Previous Quarterly Editions
Expropriation Risk: 49 47 47 47 Political Violence Risk: 60 62 62 64 Terrorism Risk: 75 78 78 79 Exchange Transfer and Trade Sanction Risk: 52 51 51 49 Sovereign Default Risk: 40 40 40 42
TREND ► OUTLOOK ▲
After three years of underperformance, the Colombian economy is gaining momentum. Growth is expected to be 3.5% this year and slightly higher in 2020. With inflation under control, gradual improvements in the labour market and an encouraging monetary policy are boosting private consumption, and domestic demand is now the main driving force of the economy. One of the first acts of President Ivan Duque’s administration on taking office last August was to cut corporate tax rates and this, coupled with the ongoing impact of his predecessor’s infrastructure construction programme and greater access to credit, is resulting in more investment. Growth in manufacturing and services looks particularly promising, and this will be needed to counteract a lag in the traditional export areas related to energy and mining, which have suffered from the downturn in global trade. The oil sector continues to account for more than a third of export revenues but output has fallen by more than 10% since 2014 after years of underinvestment. Government efforts to reverse the decline, including modifying contractual terms for offshore exploration, helped to increase foreign direct investment in the hydrocarbons sector by 45% in 2018 but it will take time to overcome entrenched stagnation. Although President Duque’s extraordinary drop in popularity during his first six months in office has now stabilised, it has weakened him politically. The legislature shredded his tax reform bill in December, effectively halving Duque's original revenue target to 2.4 billion dollars and forcing him to shelve a controversial proposal to expand VAT to cover basic food items. While he did manage to increase income tax on high earners and start a new crackdown on tax evasion, the cut in projected revenues led to Colombia’s first credit rating downgrade in 15 years when Standard & Poor's reduced it to one notch above junk. In April, the House of Representatives firmly rejected the president’s attempt to make significant changes to the 2016 peace deal with the FARC. Although Duque’s hard line on the country’s peace process played well for him while campaigning last year, the realisation that it requires a return to heavy security spending using funds diverted from elsewhere has contributed to his low approval ratings. Widespread protests against the government are likely in the months leading up to local elections in October, when his Centro Democratico is likely to perform poorly. As the crisis in Venezuela continues, the cost to neighbouring Colombia keeps climbing. It 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.
The extractive sector welcomed last year’s ruling by the Constitutional Court that popular consultations conducted by governments at the regional or municipal levels do not have the ability to veto agreements reached with the national government. However, there remains a risk that removing the possibility of a local veto may encourage greater direct action against unpopular projects. The Duque administration continues efforts to reduce bureaucratic hurdles to foreign investment but investors are worried that his determination to take on and defeat the ELN, which is now gaining strength from operations across the border in Venezuela, will result in more attacks on infrastructure.
TREND ▲ OUTLOOK ▲
A two-day national strike at the end of April saw hundreds of thousands of students, farmers, union activists and members of minority groups march through Colombia's main cities to protest a range of issues including crime, human rights abuses, the poor state of public transport, and what many see as the prioritising of deficit reduction over public services. Although the issue was not widely vocalised during the protests, migrants from Venezuela have increased pressure on service provision and raised social tensions in many parts of the country. Relations between Bogota and indigenous leaders in Cauca, where the Pan-American highway was blocked for much of March, deteriorated further in April despite a government offer to invest 250 million dollars in indigenous communities.
TREND ▲ OUTLOOK ▼
Duque's scrapping of peace talks with the National Liberation Army (ELN) increases risks to oil infrastructure and personnel, with at least 20 pipeline bombings attributed to the group during the first four months of 2019. Although the legislature has frustrated his efforts to alter aspects of the 2016 deal with the FARC, the president is pushing ahead with a hardline security strategy that will prompt an uptick in violence while stretching the resources of the security forces, which must also deal with the spillover from the crisis in Venezuela.
TREND ▼ OUTLOOK ▼
The central bank maintained its key interest rate at 4.25% in April and no immediate change is expected given that inflation, while rising, is still comfortably inside its long-term target range of 2-4% amid moderate economic growth. However, a rate hike of 50 basis points close to the end of the year is likely if domestic demand intensifies or the current account and public deficit increase. The external factors that could trigger a change in monetary policy include an increase in external interest rates and a slower portfolio capital flow to emerging market countries. The central bank is building up its international reserves to increase its room for manoeuvre. The peso should remain stable in the coming months unless impacted by the Venezuelan crisis.
Persistent deficits pushed public debt to 50.5% of GDP in 2018, up from 37.6% five years earlier and now with a larger share of external financing. Despite the government’s desire to control spending, the mounting costs related to Venezuelan migration, which are edging towards 0.5% of GDP, have forced an expansion in the deficit limit for this year from 2.4% to 2.7%. The government was able to hit its 2018 deficit target of 3.1% but this year’s target of 2.3% now looks highly optimistic. However, foreign reserves are now around 50 billion dollars, providing a significant cushion, and Colombia has a credit line of 11 billion dollars with the IMF.
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