Previous Quarterly Editions
Expropriation Risk: 47 47 47 49 Political Violence Risk: 62 64 64 70 Terrorism Risk: 78 79 80 80 Exchange Transfer and Trade Sanction Risk: 51 49 51 52 Sovereign Default Risk: 40 42 42 44
TREND ▲ OUTLOOK ▲
Although President Ivan Duque was elected with some enthusiasm in 2018, his popularity fell sharply during 2019 as the peace deal reached with the FARC rebel group by President Santos in 2016, and which Duque opposed, began to unravel. Congress has also frustrated his efforts to increase tax revenues to support public spending. Duque's Democratic Centre (CD) did poorly in local and regional elections in October, losing ground to the centre-left in a clear protest vote. Hundreds of thousands of people then joined demonstrations across the country in November and December to protest continuing corruption, new education cuts, proposed labour reforms, and rising insecurity. Although the government braced itself for major unrest during a national strike held in November, the demonstrations were initially peaceful. However, the death of a student who was hit by a tear gas canister pushed public anger to a new level and clashes with police left several dead and hundreds injured. President Duque responded to the protests by launching a 'national conversation' to address some of the demands, but his hope of an extended debate about long-term policy options was clearly inadequate. Nor did a government offer of 600 million dollars in tax rebates make much impact. Subsequent meetings with union leaders also made little progress on addressing what quickly became a list of thirteen key demands. These include that Duque properly implement the peace process and fund the commitments made to those who have left the FARC, but the demand with most support is for a pledge not to raise the pension age or cut the minimum wage. Duque has denied contemplating doing either, but members of his minority right-of-centre coalition may be tempted to join calls for a public commitment to no change. The economy itself was relatively robust in the second half of 2019, with private consumption buoyed by high wages and the availability of credit. Going into November, annual growth looked set to be around 3.3%, far higher than the rate for Latin America as a whole, while a reduced VAT rate on machinery and equipment was helping to boost investment. However, while it will take some time for the economic impact of the strikes and unrest at the end of 2019 to become clear, household consumption has already fallen heavily. In the medium term, the government is losing its room for manoeuvre as the IMF, which is providing a credit line of 11 billion dollars, questions its rising debt trajectory from 37% of GDP in 2013 to 52% five years later. Duque’s original plan was to use tax reform to raise revenues by about 1% of GDP through a crackdown on evasion, a steeper rate for high earners, and additional tax on the earnings of financial institutions, while lowering business rates to encourage the levels of investment that can sustain growth. These were already in doubt as opponents in Congress took advantage of the government’s vulnerability, but the protests and strikes at the end of 2019 have left Duque with little hope of a serious rise in revenues as he faces new demands for public spending during 2020.
The Duque administration is now paying the price for its half-hearted implementation of the 2016 peace agreement. Duque’s evident hostility to the peace deal helped to bring him to power on a wave of support from voters who saw the 2016 agreement as too soft on the FARC. Once in office, he ignored, underfunded or slowed down many of its provisions. Most significantly, the administration has let the rural development projects that were a central part of the agreement fall far behind schedule. The risk to the economy from a resurgence of FARC violence was overshadowed by the immediate disruption caused by the national strikes and demonstrations late in 2019, but it will be an increasingly serious concern for investors in 2020.
The protests in November began surprisingly peacefully but the public mood changed after a teenager died during a protest when hit by a tear gas cannister. The heavy-handed response of the government’s main means of dealing with protests, the Mobile Anti-Disturbance Squadron (ESMAD), was widely caught on video and quickly led to demands that the force be disbanded. This will be difficult as the government has few alternatives other than the use of soldiers, but deployment of the ESMAD at rallies is now highly inflammatory and appears to guarantee more violence. Violence against former FARC members continues, with little sign of greater government protection.
TREND ► OUTLOOK ▲
The FARC leadership has threatened 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 in the latter half of 2020. The ELN, now the country’s largest active rebel group, made a tactical mistake early in 2019 with a deadly attack on a Bogota police academy that was widely condemned, giving Duque an excuse to end talks and crack down. The ELN still attacks energy infrastructure and, while less active in the second half of 2019, it remains a problem for Duque.
The central bank kept its key interest rate at 4.25% in December, continuing two years without change. However, inflation continues to creep up, ending the year at 3.8%, and the bank’s refusal to revise its September projection showing growth at 3.2% for 2019 looked optimistic. The peso, which struggled against the dollar for much of 2019, was hurt again at the end of the year by the government’s concessions on revenue and spending in order to get a watered-down tax reform bill through Congress and placate protesters.
The legal ceiling on the deficit was relaxed for 2019 and will be raised to 2.3% for 2020 as the government copes with more than one million Venezuelan migrants who are now in Colombia and stretching resources in the border area. The higher limits have allowed the government to contemplate borrowing some six billion dollars to meet the spending gap in the 2020 budget, but more may be needed. However, the government still has the IMF line of credit and foreign reserves have reached a record high of 53 billion dollars.
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