Effects on the Colombian Economy of the Quantitative Easing

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1 Effects on the Colombian Economy of the Quantitative Easing Jorge Toro Chief Economist Banco de la República- Colombia IIF Annual Meeting of Latin America Chief Executives Santiago de Chile, March

2 Loose monetary policy in the U.S. and elsewhere has increased foreign capital inflows to Colombia. Foreign Investments (FDI and portfolio) have become the main financing source of the current account deficit US$ mill 10,000 8,000 6,000 4,000 Foreign Investments BALANCE OF PAYMENTS AND CAPITAL FLOWS Bonds, loans and other capital flows Capital and financial account Current account QE1 (nov 2008 mar 2010) QE2 (nov 2010 jun 2011) QE3 (sep ) Foreign capital inflows 2, ,000-4,000-6,000 mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09 sep-09 mar-10 sep-10 mar-11 sep-11 mar-12 sep-12 Source: Banco de la República, Balance of payments.

3 Foreign Direct Investment in 2012 achieved a peak in absolute terms. Portfolio investment also increased significantly in US$ mill 4,500 3,500 FOREIGN INVESTMENT INFLOWS Portfolio investment in the local market Foreign direct investment 2,500 1, mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09 sep-09 mar-10 sep-10 mar-11 sep-11 mar-12 sep-12 Source: Banco de la República, Balance of Payments

4 Portfolio Foreign Investment attained the equivalent to 1% of GDP In US$ millions 1,600 1,400 1,200 1, US$ millions PORTFOLIO FOREIGN INVESTMENT (PFI) IN THE LOCAL MARKET % of GDP % of GDP 2% 1% 0% -1% Source: Banco de la República, Balance of Payments

5 Interest rate differential and a positive profit margin has maintained strong attractiveness for investing in Colombia 12 Interest rates spread¹ (%) ¹Spread: (Colombian interbank interest rate- FED Funds rate)*100 Source: Banco de la República ¹Margin: ((1+Tasa Coloc. Tot) -(1+Devaluation)(1+Libor 3m))*100. Source: Banco de la República Profit margin¹ (%)

6 Capital inflows from bonds, loans and other sources have also increased US$ mill BONDS, LOANS AND OTHER CAPITAL INFLOWS 4,500 3,500 Bonds Loans and other capital flows 2,500 1,500 Source: Banco de la República, Balance of Payments 1/ Cumulated from October 2010 to September mar-04 sep-04 mar-05 sep-05 mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09 sep-09 mar-10 sep-10 mar-11 sep-11 mar-12 sep-12 Source: Banco de la República, Balance of Payments

7 Colombia stock exchange has shown a remarkable performance due in part to capital inflows Stock Exchange Index 2, QE2(nov mar-2011) QE3(sep 2012) 18, , , , QE1(nov-2008-mar- 2010) 14, , , , , , , , COLCAP IGBC The Colombia s stock exchange is measured by the General Index (IGBCas it is abbreviated in Spanish) which is a capitalization-weighted index of the stocks traded on the BVC. The Colombia COLCAPIndex is a market-capitalization weighted index that includes the 20 most liquid stocks listed in the BVC. Source: Banco de la República, Balance of Payments

8 The Colombian risk premium for bonds has kept a downward trend Credit Default Swap (CDS) 5 years 0 feb-05 feb-06 feb-07 feb-08 feb-09 feb-10 feb-11 feb-12 Brasil Chile Colombia México Perú Source: Bloomberg

9 Due to increased confidence in the country basic points 1200 EMBI Colombia Source: Bloomberg

10 Larger capital inflows have coincided with an increase in export prices and expanding volume of exports of oil and other mining goods 300 Export price index (2005=100) (Oil, Coal, gold and nickel) dic-03 jun-04 dic-04 jun-05 dic-05 jun-06 dic-06 jun-07 dic-07 jun-08 dic-08 jun-09 dic-09 jun-10 dic-10 jun-11 dic-11 jun-12 dic Source: DANE-DIAN- Banco de la República dic-04 jun-05 dic-05 jun-06 dic-06 jun-07 dic-07 jun-08 dic-08 jun-09 dic-09 jun-10 dic-10 jun-11 dic-11 jun-12 dic-12 Export volume index (2005=100) (Oil, Coal, gold and nickel) Volume index Movil average (12 months)

