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Colombia’s Consumer Credit Plummets to Record Low in 2024: Experts Warn of Economic Downturn Ahead

The slowdown that the economy had in 2023 with a growth of just 0.6 percent, the still high cost of money with interest rates from the Bank of the Republic at 12.75 percent and inflation still high at 8, 35 percent continue to take their toll on Colombians.

This situation is mainly evident in the poor performance of consumer credit in the last year. According to the latest data from the Bank of the Republic, this portfolio reached 205.5 billion pesos in January 2024, which represents a 3 percent drop compared to the same period of the previous year (212 billion pesos).

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The country had not seen a negative variation of that size since records began (there are bases since 2004). “Consumption is one of the main drivers of the Colombian economy, as it represents around 78 percent of GDP. In this way, the decline in the consumer portfolio, which began a few months ago and is the worst since records began, even more so than in the 2009 crisis, points out, together with the deterioration in quality levels, the possibility of low growth for the first quarter of 2024,” said Wendy Sánchez, Data and Projects economist.

This is not the only warning sign. Debts with more than 30 days in arrears of Colombians totaled close to 35 billion pesos until November, the latest known data, and their real annual growth exceeded 29.1 percent. This is mainly driven by the default of microcredit, consumer and commercial modalities.

Meanwhile, the Bank of the Republic reported that the total portfolio reached 646 billion pesos as of January 2024, which meant a slight increase of 2.9 percent compared to the same period of the previous year. However, this data was well below inflation (8.35 percent as of January).

According to the firm Data and Projects, the only period in which the total portfolio had grown below inflation had been between March and June 2021, a time in which the country was launching its economic reactivation and was also suffering from violence and the blockades of the national strike. Otherwise, even in the most complicated periods such as the financial crisis experienced in 2009 and the covid-19 pandemic in 2020, the variations in the total portfolio remained above 4 percent annually.

When reviewing the other portfolios, you can see how the commercial portfolio grew by 5 percent with data as of January 2024, reaching 319 billion pesos. For its part, the mortgage portfolio was 102 billion pesos in January, which represents an increase of 9 percent compared to the same period of the previous year, and the microcredit portfolio grew another 9 percent, up to 18.2 billion pesos.

Deterioration in portfolio quality

According to the Bank of the Republic’s risk perception survey of the financial system, which seeks to identify the perspective of different agents of the economy regarding the most important risks and vulnerabilities facing the sector, the deterioration in the quality of portfolio continues to be the most relevant risk in terms of system stability in the next 24 months. That concern was mentioned by 53 percent of survey participants.

Following this risk, concerns about high interest rates, high levels of inflation and the lower performance of local economic activity were mentioned by banks with a participation of 35 percent each.

As of November 2023, the quality of the portfolio due to default for the total portfolio was 5.20 percent. The increase in the indicator compared to the previous month reflected the month-on-month increase in the balance, especially in the consumer portfolio.
Specifically, this modality reported an indicator of 8.4 percent; followed by microcredit, which stood at 8.2 percent; commercial, at 3.7 percent, and housing, at 3.2 percent.

For Luis Fernando Mejía, director of Fedesarrollo, in the second half of 2024 there would be a positive trend. “Not probably with growth, but at least a valley is reached in terms of that drop that we have been seeing in the total portfolio and its different modalities, also with a slightly faster recovery, especially in 2025,” he highlighted. he.

For the expert, the factors in favor of this recovery would be “a more dynamic growing economy on the one hand, and on the other hand, the effects of the reduction in interest rates that will occur throughout this year will already be seen.” he pointed out.

Expert expectations

Experts analyze the reasons for the trend and when they expect it to change, in addition to the effects they have caused.

For Luis Fernando Mejía, director of the independent economic and social research center Fedesarrollo, there are two main reasons for this variation.

“The first has naturally to do with the increase in interest rates, especially through the very important increase that the Bank of the Republic made in its intervention rate. That was transferred to all types of credit, mortgage, consumer, ordinary, commercial credit and, of course, to the extent that higher interest rates, obviously this demand for credit decreases and that is reflected in the figures we are seeing,” he said.

On the other hand, he highlights that the other element that affects the situation has to do with the economic slowdown, since, naturally, “to the extent that the economy grows less, of course there are also fewer needs for financing productive activities, such as for example, on the business side, and that also decreases the demand for credit. And of course, it also has to do with the increase in inflation,” he added.

For Mejía it is clear that inflation also increases interest rates. “This higher inflation is incorporated into interest rates and that has, of course, increased the cost of borrowing,” he said.

In turn, Jonathan Malagón, president of the Association of Banking and Financial Entities of Colombia, Asobancaria, highlights that in effect, bank credit would have had a real annual decline of 6.7 percent at the end of 2023, which forms the biggest drop since June 2000.

“This historic decline is explained by three reasons. The first is the strong cycle of economic slowdown, with GDP growing only 0.6 percent last year, the lowest figure of this century with the exception of the pandemic and the eighth worst in the last hundred years. Within this context of low growth, the fall in investment and the production of services such as commerce, industry and construction stands out, as well as the slowdown in household consumption,” he noted.

In addition, he listed that the second reason has to do with the financial conditions of households and companies in the midst of an inflation that completed twenty-nine months outside the target range of the Bank of the Republic.

“This led the issuer to have a contractionary monetary policy, leading consumers to demand less credit. Finally, the third reason is associated with the credit risk that the entities perceived, since the maturity indicators increased in all modalities during the last year, causing banks to be stricter with the requirements for granting loans, seeking to safeguard depositors’ savings,” he said.

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2024-03-04 14:07:30
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