An Outlook of the Colombian Economy Mauricio Cárdenas

An Outlook of the Colombian Economy Mauricio Cárdenas Minister of Finance and Public Credit January, 2014

Agenda 1. Policy strategy 2. Macroeconomic achievements 3. Economic Outlook and Financial Plan

Fiscal Consolidation The Fiscal Rule: Discipline for the National Central Government Structural Balance of the CG (% of GDP) 0-0,5 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023-2,4-2,4-2,3-2,2-2,1-2,0-1,9-1,6-1,4-1,2-1,0-0,8-1 -1,5-2 -2,5-3 Ar$cle 5 Fiscal Rule. ( ) the Na$onal Government will enforce an annual decreasing path for the deficit of the structural fiscal balance. Law 1473 of 2011. Source: Ministry of Finance. Structural Deficit Targets 2014: 2.3% of GDP 2018: 1.9% of GDP 2022: 1.0% of GDP

Inflation targeting Inflation is at the lowest level in decades Consumer price index (Annual variation) 9% 8% 7% 6% 5% 4% 3% 2% 1% 1,94% dic-03 dic-04 dic-05 dic-06 dic-07 dic-08 dic-09 dic-10 dic-11 dic-12 dic-13 Target range Source: DANE.

Monetary and exchange rate policy 5,5% Low inflation expectations give ample space for countercyclical monetary policy 5,25% Central Bank interest rate 5,0% 4,75% 4,5% 4,0% 3,5% 3,25% 3,25% 3,0% Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Source: Central Bank.

Monetary and exchange rate policy Interventions in the market have stabilized the exchange rate and increased the international reserves Exchange rate and interventions in the exchange market (US Million) 45.000 International reserves (US$ Million) 2000 1950 55 50 45 42.000 1900 40 39.000 1850 1800 35 30 25 36.000 1750 1700 1650 20 15 10 5 33.000 30.000 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Interventions USD millions (right axis) Exchange rate Source: Central Bank.

Agenda 1. Policy strategy 2. Macroeconomic achievements 3. Economic Outlook and Financial Plan

8,0 Economic growth Consolidation of economic growth Quarterly GDP (Annual % variation) 8,0 6,4 6,6 6,0 4,0 5,1 5,4 3,7 3,0 3,6 4,2 5,1 5,5 5,9 4,9 3,3 3,9 5,1 2,0 1,3 1,4 3,0 2,8 2,6 0,0 0,2 1,0 I II III IV I II III IV I II III IV I II III IV I II III IV I II III Source: DANE. 2008 2009 2010 2011 2012 2013

Economic growth Highest growth rate in the region* Annual GDP growth Q3(%) 6,0 5,0 5,1 4,7 4,4 4,0 3,3 3,0 2,0 1,0 2,2 1,3 1,1 0,0 COLOMBIA CHILE PERU URUGUAY BRASIL MEXICO VENEZUELA Source: The Economist- Boomberg.*InformaCon to December 19th, when Colombia s GDP figures were published

Source: The Economist- Boomberg.*InformaCon to December 19th, when Colombia s GDP figures were published Economic growth and 15th worldwide* Annual GDP growth Q3(%) 15 10 5 5,1 0-5 -10 Moldova Mongolia Macao Kyrgyzstan Uzbekistan China Sri Lanka Tajikistan Philippines Nigeria Singapore Indonesia Vietnam Namibia Colombia Malaysia Iceland India Chile Bahrain Latvia Morocco Peru Turkey Romania Macedonia South Korea Uruguay Israel Serbia Saudi Arabia Hong Kong Thailand Japan Tunisia Australia Lithuania Brazil Norway Canada Malta Poland Switzerland Hungary South Africa United States Taiwan United Kingdom Armenia Mexico Russia Germany Venezuela Slovakia Austria Belarus Bulgaria Estonia Denmark Belgium Sweden France Euro Area Croatia Netherlands Slovenia Finland Portugal Spain Czech Republic Ukraine Italy Greece Cyprus

Macroeconomic achievements The investment rate is at a record level 32% Investment rate (% of the GDP) 28% 27,2% 28,0% 28,4% 24% 23,2% 23,9% 24,5% 20% 18,8% 16% 14,2% 12% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-III Source: DANE.

Colombia is the Latin American country with the highest job creation rate 12,0% 10,7% Job creation Latam 6: Jobs created between Aug 2010 and Oct 2013 (% of Labor Force) 9,0% 8,5% 6,0% 5,6% 5,3% 3,0% COLOMBIA CHILE PERU* MEXICO** BRASIL ARGENTINA** 3,8% 3,4% Source: DANE & StaCsCcs Agencies.*Lima s Metropolitan Area.**InformaCon available for 3Q 2013.

12% 10% 8% 6% 4% 2% 0% - 2% - 4% - 6% oct- 08 ene- 09 abr- 09 Job creation Formal employment has increased since the approval of the tax reform jul- 09 Formal and Informal Working Population Criteria: Affiliation to Social Security* Quarterly moving average - Annual variation oct- 09 ene- 10 abr- 10 jul- 10 oct- 10 Tax Reform Approval ene- 11 abr- 11 jul- 11 Formal informal oct- 11 ene- 12 abr- 12 jul- 12 Ene-Oct 2013: 660.000 new formal jobs Source: DANE. *Informal: Working populacon in posicons that do not contribute to social security. oct- 12 ene- 13 abr- 13 jul- 13 7,6% - 2,3% oct- 13

Macroeconomic achievements Fiscal balance: The 2012 surplus of the public sector was the highest of the last 49 years 1,00 - -1,00-2,00-3,00-4,00-5,00-6,00-7,00 Balance NFPS (% of GDP) 0,36 0,45-8,00 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Ministry of Finance.