11 Oil and mining exports have achieved a historically high share of total exports in ,000 Composition of Colombian Exports Total Exports (US$ millions) 50,000 40,000 30,000 20,000 10,000 0 Others Mining goods 73% 71% 52% 65% 46% 56% 47% 47% 45% 40% 46% 54% 48% 60% 54% 55% 53% 53% 44% 29% 27% 35% Source: DANE-DIAN- Banco de la República Source: DANE DIAN

12 Being stimulated by of high terms of trade. Index 2005= Terms of trade and oil export prices Terms of trade (Index) Oil export prices US$ / Barrel dic-03 jun-04 dic-04 jun-05 dic-05 jun-06 dic-06 jun-07 dic-07 jun-08 dic-08 jun-09 dic-09 jun-10 dic-10 jun-11 dic-11 jun-12 dic-12 Source: DANE-DIAN- Banco de la República

13 As a result, the Colombian peso has maintained a continuous appreciation trend 3,500 Nominal foreign exchange 3,000 2,500 2,000 1,500 1, Source: Banco de la República 40% 30% 20% 10% 0% -10% -20% -30% Annual devaluation of nominal foreign exchange

14 Intervention in the foreign exchange market has been unsuccessful for stemming the appreciation trend Source: Banco de la República.

15 That is a phenomena common to other Latin American countries 160 Nominal foreign exchange Index (ene 09=100) feb-03 feb-04 feb-05 feb-06 feb-07 feb-08 feb-09 feb-10 feb-11 feb-12 feb-13 Brasil Chile Colombia Mexico Peru Source: Bloomberg

16 The real exchange rate in Colombia has also sharply appreciated during the last few years ITCR_IPP ITCR_IPC ene-90 ene-91 ene-92 ene-93 ene-94 ene-95 ene-96 ene-97 ene-98 ene-99 ene-00 ene-01 ene-02 ene-03 ene-04 ene-05 ene-06 ene-07 ene-08 ene-09 ene-10 ene-11 ene-12 ene-13 Source: Banco de la República

17 Leading to an increasing trend of imports. Source: DANE-DIAN Banco de la República,

18 Mainly explained by a higher import volume. Import price index Source: DANE-DIAN Banco de la República Import volume index

19 Causing an expansion in the country's current deficit, that would be larger in the absence of surplus from the mining sector 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Current Account by sectors % of GDP Other sectors Public sector Total Mining sector 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: Banco de la República, Balance of Payments

20 The capital account surplus is larger than the current account deficit Capital and Current Account (% of GDP) Capital Account Current Account I-09 II-09 III-09 IV-09 I-10 II-10 III-10 IV-10 I-11 II-11 III-11 IV-11 I-12 II-12 III-12 Source: Banco de la República

21 As a result, asignificant accumulation of international reserves has taken place 40,000 International reserves (US$ millions) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 ene-04 jul-04 ene-05 jul-05 ene-06 jul-06 ene-07 jul-07 ene-08 jul-08 ene-09 jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13 Source: Banco de la República, Balance of Payments

22 Which has an important quasi-fiscal cost interest rates spread 2/ US$ millions % of Reserves % of GDP % % % % % % % % % -1, Source: Banco de la República Net cost of the intervention (US$ m) 1/ 1/ Less than zero implies a negative impact on the balance sheet of the central bank 2/ Difference between the policy interest rate of Colombia and the implicit rate of return in dollars of gross international reserves. 2012: Preliminary data

23 Appreciation has led to a loss of economic dynamism, particularly of the tradable sector 10% 8% Tradable GDP Non Tradable GDP 6% 4% 2% 0% -2% Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Fuente: DANE. Cálculos del Banco de la República. Source: Dane, cálculos Banco de la República

24 END

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