Previous Quarterly Editions
Expropriation Risk: 49 50 52 49 Political Violence Risk: 56 57 60 60 Terrorism Risk: 74 74 75 75 Exchange Transfer and Trade Sanction Risk: 56 56 54 52 Sovereign Default Risk: 40 42 40 40
TREND ▼ OUTLOOK ▲
Colombians once again elected a right-wing government in June, handing victory to Ivan Duque of the Democratic Centre (CD) with 54% of the vote in a polarising election that lacked a centrist candidate but was unexpectedly peaceful. However, with 42%, his opponent, former Bogota mayor Gustavo Petro, achieved the best showing yet by a candidate from the left and the CD fell well short of a majority in the legislative elections held in March. Only 42 years old when he took office in August, Duque is the country’s youngest president and will rely heavily on support from Alvaro Uribe, the former president who heads the CD.
The promised pro-business stance of his administration, including a cut in the corporate tax rate, has been welcomed by international investors. Colombia’s ties with the United States are also expected to improve. Duque was in Washington meeting senior figures from the Trump administration within days of his election, and US Defense Secretary James Mattis visited Bogota shortly after his inauguration. The impact of Duque’s victory on domestic security may be less positive, however. The CD benefited from a popular backlash against aspects of the peace deal reached by Santos with the FARC guerrilla group to end the country’s decades-long civil conflict. If the new government fails to follow through on the pledges made to former FARC members who are returning to civilian life, the likelihood is that conflict will return in some rural areas.
The peace talks that began under Santos with the ELN, now the country’s largest guerrilla group, are unlikely to prosper under Duque and a reversion to force by both sides seems probable. With growth expected to be only around 2.5% this year, and there is concern about the growing fiscal deficit. To reassure markets given his relative inexperience, Duque has brought back a former finance minister from the Uribe era to carry through the corporate tax reductions. Politically, Duque must cope with the taint of corruption and scandal hanging over the CD. Uribe resigned from the Senate at the end of July after the Supreme Court summoned him for questioning over alleged witness tampering and bribery, only to reverse his decision in August as he seeks to discredit the Court. The ongoing crisis in Venezuela means that people continue to cross the border into Colombia, which more than a million people have done since the start of 2017 - initially Colombians who had crossed the border to avoid guerrilla-related conflict in their own country and more recently Venezuelans escaping economic hardship. Just before leaving office in August, Santos granted 440,000 Venezuelan migrants temporary work permits, reducing the possibility of unrest among those now in Colombia. Most Colombians still feel a moral responsibility to help them and accept the situation, but Duque may take a harder line if migrant numbers continue to rise.
Duque’s election is a relief for the extractives sector, as his opponent had promised to phase out government assistance for oil and coal in favour of support for renewables, but his honeymoon period will not last long. Uncertainties surrounding environmental rules, permit delays and local community opposition to new projects will continue to limit development possibilities. Efforts to resolve them could prove lengthy as the local levels of government continue to take a harder line on environment impact issues than national officials.
A tough approach by Duque towards the peace process will worry investors as a resumption of violence is likely to hit energy infrastructure once again, much of which lies vulnerable in remote locations. This could jeopardise much-needed investment in onshore exploration adjacent to current oil fields that are rapidly maturing.
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The Santos administration recently provided an incentive for the leadership of the largest criminal organisation, Los Urabenos, to turn themselves in. However, rising gang violence is now a major threat to personal security in many urban areas as larger groups split into smaller units that compete viciously to handle and sell narcotics. Domestic cocaine consumption has been rising in recent years, and an effective coca eradication effort on the scale urged by Washington and apparently under consideration by Duque will push up the street price of cocaine and make the narcotics distribution sector even more competitive. Much of the government response is left to mayors and provincial governors with limited resources, suggesting that drug-related violence will increase.
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The ELN failed to agree a ceasefire before Santos stepped down. On taking office, Duque insisted again that the ELN must completely end all criminal activity before he will continue the talks in Havana that Santos began in 2016, and the group’s lack of internal discipline meant that a new round of kidnappings has offered him a reason to disengage. Washington will expect support if it steps up pressure on the Maduro government in Caracas, but Duque will be wary of policies that encourage more Venezuelans to cross into Colombia.
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After cutting interest rates by 25 basis points to 4.25% in April, the central bank did not make a further cut in June after inflation moved above the midpoint of its 2-4% target band. Following cumulative cuts of 350 basis points since the end of 2016, it appears prepared to leave interest rates unchanged for the remainder of the year. Having recovered some strength against the dollar, the Colombian peso remained steady during the first half of 2018 despite the election, and it may even rise slightly if Washington maintains a steady approach towards its own rate increases.
A Santos-era tax reform helped produce an 8.3% rise in state earnings early in the year and this has contributed to a more positive debt situation. As the economy continues to pick up next year, the outlook should continue to improve if Duque makes a point of reining in spending. However, the effect of his proposed corporate taxes is not yet clear and any meaningful reduction in spending will require painful reforms to the country’s pension system.
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