Previous Quarterly Editions
Expropriation Risk: 47 47 47 47 Political Violence Risk: 62 62 64 64 Terrorism Risk: 78 78 79 80 Exchange Transfer and Trade Sanction Risk: 51 51 49 51 Sovereign Default Risk: 40 40 42 42
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Colombia is now paying a price for its half-hearted implementation of the peace agreement reached between the Santos government and FARC leaders in 2016. At the end of August, the leader of the FARC delegation at those peace talks, Ivan Marquez, appeared in a video to declare a "new phase of armed struggle", calling on demobilised rebels to rearm and referring to possible alliances between dissident FARC units and the ELN, now the country’s largest guerrilla group. President Ivan Duque responded by dismissing Marquez as a "narco-terrorist" being harboured by the Maduro regime in Venezuela. But the country is preparing for a revival of the FARC and a return to the debilitating conflict that blighted its growth for half a century. Duque’s evident hostility to the peace deal, which helped bring him to power on a wave of support from voters who saw the 2016 agreement as too soft on the FARC, has ensured serious doubts that it will succeed. Underfunding of crucial aspects of the deal has created widespread dissatisfaction among former FARC members, and more than 3,000 are already thought to have taken up arms again. Most significantly, the administration has let the rural development projects that were a central part of the agreement fall far behind schedule. Many rural areas lack the most basic services such as water, electricity and schooling, that were promised. These failings not only perpetuate rural poverty but leave communities in former FARC areas vulnerable to other armed groups. The risk of a resurgence in FARC terrorism comes at a bad time for the Colombian economy. After three years of underperformance, it was showing signs of a demand-driven recovery earlier in 2019. But it is faltering again and in July the central bank cut its forecast for growth in 2019 from 3.5% to 3%, with just 3.2% expected in 2020. After several years worrying about prices for oil, coal and gold, Colombia now needs to worry about a new threat to the important banana sector. In August, the government declared a national emergency after discovery of TR4, a soil-based fungus that attacks banana plants, at a handful of plantations in La Guajira in the north of the country. The fungus cannot be controlled by pesticides, only by isolating infected soil. Bananas are Colombia's third-largest agricultural export behind coffee, which is facing its own crisis as low global prices force farmers to abandon their plantations.
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Having welcomed a ruling by the Constitutional Court last year that prevents popular consultations at regional or municipal levels from overturning agreements reached with the national government, the country’s mining community now wants a legal framework that provides certainty for issues such as environmental licensing and the public approval process. In return, it is offering 7.5 billion dollars in new investment over five years. The government in Bogotá, which is particularly keen to build up copper mining in the north and west of the country, appears sympathetic but remains wary about the strength of local opposition to specific projects. The Duque administration continues efforts to reduce bureaucratic hurdles to foreign investment. However, investor concerns about the safety of energy infrastructure from ELN attacks will move to a new level if the FARC resumes its armed struggle.
Attacks on civil society leaders are continuing. According to one study, 59 community leaders and human rights advocates were killed in the first four months of this year, bringing the total close to 700 since the peace deal was signed. These people provide a crucial link between the state and their communities, many of which have no inherent trust in Bogotá. The delay in implementing rural development plans has left them in a difficult position, while underfunded state agencies have provided little support or protection. It is likely that violence against local community leaders will increase ahead of October’s regional and local elections. The two-day national strike at the end of April to protest at crime levels and poor public services was followed by a nationwide strike in the education sector at the end of August. The number of Venezuelans now in the country is also contributing to social tensions.
After the 2016 deal reached with the FARC, the ELN increased its activity in an attempt to force Bogotá into concessions in separate peace talks. There were more than a hundred attacks on oil pipelines in 2018 and a further 20 in the first quarter of 2019. However, a bomb attack on a Bogotá police academy in January was a serious miscalculation, giving Duque an excuse to end talks with the ELN and increase security operations against the group. Although the response to the new FARC call to arms is not yet clear, the risk of terrorist attacks is likely to increase before the local and regional elections in October, especially if the rebels are now drawing support from Venezuela.
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The central bank maintained its key interest rate at 4.25% in July. The rate has remained unchanged for 15 months, but the bank is watching inflation closely. This is now expected to end 2019 at 3.7%, significantly above the annual target figure, as a result of higher food prices and the weakness of the peso. Although inflation should fall again in 2020, a rate hike before the end of 2019 is increasingly likely. The peso has been struggling, falling 17% against the dollar in the 12 months to August as investor confidence waivers.
Persistent deficits pushed public debt above 50% of GDP in 2018, up from 37.6% five years earlier and now with a larger share of external financing. The government’s budget for 2020, unveiled in July, has been creative with expected revenues by counting expected privatisation income. Together with lower revenues following tax cuts and potential problems with switching to an electronic tax collection system, this risks a widening of the deficit after concerted efforts to bring it down. However, foreign reserves are now around 50 billion dollars, providing a significant cushion, and Colombia has a credit line of 11 billion dollars with the IMF.
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