Colombia: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
Slowdown in activity in 2016
In 2016, activity is expected to suffer again from the weakness in commodity prices, oil prices in particular, and the slowdown in private consumption. The country's economic performances are effectively closely tied to hydrocarbon exports (nearly 50% of the country’s exports) and to a lesser extent mining and agricultural activity. The weak price of hydrocarbons, which generates about a third of state revenues, is likely to curtail public investment while household consumption is affected by the rising inflation and unemployment that affects their purchasing power.
Private investment primarily intended for the energy sector is expected to remain sluggish due to weak oil prices and rates hikes by the central bank for ten times, after the increase decided in September 2015. The increase in production capacity of the largest refinery of the country should however help to increase industrial production. The tourism sector is also expected to benefit from progress on the peace deal with the FARC. Inflation is expected to increase, particularly affected by rising food prices due to the drought that has gripped the country in the first half of this year, caused by El Nino.
Budget and current account deficits still large
The public deficit deepened in 2015, hit by the fall in oil prices, which represent almost a third of State income. This trend is set to continue in 2016 due to the persistent weak of hydrocarbon prices.
Despite an expected reduction in investment spending, the anticipated increase in current spending because of higher transfers to the regional governments, stipulated under the constitution, is likely to reduce the central government's room for maneuver. Colombia, with a reputation for fiscal rigor and an orthodox economic policy, is committed to respecting the law on budgetary equilibrium adopted in 2011, which provides for the return of the central government's structural deficit to 1% of GDP by 2022. The plan to abolish net worth tax and the financial transactions tax, which had been postponed to 2018-2019, could, therefore, be canceled. Regarding foreign trade, the current account deficit is expected to decline thanks to the reduction in imports of consumer goods, affected by the depreciation of the local currency. Imports of oil derivatives are also expected to reduce given the increase in production of the refinery Refica (in Cartagena). However, oil exports should remain low affected by both lower prices and lower US demand. Exports of minerals, especially coal are also affected by the weak prices.
Important advances in peace negotiations with the FARC
On June 2016, the Colombian government and the Revolutionary Armed Forces (FARC) took a further step in the peace process with the signing of a historic ceasefire and disarmament agreement of the rebellion. This is an important step in the negotiations initiated by President Santos since 2012. This agreement will be subject to approval of the people through a plebiscite scheduled for this fall.
The desire of both sides to put an end to the conflict bodes well and is a major step forward for Colombia. The Colombian authorities are talking of a peace deal being signed in March 2016 and believe that an improvement in the security climate could have a positive impact on the economy of somewhere between 1 and 2% of GDP. A positive outcome to the peace talks does not mean that Colombia will be free of its internal problems such as drug trafficking and crime. The guerrillas are only indirectly linked to drug trafficking and to the drug traffickers and emerging criminal bands (BACRIM), which are also involved in the trafficking of narcotics. In the long term, however, the peace deal should strengthen the institutional framework, help boost investment and the country's social development.