7%
Inflation target
6%
Headline inflation
5%
3,0%
4%
3%
2% 2,83%
1% 1,97%
0%
Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20
Source: Banco de la Repúlblica and DANE
18• BR has taken a gradual approach to its monetary easing, seeking a sustainable level of
stimulus to support the recovery. There is uncertainty surrounding i) effects of the shocks on
supply and demand, ii) international financial conditions, iii) public debt dynamics, iv) effects
of the shocks on financial stability.
Foreign participation in the local public debt market
(Non-resident holdings as a % of outstanding securities)
60%
50%
40%
30%
20%
10%
0%
Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 Mar-19 Dec-19
Brazil Chile Colombia Peru
Perú
Source: Arslanalp and Tsuda (2014)
19• The financial sector, faces these shocks with high levels of liquidity and solvency. The length of
the recovery period poses challenges to profits and business cases.
• Risk has increased and credit supply (and demand) and prices will continue to reveal this.
Liquidity risk indicator of credit establishment Solvency ratio of credit establishments
400
18
350 17 14,8
16
300
210,4 15
250 14
13
200
12
Liquidity risk indicator (IRL) 11 Total Solvency Ratio
150
10 Regulatory limit
Regulatory limit
100
9
50 8
jun-14 jun-16 jun-18 jun-20 may-10 may-12 may-14 may-16 may-18 may-20
20
Source: Superintendencia Financiera and Banco de la RepúblicaYou can also read