Macroeconomic achievements 45 The misery index stands at historically low levels (Misery Index = Inflation + Unemployment) 40 35 30 25 20 15 10 5 0 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* Inflation Unemployment Misery Index Source: DGPM-MHCP based on Dane s ENH & GEIH. End of year. * 2013: data to November.

Macroeconomic achievements Colombia has the lowest level of inflation in the region 12,0 10,0 Latam 6: Inflation (annual variation 2013 ) 10,50 8,0 6,0 5,77 4,0 2,0 1,94 2,40 3,08 3,60 0,0 COLOMBIA CHILE* PERU MEXICO* BRAZIL* ARGENTINA* Source: Central Banks.*As of november 2013.

Reduction in poverty Colombia had the second largest reduction in poverty between 2010 and 2012 in Latin America Latam 6: Reduction in poverty between 2010 and 2012 (Variation in percentage points) 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% -10,0% -0,6-4,5 46,1% 45,5% -5,5 37,2% 31,3% 32,7% -4,0 25,8% 24,9% 20,9% -0,7-3,2 15,1% 14,4% 8,6% 5,4% PERU COLOMBIA BRASIL* ARGENTINA CHILE* MEXICO 2010 2012 Source: DANE & StaCsCcs Agencies. CEPAL. World Bank.*As of 2011 (compared with 2009).

Reduction in inequality and the largest reduction in inequality during the same period Latam 6: Reduction in GINI coefficient between 2010 and 2012 (Variation in points) 60,0 55,0 50,0 45,0 40,0 56,0-2,1 53,9 42,7-2,0 40,7 46,9-1,7 45,2 50,9-1,1 49,8 52,4-0,8 51,6 53,3-0,7 52,6 35,0 30,0 COLOMBIA ARGENTINA PERU* MEXICO CHILE* BRASIL 2010 2012 Source: DANE & StaCsCcs Agencies. CEPAL. World Bank.*As of 2011 (compared with 2009).

Agenda 1. Policy strategy 2. Macroeconomic achievements 3. Economic Outlook and Financial Plan

Outlook 2014 8 The economy is expected to grow at its potential rate in 2014 Economic growth (Annual variation) 6,7 6,9 6,6 6 4 2 2,6 1,7 2,5 3,9 5,3 4,7 3,5 1,7 4,0 4,2 4,5 4,7 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014* Source: DANE.*ProjecCons.

Economic Outlook FED tapering will have two effects on the Colombian economy Short run Effect: Financial Sector Rise of US Bonds interest rates NegaCve effect on interest rates in Colombia and Latam Increased volaclity of Latam debt Long run Effect: Real Sector FED Tapering is the result of be_er economic condicons in the US Recovery of US demand means higher growth of exports for Colombia Sustained economic growth in the long run

6 Economic Outlook FED tapering will represent an external shock on the economy US Interest Rates (%) 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 U.S. 10-yr yield U.S. Fed funds rate Source: Bloomberg.

Economic Outlook New Infrastructure projects will contribute to maintain economic growth under adverse external conditions 36 projects under public inicacve 9 open biddings Total Investment: 47trillion COP 11 trillion COP for the first 9 projects Tolls account for around 50% of total incomes

Economic Outlook Potential growth for the economy will increase from 4.6% to a path between 5.0% and 5.3% 8 Effects of infrastructure projects on potencal GDP 7 Annual variation, % 6 5 4 3 2 5,3 4,6 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Scenario including infrastructure projects Current scenario Source: DNP- NaConal Planning Department.

Economic Outlook Average annual impact of projects on GDP accounts for 1.56% from 2015 Efecto de los proyectos 4G sobre el PIB Impact on GDP 1.63% Number of new jobs: 180,000 to 450,000. Most benefited sectors between 2015 and 2019: - Civil works: 11.3% average growth - Non- metallic minerals: 5.5% growth - Products from non- metallic minerals: 4.4% growth. Direct Indirect Source: DNP- NaConal Planning Department.

Colombian local interest rates have decreased since November 8 Public Debt Interest Rates (%) 3,3 7,5 7 6,5 6 5,5 5 4,5 4 3,1 2,9 2,7 2,5 2,3 2,1 1,9 1,7 1,5 3,5 1,3 Jan- 13 Feb- 13 Mar- 13 Apr- 13 May- 13 Jun- 13 Jul- 13 Aug- 13 Sep- 13 Oct- 13 Nov- 13 Dec- 13 Jan- 14 Internal TES 2022 Global TES 2023 10- year Treasuries (right axis) Source: Bloomberg.

Public Debt Evolution of Foreign Capital Funds COP Million 12.000 10.000 8.000 6.000 4.000 2.000 0 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 8,0% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% Percentage Fondos Foreign de Capital Funds Extranjero Participación Participation tenedores of foreign extranjeros TES holders sobre on total saldo TES de holders TES Source: Ministry of Finance.

Financial Plan 2014 USD million USD million SOURCES 24,915 USES 24,915 Disbursements 19,991 Deficit 9,469 External 4,000 Of which: Bonds 2,000 External Debt Interests 2,368 Multilaterals 2,000 Internal Debt Interests 7,152 Internal 15,992 TES 15,984 FEPC 1,685 Auctions 9,654 0 Public Entities 3,828 Central Bank Losses 659 FEPC and others 2,503 0 Others 7 Sentences 158 Accruing Adjustments 71 0 0 Amortizations 12,074 Initial Availability 1,927 External Debt 2,395 In USD 1,146 Internal Debt 9,679 In COP 781 0 Treasury Operations 2,293 Final Availability 870 In USD 486 Floating Debt 633 In COP 384 Source: Ministry of Finance.

An Outlook of the Colombian Economy Mauricio Cárdenas Minister of Finance and Public Credit January, 2014