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Expropriation Risk: 42 42 42 45 ▲ Political Violence Risk: 73 73 60 60 ► Terrorism Risk: 76 76 78 80 ▲ Exchange Transfer and Trade Sanction Risk: 55 55 55 45 ▼ Sovereign Default Risk: 47 47 47 57 ▲
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Colombia is at serious risk from climate change, including sea-level rises, storms, drought and flooding. Such risks threaten agriculture and food security, infrastructure, housing and human life. Landslides, prompted by heavy rains and exacerbated by factors such as mountainous topography and deforestation, already occur regularly, with poorly located, informal housing developments sometimes proving deadly for inhabitants.
A spike in deforestation in 2017 highlighted an unintended consequence of the former government’s peace accord with the Revolutionary Armed Forces of Colombia (FARC), a group that ensured the maintenance of tree cover in many areas for protection against aerial attack and surveillance. Other factors which continue to drive deforestation include clearing for coca cultivation, common in Andean areas, and cattle grazing in Amazonian regions. The situation compounds concern more broadly for the Amazon rainforest’s future, now thought in places to be emitting more carbon than it captures.
In December 2020, President Iván Duque’s government revised Colombia’s Nationally Determined Contributions on climate action, pledging to reduce greenhouse gas emissions by 51% by 2030 compared to the projected baseline. That forms part of a wider effort to achieve net-zero emissions by 2050, since reinforced by measures designed to address methane emissions. Having taken an active role in the Global Methane Pledge at last year’s COP26 summit, in February, Colombia became the first South American country to regulate methane emissions from oil and gas. For all Colombia’s environmental challenges, its plans for addressing climate change are now considered to be amongst the most ambitious in Latin America.
How such ambitions will translate into results is uncertain, particularly in the context of this election year. Presidential frontrunner Gustavo Petro has presented himself as an environmentalist, not least in expressing his desire to expedite Colombia’s energy transition and shut down oil and gas exploration. However, his victory is not yet secured, and he would have any radical policies constrained by a fragmented Congress.
In a country where oil and coal account for nearly half of exports, perceived attacks on extractive industries would always be controversial, but the Russia-Ukraine crisis will make them more so. High oil prices and serious global energy and food
pressures are likely to dampen much of the enthusiasm there was for drastic action on reducing extractives and increase the temptation to pursue increased domestic production of oil and gas, as well as agricultural products.
A moratorium on fracking remains in place but has not prevented the approval of pilot projects, pending hearings on the issue at the country’s highest administrative court. Such pilots, it is argued, could make for a better-informed decision on how to proceed with regard to developing non-conventional energy deposits. The matter has generated environmental concerns and substantial community opposition and looks set to remain highly contentious, regardless of who takes on the presidency after May.
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Colombian tax revenue relies heavily on corporate tax. The desire of both the incumbent government and any incoming one to avoid provoking renewed public ire over fiscal reform will maintain the focus in this area, rather than on increasing taxes on individuals.
The way the presidential election on May 29 pans out may nevertheless spook investors, with a win by leftist frontrunner Petro likely exacerbating fears of expropriation, particularly in the oil and mining sectors. Petro has previously played down fears of land expropriation, but with land ownership having long been at the core of Colombia’s socio-political conflicts, efforts to narrow the gap between Colombia’s rich and poor may necessitate action on land ownership. This could see changes in taxation, should they manage to get measures through parliament.
A fragmented legislature looks likely to constrain any radical policy shifts by the incoming president. Presidential campaigning will also see Petro’s polling lead narrow as election day approaches. Accusations by Petro’s critics of radical socialism and comparisons with Venezuelan presidents Nicolas Maduro and Hugo Chavez, however implausible, will nevertheless perpetuate concerns around possible expropriation, potentially weighing on private investment.
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Last year’s social unrest has largely subsided for now, but many social, economic and political drivers of public anger will have worsened during the COVID-19 pandemic, with heavy-handed responses to protests by the security forces further exacerbating anti-government feeling. The United Nations, U.S., European Union and international human rights bodies have expressed concern about the government’s handling of recent protests, while domestically, calls for the disbandment of the Mobile Anti Disturbance Squadron (ESMAD) have re-emerged.
The latter issue will remain a live one, particularly given the incumbent government’s recent announcement that U.S. financial support could be used, in part, to reinforce ESMAD. The situation will pose dilemmas for the incoming government, particularly if large-scale protests reignite.
Meanwhile, the handling of the March 13 legislative elections – results of which were marred by claims of irregularities – will undermine faith in election processes generally, stoking discontent with the presidential result, whatever it may be. The race looks likely to result in a left-right run-off, and debate is likely to polarise society, potentially stoking tensions further.
With the incumbent government widely accused of having neglected its obligations under the FARC peace process, a change of president could raise hopes of renewed efforts to secure peace, particularly if Petro wins. Such an outcome would also raise the prospects of renewed peace talks with the National Liberation Army (ELN), which broke down shortly after President Iván Duque took office, when the ELN bombed a Bogota police academy in 2019.
As that attack demonstrated, talks do not necessarily promote calm in the short term. The possibility of negotiations could prompt an uptick in violence as the ELN, or other non-state armed groups, attempt to capture the government’s attention or carve out better bargaining positions. Higher oil prices could increase the likelihood of further attacks on oil infrastructure.
Conflict between non-state armed groups will continue to threaten civilian lives, particularly in rural areas. While attacks in towns and cities are less common than rural violence, and tend to be directed at the state security forces, they will also put civilians at risk.
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High oil prices since the Russia-Ukraine crisis have seen a strengthening of the peso which was around 3,800 to the dollar at the time of writing. However, they may nevertheless also push up domestic fuel and food prices, exacerbating already soaring inflation.
Having hit 8.01% in February, inflation will pile pressure on the Central Bank to raise interest rates substantially. At 4%, the bank’s key rate is already up 2.25 basis points in September. Further action is widely expected at the central bank’s upcoming meetings.
COVID-19 saw Colombia’s fiscal deficit increase to 7.8% of gross domestic product in 2020, before contracting to a lower-than-expected 7.1% in 2021.
The government’s fiscal reforms aim to generate COP15.2 trillion, largely by increasing corporate taxes, tackling tax evasion and implementing public sector austerity. One ongoing difficulty is the country’s narrow personal income tax base. A Petro win in the presidential election, even with a fragmented Congress, would probably mean further increases to corporate taxes, weighing on the country’s competitiveness and attractiveness for foreign direct investment.
The government still has access to a line of credit via the International Monetary Fund, and foreign reserves remain substantial, at nearly USD59 billion. Significant levels of state spending will nevertheless continue to be necessary this year.
