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This can be your title page Colombia’s Economic Prospects in 2009 & Beyond

Overview Colombia faces a difficult 2009 Harsh external headwinds could force the local economy into recession this year Once the global dust settles, the country should regain momentum quickly Despite structural challenges, the medium-outlook remains favourable

A Regional Outperformer Between , Colombia enjoyed a sustained period of robust economic growth Consistently outperforming the region, Colombia became an EM favourite for global investors Sound economic policy and a business-friendly government allowed the country to capitalise on a favourable external environment Real GDP Growth, % Source: BMI, Regional Central Banks

Source: BMI, BanRep Real GDP Growth, % Contribution The main engine of growth in recent years has been thriving domestic demand Buoyant consumption, commodity price strength and record investment levels have combined to galvanise economic expansion

Times Are Changing Since H108, however, Colombian households have started to tighten the purse strings This year, tighter lending conditions will put a dampener on demand for ‘big-ticket’ items Rising unemployment, pyramid scheme losses and falling remittances will keep consumer confidence subdued Retail Sales & IP, % chg y-o-y Source: BMI, DANE

Feeling The Global Chill Foreign investment levels to take a hit from risk aversion, tighter capital markets, and US & eurozone recessions FDI flows could seize up on scarcer capital resources and rise of protectionism Given the importance of FDI in boom years, rapid slowdown will severely hamper economic growth potential

Net Exports: Limited Relief Net exports less of a drag on overall growth due to fall in import penetration But exports to suffer also from demand destruction in key markets Commodity exports (10% of GDP) to falter on weaker prices for key goods, such as petrol, coal, nickel and coffee

The Venezuela Effect Venezuela – 2 nd Largest Recipient of Colombian exports (80% of autos in 2007) BMI sees acute recessionary risks in Venezuela in 2009/10 Possible bolivar devaluation in 2009 will hamper demand for Colombian exports Colombian Exports To Venezuela, % of Total Source: BMI, DANE

Reasons For Cheer, Medium-Term We are forecasting a Colombian economic contraction of 1.5% in 2009 However, as the global economy recovers, Colombian will be well-placed to bounce back Over a 10-year time horizon, we are optimistic that real GDP growth can average an annual clip of around 5%

Consumer Will Be King Colombian households will lead the recovery, propelled by lower interest rates, rising incomes & return of consumer confidence Colombia – Policy Interest Rate & Inflation Source: BMI, BanRep

Increased Security = More Investment President Uribe’s hardline security policies have laid the foundations for long-term investment We do not see significant change in economic policy after 2010 elections Security Stats & Foreign Investment Source: BMI, Ministry Of Defence, BanRep

Banking On Progress Deepening Financial Sector More opportunities in financial markets Rise in mortgages, banking products, corporate debt Government Domestic Debt Curve

Investment Grade In 2010? A question of ‘when’ not ‘if’ IG status would generate medium-term financial investment Transition From Frontier Market To Major EM Player 5-Year Credit Default Swaps, bps

Challenge 1: The US The US remains Colombia’s largest commercial and financial partner The ratification of the US free trade deal would help ensure positive flows of inward investment over the long term Much depends on willingness on Washington to implement FTA Exports By Destination 2008, % Of Total Source: BMI, DOTS

Challenge 2: Oil Colombia’s proven oil reserves are dwindling The country could become a net oil importer within a decade unless a major new source is discovered The drive to attract IOCs will be crucial going forward Source: BP Statistical Review of World Energy, June 2008 Colombia – Oil Output, Consumption & Exports

Conclusion 2009/2010: Economic Growth To Suffer Quick Recovery On Solid Fundamentals Medium-Term Outlook Sanguine

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