To what extent is Colombiaâ€™s economic growthÂ fueledÂ by consumer credit growth?
VARGAS: Consumer credit has been growing very fast, at more than 20% in real terms. However, this has had a minor contribution to our growth for several reasons. First, growth has been broadly based in terms of the source of the expenditure. Fixed investment and exports have been growing faster than total consumption. Within consumption, this credit has been funding durable consumption, which is a small part of total consumption. Consumer durables have been provided basically through imports, so their impact on total production is limited to the effect that they have on car or home appliances production.
How have central bank rate increases impacted the banking sector?
VARGAS: The Central Bank interest rate hikes have been transmitted to basically all deposit and lending interest rates in the financial system. Interestingly, it has also increased the spread between lending rates and the government bond rates at the same maturities, which means that the risk premium has been increasing after the interest rate hikes. This is very interesting because it means that the overall risk taking attitude of the financial system has been impacted by the interest rate hikes.
How much of Colombiaâ€™s monetary policy is linked to American actions?
VARGAS: Of course the Colombian economy has strong links to the US economy and to US monetary policy. In particular the policy of zero interest rates or close to zero interest rates on ample liquidity in the US has effects on Colombia. It guarantees us low external interest rates, capital inflows, and a sustained demand for our exports with important effects on the volume and prices of these exports. However, the monetary policy in Colombia is influenced by other factors as well, such as domestic factors related to internal confidence, productivity developments, the exploitation of mining resources, etc. So in general, monetary policy in Colombia responds both to what happens in the US, with conditions, with contexts, but also to local factors.
What are the main challenges Colombiaâ€™s banking sector faces today?
VARGAS: Colombian banks are now facing an immediate challenge, which is getting closer, at least partially, to Basel III. Both the regulators and the industry have been working hard in this sense. Capital regulation is being revised, and basically the definition of capital is being reviewed, both by the industry and the regulators. Also, liquidity regulation has been improved, and is already in place, and close to Basel III. Over the medium term, I would say that the main challenge the Colombian bank system faces is the ability to keep its strength while it expands both locally and internationally. Colombian banks have been investing abroad, especially in Central America. So the challenge is to keep the current strength, even as they expand.
What is your economic outlook for Colombia?
VARGAS: I think that the Colombian economy is starting a phase of high growth. I think we will be able to maintain growth rates like the ones we have observed over the past two years or so, thatâ€™s between 4.5% and 5.5% a year. The reasons behind that are different. First, we have definitely improved the security situation. Second, we have had reconciliation with the fiscal sector with a sustainable, public debt path. Third, we have increased mineral and oil reserves and resources that are being exploited. That means an increase in volume of exports on production of these items. In general we have a strong, confident, environment in the country.Â Colombia still faces some challenges for sustained growth in the future. The main one, in my opinion, is the reduction of the informal sector in Colombia, which is key to greater productivity in the future. The second one is improved allocation, and the third one is continued financial deepening and the expansion of capital markets.
What consequences has the expansion of the energy sector in Colombia had on the Central Bank?
VARGAS: The expansion of the energy sector in Colombia definitely has had some consequences on the Central Bank policy and the Central Bankâ€™s view of the economy. The main challenge, perhaps, is the inflow of dollars that comes after the large FDI inflows into the economy, and more subtly, the impact that it has on the expectation of appreciation of the Colombian peso. That is something that we have to take into account whenever we judge whether the Colombian peso is overvalued, undervalued, or at proper value.
I think that the Colombian economy is starting a phase of high growth. I think we will be able to maintain growth rates like the ones we have observed over the past two years or so, thatâ€™s between 4.5% and 5.5% a year.
What is the contribution of the financial system in Colombia to total GDP?
VARGAS: The value added of the financial system in Colombia amounts to 19% of total GDP, while total domestic credit is around 36% of total GDP.
What is one of the main strengths of Colombian economic policy?
VARGAS: One of the strengths of Colombian economic policy, one that we acquired over the last ten or twelve years, is the ability to conduct counter-cyclical monetary, and even fiscal, policy. Thatâ€™s due to the fact that we have contained inflation. Inflation is around our 3% target. Itâ€™s also because we have exchange rate flexibility. We have escaped the problem of the original sin, so now we can let the exchange rate absorb a large part of the external shocks; and that was what happened after the Lehman crisis. In 2009, Colombia grew 1.5% while the rest of the emerging markets had lower rates of growth.