Previous Quarterly Editions
Expropriation Risk: 47 47 49 52 Political Violence Risk: 64 64 70 68 Terrorism Risk: 79 80 80 78 Exchange Transfer and Trade Sanction Risk: 49 51 52 56 Sovereign Default Risk: 42 42 44 48
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President Iván Duque extended Colombia’s nationwide COVID-19 lockdown measures in early April 2020 as he prepared the country for an extended period of stringent confinement that even forbids outdoor exercise. Those over 70 cannot leave their homes until the end of May 2020, and schools and universities remain closed until then. The government’s measures have largely been accepted, helped by Duque’s message that because 80% of virus carriers are asymptomatic then social distancing is the only way to be safe. Informal workers have been particularly hard hit by the quarantine, particularly in Bogotá, which had more than half of the country’s early cases. Venezuelan migrants, some 60% of whom are unregistered in Colombia and have limited access to state assistance, have also been affected and some have returned, including a column of 5,000 who left Bogotá to head back to Venezuela on foot. Colombia’s economy was relatively strong compared to its neighbours going into the virus crisis and latest estimates from the World Bank suggest that it faces a contraction of only 2% this year, compared to a regional average of 4.6%. While combating the virus is the central issue facing the country, other problems have not gone away. Colombia’s largest guerrilla group, the National Liberation Army (ELN), has declared a humanitarian ceasefire while reserving the right to defend itself. It seems to be hoping that the government will respond with an offer of peace talks, but Duque has firmly rejected this and a release of ELN prisoners is equally unlikely. In its poor handling of the peace effort inherited from its predecessor, the Duque government has broken trust with the FARC, the country’s main terrorist group until it was persuaded to disarm by promises of social and economic reintegration that Duque has not kept. The risk to the economy from a resurgence of FARC violence, while overshadowed by recent developments, has the potential to quickly become a serious issue. Another area of concern remains the country’s trade performance. Colombia is highly dependent on a handful of commodities exports, with oil (28%) and coal (15%) accounting for over 40% of overseas sales, and coffee for 5%. This export structure makes the economy vulnerable to external shocks, such as the recent collapse in global oil prices. Even before the impact of the virus, Colombia’s capacity to diversify its exports was being limited by persistent structural barriers including poor infrastructure and lack of export experience in the private sector, and the government appears powerless to bring about meaningful change. While export values have remained static or fallen, the modest but steady expansion of domestic GDP, which was forecast to be 3.5% for 2020 at the start of the year, is continuing to increase the country’s imports. The widening gap between exports and imports will further expand the current account deficit, which is already one of the highest among Latin America’s large economies. In terms of market, the US accounts for 28% of total exports but is now heading towards recession, while regional trade, which accounts for another 26%, has been weakened by the economic situation in Brazil, Argentina and of course neighbouring Venezuela, which took almost 20% of Colombian exports as recently as 2007 but now takes less than 1%. By contrast, despite Colombia’s Pacific coastline, China accounts for less than 6% of its exports, something that was long regarded as a failing but actually leaves Colombia in a relatively good position this year. The recent award of a contract to build Bogotá's first metro line to a Chinese construction firm could, if successful, bring closer ties, but President Duque will not want to risk any move that draws criticism from Washington, traditionally Colombia’s strongest ally.
The virus crisis, including efforts to develop a vaccine for COVID-19, are likely to renew Colombia’s frustration with the slow pace of regional efforts to reduce pharma costs through joint price negotiations or pooled procurement. It already sets maximum prices for essential medications and limits imports of new treatments unless they have been shown to be more effective than existing, lower-cost equivalents. The Ministry of Health regularly posts reference prices for medications whose prices are not regulated so as to facilitate comparative shopping among private health care insurers and consumers. The outcome of the virus crisis may give more countries in the region an impetus to follow Colombia’s lead but, even if not, Bogotá is likely to extend this approach towards the pharma sector.
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President Duque has begun a prisoner release scheme to reduce the risk of COVID-19 in the country’s overcrowded prison system. With 120,000 inmates, it is now 40,000 above capacity. This should go some way towards reducing virus-related riots such as the one in Bogotá's La Modelo facility on March 21 2020 that left 23 dead and was reportedly part of a coordinated series of riots at 13 Colombian prisons. But more releases will be needed to slow the spread of the virus and this will quickly bring criticism from Duque’s own conservative support base. The protests in late 2019 against public spending cuts and labour reforms produced enough of a government retreat to prevent a repeat in early 2020, although the heavy-handed action of the government’s Mobile Anti-Disturbance Squadron (ESMAD) was also a factor. The issue of labour reform is likely to resurface in some form after the virus crisis.
The FARC leadership has threated a return to violence unless the Duque government meets its obligations under the peace deal. With former members picking up arms again, this could be a serious risk, particular if Duque appears weakened by the government’s response to the virus emergency. The ELN’s unilateral ceasefire, while welcome, is clearly self-serving and fragile.
The central bank cut its benchmark rate by 50 basis points to 3.75% at the end of March 2020 and a similar cut is expected in April 2020, with a rate of 3% likely by mid-year. The moves are part of efforts to soften the impact of the virus, with the bank deploying 7.5 billion USD to increase liquidity. It is also instructing commercial banks to extend debts for smaller businesses. The peso lost 7% of its value against the dollar (USD) during 2019 but was strengthening during the first months of 2020 until the collapse of oil prices, and then COVID-19, pushed it down again.
The legal ceiling on the deficit had been raised to 2.3% this year to help meet the costs associated with Venezuelan refugees, but it will clearly need to go higher. The government had contemplated significant borrowing this year to help meet the budget deficit, but it is now concentrating on virus-related relief. It still has access to an IMF line of credit and began the crisis with foreign reserves at a record high of 53 billion USD.
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