Colombia: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: A4

Risk Assessment²

Economic growth supported by strong domestic demand
After suffering in 2009, economic activity rebounded in 2010. GDP growth will stay on track in 2011 thanks to the strength of domestic demand. Household consumption will remain dynamic, buoyed by the decline in prices for imported products associated with the peso appreciation. Private investment will grow strongly with a predilection for mine and oil exploitation and housing. Public investment will remain steady in sectors considered priority like infrastructure (roads and ports), social habitat, education, and innovation. Proceeds from the sale of 9.9% of the national oil company Ecopetrol (80% of national production and reserves) will finance the expansion of hydrocarbon production. Construction, distribution, and banking will be the main beneficiary sectors.

Public-sector financial consolidation difficult to achieve due to the lack of fiscal revenues
With the accommodating policy adopted in response to the crisis, public sector accounts have deteriorated. The consolidation process is expected to begin this year thanks especially to the growth of fiscal revenues associated with the development of hydrocarbon exploitation and the increase in taxes on wealth, alcohol, and gambling. The consolidation process will nonetheless be slow due to the need to continue spending on investments and to the ultimate impact of tax evasion on public financial resources, reluctance to raise taxes, and reductions in US military aid. Domestic actors hold two thirds of the public debt (45% of GDP).

A slight current account deficit readily financed by foreign investment
Exports will benefit from more buoyant demand in North America and from the normalization of trade relations with Venezuela and Ecuador. Although exports of ores (coal, gold), gemstones (emeralds), and agricultural products (coffee) will grow, sales abroad of manufactured and food products will again be constrained by the strength of the peso, which appreciated 13% against the dollar in 2010. Imports will be driven by domestic demand, especially for products where domestic production is limited as is the case for capital goods, automotives, electronics, and home appliances. Dividend repatriation by foreign companies will increase albeit offset by transfers from Colombian emigrants residing in the United States. Conversely, funds coming from Spain, the other country hosting emigrants, will stagnate at a low level. The overall result will be the persistence of a current account deficit, financed by foreign investors still attracted by the mining oil potential and increasingly by construction, food, mass distribution and banking. Meanwhile, the BIRD has regularly financed projects focused on agricultural, environmental, educational, or social development. Already endowed with large foreign-exchange reserves, Colombia moreover obtained an extension from the IMF on a $3.5 billion flexible credit line in May 2010.

Combating violence and pursuing socio-economic development are the priorities
Last year's elections kept the center-right coalition in power. The new president Juan Manuel Santos intends to focus on economic and social development while continuing to combat violence. He also seeks to redirect royalties from oil and mining to infrastructure, education and innovation. At this juncture, however, ultimate allocation of the funds has been left up to local governments. Similarly, he hopes to accelerate the pace of agrarian reform by restoring ownership to farmers of the substantial land area from which they were driven by armed groups and drug traffickers. Lack of an exhaustive land registry compounded by resistance from latifundia proponents and armed groups will complicate matters. As with corruption, the persistence of insecurity is a major drawback. Even weakened, the FARC and the ELN guerrilla movements still have the capacity for troublemaking. Despite undeniable progress, urban criminality is still very much a fact of life notably with inter-gang turf battles for control over the trafficking of drugs and arms. Assassinations, kidnappings, attacks and extortion have hardly disappeared. In this environment, productive domestic and foreign investment has remained below the country's potential.

Strengths

• Abundant natural resources (agricultural, mining)
• Institutional stability and policy of maintaining macroeconomic stability and strengthening the financial sector
• Diversification of exports in the framework of ATPDEA, the Andean Trade Promotion and Drug Eradication Act and various free trade agreements
• Extensive military aid from the United States focused on limiting drug production and trafficking and combating the guerrilla movement
• Oil resources under development
• High tourist potential
• Two seacoasts

Weaknesses

• Education, health, and infrastructure deficiencies
• Poverty afflicting nearly half the population amid severe income inequality
• Difficult security situation due to drug-related violence despite the weakening of FARC, Latin America's largest guerrilla movement
• High unemployment
• Occasionally strained relations with neighboring Venezuela, Ecuador, and Brazil
• Large informal sector (45% of economic activity)
• Sensitivity to raw material prices (30% of exports)

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