Colombia’s weak investment caps fragile growth

Colombia’s August 2025 economic print confirms the persistence of a fragile, consumption-led recovery as structural impediments in investment and external accounts remain unaddressed. National economic activity expanded 1.98% year on year, underperforming both historical averages and regional peers, with Chile and Peru posting 2.3% and 2.7% growth, respectively, in recent months. This outcome reflects a composition skewed toward services and household spending, offset by ongoing weakness in mining and construction—sectors that contracted 10.2% and 6.4% year on year in Q2, respectively. The divergence signals that Colombia’s growth model remains exposed to commodity price volatility and policy constraints.

Inflation stood at 5.1% year on year in August, providing modest real wage gains and supporting private consumption, while the Banco de la República held its benchmark rate at 9.25% through the third quarter. These parameters deliver mildly positive real rates, yet credit conditions remain tight for firms and households, limiting fixed capital formation, which grew only 1.7% year on year in Q2. Supply-side weakness is compounded by tepid export performance: Q2 exports fell 1.6% year on year as oil and coal prices softened, while imports climbed 9.7% amid recovering domestic demand. The resulting current-account deficit widened to 5.5% of GDP for the first half of 2025, underscoring vulnerability to external shocks.

Fiscal and debt positions remain delicate. Public debt is estimated at 61% of GDP, and the 2025 fiscal deficit is projected to exceed 4% of GDP, constraining space for stimulus. Local-currency sovereign yields on the TES 2028 benchmark reached 10.2% in late October, up 60 basis points since mid-year, as investors price persistent fiscal and inflation risk. Hard-currency sovereign spreads remain elevated above 300 basis points over U.S. Treasuries, while Chile and Peru continue to enjoy tighter external funding margins. This differential reflects market skepticism regarding Colombia’s ability to restore growth without risking fiscal deterioration.

Capital flows show uneven resilience. Foreign direct investment rose to USD 3.44 billion in Q2, a 22% increase year on year, but the bulk of inflows remains concentrated in services rather than tradables, reducing the impact on job creation and export diversification. Portfolio flows are volatile and highly sensitive to U.S. monetary policy and global risk appetite, as seen in the subdued performance of the COLCAP index and persistent volatility in the TES curve. The Colombian peso (COP=X) depreciated nearly 6% against the US dollar since July, reflecting renewed global dollar strength and heightened investor risk aversion to Colombia’s weak external and fiscal outlook.

Financial markets interpret the 1.98% activity growth as a signal of limited momentum and downside risk, not stabilization. The COLCAP index has failed to break out of a narrow range, while sovereign and corporate spreads remain wide as market participants seek evidence of a turn in fixed investment and external balances. Monetary easing remains constrained by the risk of further currency weakness and sustained external deficits. Until investment and export trends improve, Colombian assets are likely to underperform regional comparables.

To re-establish a credible recovery path, three thresholds must be met by mid-2026: quarterly GDP growth should exceed 2.5% year on year, gross fixed investment must accelerate above 4% year on year, and the current-account deficit should narrow below 4% of GDP. Achieving these metrics would support a re-rating of local assets, a narrowing of risk spreads, and a more resilient macro framework.

Absent these improvements, Colombia will remain exposed to currency volatility, high sovereign risk premiums, and persistent underperformance versus regional peers. The next two quarters are pivotal in determining whether policy adjustments and external tailwinds can break the current pattern of low growth and elevated risk.