Soaring Inflation is a Big Threat to Petro: Colombia Market Talk

Oscar Medina and Andrea Jaramillo
·4 min read
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(Bloomberg) -- Colombian inflation poses a major risk to President Gustavo Petro’s popularity and his ambitious reform agenda this year, according to analysts who spoke with Bloomberg.

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Consumer prices rose more than 13% in 2022, the fastest pace in more than two decades, hurting poorer Colombians who mainly backed Petro. Worse may be yet to come, according to Juana Tellez, chief economist at BBVA Colombia.

“We’re going to see inflation continue to accelerate at least in the first quarter,” Tellez said. “More importantly, average inflation will be very high this year.”

Tellez participated in “Colombia Market Talk” on Jan. 17 at Bloomberg’s Bogota office. The other attendees were:

  • Camilo Herrera, founder of Bogota-based consumer consulting firm Raddar

  • Andres Mejia, a political consultant who teaches at the business school of Bogota’s Los Andes University

Petro wants to overhaul the nation’s health and pension systems this year and reform the labor market, while also seeking a peace deal with several guerrilla groups and drug-trafficking organizations. To have any chance of achieving these huge tasks, he needs to retain a lot of popular support, which soaring consumer prices could undermine, according to Mejia.

A majority of Colombians have no memory of such a high inflation rate, Herrera added.

“People don’t know how to behave when prices are rising,” at such a fast pace, he said. “And they may start blaming the government.”

The central bank, which targets annual consumer price increases of 3%, hasn’t had to deal with inflation at these levels since the late 1990s.

Local Elections

Petro’s plans are also constrained by upcoming elections for mayors and governors in October, according to Mejia, the political analyst. That limits the legislative agenda to mostly the first half of the year, since many lawmakers will be campaigning in the provinces after that, he said.

“Even though at this moment the government has the means to mobilize a majority in congress, the amount of work needed will make it very difficult” to get all of the reforms passed in such a short window, Mejia said.

While the details of the health and pension reforms are still unclear, they are expected to have a large fiscal cost, according to BBVA’s Tellez. Pension funds are major players in Colombia’s asset markets, and changes to the pension system may hit bonds and the peso, she said.

“We need announcements soon, and especially on the amount of public funds that will be needed to implement those changes,” Tellez said.

Peso Volatility

As discussions get underway, the Colombian peso will probably see a lot of volatility, Tellez expects.

The economy grew about 8% in 2022, according to the central bank, one of the fastest expansions among major emerging markets. That growth is forecast to slow to less than 1% this year as consumers feel the pain of the central bank’s interest rate hikes.

Policy makers have raised the key interest rate by 10.25 percentage points over the last year and a half, to 12%. Economists surveyed by the bank forecast one more hike, to 13%.

Despite that, consumer spending has remained strong, and a lot of Christmas spending last year was paid for with credit cards charging very high interest rates, according to Tellez.

“Growth is not sustainable,” Tellez said. “We need to have this slowdown. It is necessary, it is healthy.”

Colombia may see a shift in consumer trends this year as government subsidies provide extra money for low-income households, while the high and middle-income workers who drove 2022 demand will feel the pinch of higher interest rates this year, Herrera said.

OTHER COMMENTS

  • Mejia:

    • This year, the government will need to decide on whether it will grant new oil exploration contracts. If it doesn’t, investors will assume it has decided against new drilling

  • Herrera:

    • Colombia is seeing high demand from Venezuela for textiles which may push up domestic prices

  • Tellez:

    • Bank loans are beginning to show rising delinquency rates, including consumer lending and loans tied to wages

    • Colombia’s financial plan published in December sent a positive message to markets the fiscal rule will be respected

Read previous editions of Colombia Market Talk

  • Experts say the peso’s drop casts doubt on Petro’s energy plan

  • Ex-central bank officials expect higher interest rates

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