The outcome of the November presidential elections in the United States, the pace of the reduction of the local monetary policy rate, the legislative agenda and tax collection by the Government will be determining factors for the Colombian economy during the remainder of 2024.
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This was explained by Carolina Monzón, manager of Economic Research at Banco Itaú Colombia, during a virtual meeting organized by the bank for clients and the general public, in which the international context and the investment outlook were also analyzed.
Regarding the local environment, Itaú’s team of experts said that this year the Colombian economy will close with a growth of 1.4% compared to 2023 (revised from 1.2%), supported by a future improvement in inflation levels, which in turn would give the issuer more room to maneuver to lower the monetary policy rate to 8.75% at the end of the year (currently at 11.25%).
In this regard, Monzón assured that it is very likely that The Board of the Central Bank of the Republic maintains caution in its rate reduction decisions for the second half of the year, making cuts of 50 bps in the meetings of July and September, and then accelerating the pace with reductions of 75 bps in October and December.
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The economist added that a scenario with less restrictive global financial conditions, leveraged by a rate reduction by the Federal Reserve (FED), which is expected to happen in September, could also favor a faster pace of cuts in Colombia.
In contrast, Itaú’s team of analysts revised upwards the CPI expectation for the end of the year, raising it 40 bps from 5.2% to 5.6%, due to the inertia in the rental indicator in recent months.
Sovereign rating at risk
According to Itaú’s analysis, the high levels of fiscal deficit and the current deterioration in tax collection could lead to a rating downgrade for Colombia, so closing the current account deficit will be key in the second half of the year.
In this regard, Monzón explained that the announcements made by the National Government, to reduce spending and boost tax collection, send a good signal to the rating agencies. However, he added, the development of the legislative agenda in Congress will also be decisive, where discussions are expected to take place for the approval of several projects, including a new Financing Law, the Health Reform and the Labor Reform.
The United States sets the tone
Regarding the performance of the US economy, Itaú’s team of economists explained that it has been resilient over the past year and has performed well, especially in reducing inflation, but there are still leading indicators that show a slowdown in key sectors. For the whole of 2024, the US economy would expand by 2.5%.
In this context, Juan David Robayo, Senior Analyst of Economic Research at Itaúexplained that estimates indicate that the monetary authority of that country will execute two cuts of 25 points in its reference rates during this year, impacting the global economy, especially the rate paths of emerging economies and the movement of their currencies..
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In addition to the above, he added, the result of the presidential elections in November would also have repercussions on the global economic scenario, given that tariff policy, which could be more protectionist, immigration policy, and tax policy for American companies and citizens are being discussed.
According to Robayo, this could lead to a new depreciation of the region’s currencies, including the Colombian peso, in the last quarter of the year.
Dollar.
Asset performance expectation
According to Valeria Álvarez, Senior Structurer at Itaú, current issues in the region will influence the performance of currencies.
According to the expert, after the elections in Mexico, the Colombian peso has found a floor around $3,900 – $4,000, but the start of sessions of the Congress of that country is still expected in September, still under the presidency of López Obrador, which may bring some volatility to the performance of the currencies.
“We insist that the trend of the Colombian peso will continue to be closely linked to catalysts such as inflation in the US, the FED and DXY, which seems to bring a cycle of less strength in the global dollar, but we do not rule out that a new episode of volatility mainly in currencies such as the Mexican peso and the Brazilian Real, as well as an international environment with uncertainty measured by the VIX index, could again leave the Colombian peso in an uncomfortable position between $4,100 – $4,200, so it makes sense to buy the breakouts above $4,000.”Alvarez explained.
Likewise, the Itaú Comisionista de Bolsa team mentioned that in terms of fixed income, the cycles of cuts by the Banco de la República cause a steepening of the curve in pesos (10 years – 2 years) that we have insisted on since the beginning of the year. With a movement that is already above the historical average.
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In this regard, the economist added that, “With an expectation of 750 bps of declines for this cycle, to a neutral rate of 5.75%, we expect a steepening of the curve in pesos of 400 bps, which implies an additional journey of 200 bps and where we favor appreciations of the short curve”.
Finally, in terms of variable income, Itaú analysts pointed out that, in the midst of a local market with limited liquidity, opportunities in the Colombian Global Market become more attractive and; although in the first half of the year, attention was focused on cyclical sectors with clear fundamentals such as the technology sector, “Today the outlook is to take a more neutral position on these securities due to the possible risks of marked shocks of risk aversion”they stated.
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