Previous Quarterly Editions
Expropriation Risk: 50 52 49 47 Political Violence Risk: 57 60 60 62 Terrorism Risk: 74 75 75 78 Exchange Transfer and Trade Sanction Risk: 56 54 52 51 Sovereign Default Risk: 42 40 40 40
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President Ivan Duque used the bombing of a Bogota police station in January that killed 21 people to emphasise his hard line on terrorism. The National Liberation Army (ELN) claimed that the attack was an act of war and reaffirmed its commitment to the stalled peace talks being hosted by Havana. However, Duque ended the talks within 48 hours of the attack and asked Cuba to extradite the ELN negotiators. The decisive move will play well with the many Colombians who feel that Santos had been too soft when reaching a peace accord with the larger FARC rebel group and deplore the ELN’s attempts to justify its actions. But this is unlikely be enough to reverse the extraordinary drop in popularity that Duque has experienced in the six months since he took office in August. By the start of 2019, polls were indicating an approval rating of around 30%, with disapproval running at 65%. Part of the problem has been the president’s struggle to manage relations with Congress, even though his own Democratic Centre (CD) party is the largest in the Senate and second-largest in the House. Although corruption scandals have dominated the headlines, the real challenge has been fundamental disagreements on key issues such as tax and spending. This will make it difficult for the government to bring the fiscal deficit down to 2.4% during 2019 as it comes under greater pressure to increase public spending. Colombia saw near constant public protests in the last few months of 2018 as students, trade unions and civil society organisations demanded higher spending on education and increases in the minimum wage. The government was ultimately forced to give ground, agreeing in December to raise education spending by 1.5 billion dollars over the next four years and put up the monthly minimum wage by 6%. It also halved its expectations of revenue from a range of unpopular new measures that would have, among other things, imposed VAT on basic foodstuffs. Duque also faces a dilemma over implementing the Santos peace accord with the FARC. Both his party and his voter base generally want to see the deal scrapped on the grounds that it is too lenient in allowing the group to reintegrate into society, but large amounts of aid and investment are tied directly or indirectly to its successful implementation. The government’s own figures suggest that this will bring in 36 billion dollars of foreign investment over the next ten years, with much of that expected to benefit the key oil, mining and tourism sectors. Finally, there is the crisis in neighbouring Venezuela, which might in other circumstances have distracted from Duque’s domestic problems. Colombia has borne the brunt of emigration from Venezuela in recent years, taking in more than one million people far faster than it can settle them, and the influx is exacerbating the president’s social and economic challenges.
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Since his election, Duque has been working to reduce bureaucratic barriers to foreign investment. The extractive sector has also been helped by the Constitutional Court ruling in October that popular consultations conducted by governments at regional or municipal levels do not have the ability to veto agreements reached with the national government. Since 2016, a series of these consultations have derailed several extractive projects that had been backed by Bogota. Although the ruling should provide greater confidence for investors, who must still go through a thorough consultation process with local communities, there is a risk that the removal of the veto possibility may encourage greater direct action against unpopular projects. Duque’s tough approach to the ELN will worry investors if, as seems likely, it results in more attacks on energy infrastructure.
The Duque government’s tax proposals, especially the prospect of VAT at a rate of 19% being added to basic food including rice, bread and eggs, led to well-coordinated nationwide protests in the final months of 2018. It was a major factor in the president’s falling popularity until Congress removed it from the tax reform bill at the end of December. However, the Colombian population is now so mobilised in defence of its interests that the government will find spending cuts in any areas at all to be very difficult. Further protests are highly likely amid continuing anger at bribery scandals, Venezuelan migration, and the president’s support for the use of fracking by the state oil company.
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As the ELN peace process had essentially been frozen since Duque took office, the ending of talks in January will change little. However, it may prompt an upsurge in ELN attacks on the security forces and energy infrastructure. Secretary of State Mike Pompeo visited Colombia in January to reiterate US support for coca eradication efforts. Coca cultivation is at record levels in Colombia, which is the world's largest cocaine producer, and the faltering peace accord with the FARC has seen many former rebels returning to criminal activities in the narcotics sector.
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The central bank has been able to maintain its interest rate at 4.25% from April 2018 into 2019 as inflation fell slightly to 3.2%. It is expected to end 2019 around 3.5%, but that is still within the bank’s target range of 2-4%. The economy is relatively healthy, with growth expected to be 3.3% this year, up from 2.7% in 2018 and twice the rate for the Latin America and Caribbean region as a whole. Inflation is a manageable 3.2%, although it has been rising slightly and may come under pressure from recent increases in the minimum wage. The peso faired relatively well against the dollar in 2018 and should remain stable in the coming months unless impacted by the Venezuelan crisis.
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The Duque government has stressed the importance of maintaining the country’s credit rating, although public demands for greater spending and congressional constraints on plans to raise revenue are likely to put it under greater pressure to borrow. The current account deficit as a share of GDP is expected to rise during 2019, and the central bank has taken steps to bolster its international reserves.
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