Previous Quarterly Editions
Expropriation Risk: 45 40 42 42 ► Political Violence Risk: 73 73 73 60 ▼ Terrorism Risk: 78 76 76 78 ▲ Exchange Transfer and Trade Sanction Risk: 45 55 55 55 ► Sovereign Default Risk: 47 47 47 57 ▲
TREND ►
Despite having implemented some of the world’s longest-lasting COVID-19 lockdown measures in 2020, Colombia has struggled to bring the pandemic under control. With nearly 5 million confirmed cases and an official death toll nearing 125,000, the country is among Latin America’s worst affected. The International Monetary Fund (IMF) estimates national gross domestic product (GDP) to have contracted by 6.8% in 2020, but forecasts growth of 5.2% this year. Improving economic prospects will depend on the success of vaccine roll-out efforts, underway since February.
So far, 43% of citizens have received at least one dose and 28% have been fully vaccinated. Roll-out nevertheless faces difficulties due to shipment delays, insecurity and logistics, with challenging topography and poor infrastructure hindering deliveries of vaccines to remote areas. New virus variants threaten to exacerbate contagion. The rolling seven-day averages of daily new confirmed cases and deaths have plummeted since June, but the threat of new waves of infection will endure until inoculation is substantially more advanced.
Colombia began relaxing pandemic restrictions this year, but their effects on businesses are likely to endure beyond 2021. Unemployment was 14.4% in June, down from 19.8% in June 2020. Tourism appears to be recovering well but sectoral growth is fragile and will depend on pandemic recovery domestically and overseas.
The government was forced in May to withdraw fiscal reform proposals made in April, which triggered major protests. While COVID-19 has made the issue of reform even more sensitive, it has also made it more urgent. The fiscal deficit increased to 7.8% of GDP in 2020, from 2.5% in 2019, and is expected to reach 8.1% in 2021. S&P Global Ratings downgraded Colombia’s credit rating to ‘junk’ in May; Fitch followed in July.
The government had hoped to increase tax revenues by COP23.4tn (USD6.4bn) to alleviate COVID-19-related financial pressures but has since presented a scaled-back plan to Congress. This is intended to generate COP15.2tn, largely by increasing corporate taxes, tackling tax evasion and implementing public sector austerity. The new plan has so far avoided a backlash on the scale seen previously, though smaller protests did take place in late August; social tensions continue to simmer.
The situation will weigh further on the popularity of President Ivan Duque’s Centro Democratico (Democratic Centre, DC) as attention turns to the 2022 presidential and congressional elections. COVID-19 halted rising complaints from former members of the Revolutionary Armed Forces of Colombia (FARC) about Duque’s failure to honour his predecessor’s peacebuilding commitments. Complaints will return, particularly given the government’s continuing failure to ensure demobilised combatants’ safety. Killings of rural community leaders will further weigh on successful peacebuilding in former conflict zones, as could scandals over military and government activities.
The likely return of aerial coca eradication with glyphosate, a practice suspended in 2015 over health concerns, will further aggravate social tensions, exacerbating rural insecurity. The UN Office on Drugs and Crime revealed in June that nationwide coca crop coverage fell by 7% in 2020, but that annual cocaine production nevertheless increased by an estimated 8%. A global resurgence in cocaine demand as lockdown measures ease is likely, and could further undermine anti-narcotics work.
Colombian tax revenue relies heavily on corporate tax. The government’s desire to avoid provoking renewed public ire over fiscal reform will maintain its focus in that area, rather than on increasing taxes on individuals. The government will nevertheless hope to minimise action that could spook foreign investors as Colombia recovers from COVID-19. Foreign direct investment increased by 25.6% year-on-year in 2019, according to the UN Conference on Trade and Development, a trend the government will want to revive. Foreign investors generally face the same investment regulations as Colombian ones.
Concern over possible expropriations is increasing to some extent, due to the substantial lead of leftist Gustavo Petro in early voting intention polls ahead of the 2022 presidential elections. Having long expressed opposition to Colombia’s economic reliance on extractive industries, and to practices such as fracking, his popularity will concern the oil and mining sectors.
He 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. That could see changes in taxation.
Petro’s lead is likely to narrow significantly as election day approaches and campaigning begins. Even if he wins however, legislative constraints are likely to preclude any radical policy changes.
TREND ▼
The social unrest of May and June has largely subsided for now, but many social, economic and political drivers of public anger will have worsened during the pandemic. Heavy-handed responses to protests by the security forces threaten to exacerbate matters. The United Nations, United States, 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 have re-emerged. These calls could put the government (which favours tough security strategies) in an awkward position, particularly if large-scale protests reignite.
TREND ▲
The government attributed a March car bombing in Corinto, that injured 43 people, to FARC dissidents. A June attack on a helicopter carrying Duque, Defence Minister Diego Molano and other government officials further demonstrated such groups’ potential to generate political crises. The government’s failure to protect demobilised former fighters is seeing many rearm, while COVID-19-related economic hardship and mass migration from crisis-stricken Venezuela has facilitated recruitment by criminal organisations.
The government’s refusal to engage in peace talks with the National Liberation Army (ELN), in favour of military operations, risks prolonging threats from that organisation, now Colombia’s largest guerrilla group. Military operations to weaken non-state armed groups may do so, but they also risk destabilising them, triggering violent power struggles with rival groups.
Having cut Colombia’s benchmark interest rate to a record low of 1.75% in September, the central bank has kept it there to boost economic recovery and manage inflation. Two of the bank’s seven board members nevertheless voted for a quarter-point increase at their latest meeting, increasing speculation that a rate increase may come soon. Annual inflation accelerated to 3.97% in July, remaining just within the central bank’s target of 3% plus or minus one percentage point.
COVID-19 and low oil prices have weighed on the peso’s value; the currency fell to nearly 4,000 to the dollar in early August, its weakest level since May 2020, despite recovering oil prices. The peso has recovered slightly since and a better performance is expected in coming months.
Having raised the legal fiscal deficit limit for 2020 to 6.1% of GDP (from 4.9% in April 2020 and 2.3% before COVID-19), the Fiscal Rule Advisory Committee agreed in June 2020 to suspend limits altogether until 2022. COVID-19 saw the fiscal deficit increase to 7.8% of GDP in 2020.
The government’s new fiscal reform proposals aim at generating COP15.2tn, largely by increasing corporate taxes, tackling tax evasion and implementing public sector austerity. While the new proposal is less contentious than the first, and looks likely to pass, it fails to address structural problems, such as the country’s narrow personal income tax base.
The government still has access to an IMF line of credit, and foreign reserves remain substantial, at nearly USD59bn. Significant levels of state spending will nevertheless continue to be necessary this year.
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