Colombia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Ports on two oceans
- Large population (almost 50 million)
- Plentiful natural resources (coffee, oil and gas, coal, gold)
- Significant tourism potential
- Institutional stability
- Sensitivity to raw material price movement; the US economic situation
- Relatively undiversified economy (in terms of manufacturing)
- Shortcomings in road and port infrastructures, due to historically low levels of investment
- Problematic security situation due to drug trafficking and illegal mining, as the 2016 peace agreement is slowly implemented, particularly on the countryside
- Structural unemployment, poverty and inequality; deficient educational and health care systems
Economic momentum should only marginally decelerate
Although economic activity should remain sound in 2020, some domestic demand deceleration is expected. Household consumption is likely to slow down, driven by the job market’s weakness signals and an estimated deceleration in credit growth. Moreover, gross fixed investments may be undermined by a tight public budget and expected lower average oil prices. On the other hand, the net external trade contribution should continue to negatively impact GDP, as the decelerating global activity affects Colombia exports through lower demand and weak commodity international prices. A stronger than expected deceleration is the US, the main market for Colombian exports, and a new round of social protests represent a downside risk. Finally, yet importantly, the large twin deficits limit policymakers’ ability to implement counter-cyclical measures.
Current account deficit to remain wide
Colombia’s large twin deficits (in current and fiscal accounts) make it vulnerable to a global downturn. Current account deficit widened in 2019, due to a larger trade deficit in a context of lower fuel and extractive exports and higher imports, a tendency that should not strongly move in in 2020. Alongside, foreign direct investments are not enough to fully cover the external deficit. Non-resident holdings of local-currency government bonds are another risk factor (roughly 23 bi USD or 7% of GDP). Flows into this asset class were one of the main financing sources of current account deficits in the last few years. Moreover, external debt stands at roughly 42.7% of GDP (54% is owned by the public sector and 46% by the private sector). As such, to improve the country´s external pillars, central bank solidified its international reserves between September 2018 and May 2019. The renewal of the USD 11 billion IMF Flexible Credit Line in May 2019 provides for an additional liquidity cushion (covers around 2.6 months of imports).
The government generally executes a prudent fiscal policy on the back of the fiscal rule introduced in 2011, which aims to curb the central government deficit to a maximum of 1% of GDP by 2022. Nevertheless, the rule was recently suspended due to the necessary expenditures with Venezuelan refugees (generating concerns that it could prompt to a lax in fiscal discipline in subsequent years). IMF estimates the net fiscal costs associated with the migration crisis to peak at 0.4% of GDP by 2020, before gradually retreating over the next five years with the progressive integration of migrants into the economy. Moreover, the 2020 budget starts from very optimistic assumptions (estimates GDP to grow by 4% in 2020), meaning that meeting the 2.2% of GDP deficit target of the central government for 2020 will require some revenue and/or expenditure adjustment. The budget also includes asset sales for this year, but there may be execution risks associated with such sales.
Rising political challenges to be dealt with low political support
President Ivan Duque, from the conservative right wing Democratic Center party (DC), has struggled to pass reforms in the congress due to the minority position of his party in the legislature. Indeed, Mr. Duque has a weak approval rating. In late November 2019, demonstrations erupted across country, based on wide-ranging factors. People protested against the government failure to comply with promised higher resources for public education, the weak implementation of the FARC peace agreement, the labor and pension reforms (not yet presented), the tax reform and the killing of social leaders. Besides, the resignation in early November of the Defence Minister, after being accused of hiding the death of eight minors in a military bombing against dissident guerrillas, has also contributed to the unrest. In reaction, Duque announced a “great national dialogue” on social issues, but the self-appointed union-led National Strike Committee has stuck to its demands for one-on-one talks.
In late December 2019, the Congress approved a modified version of the 2018 tax reform, which the Constitutional Court had ruled as failing to meet part of the required procedural steps. The approved bill includes cutting the corporate tax rate by one percentage point each year, from 33 percent to 30 percent in 2022, a surcharge on profits from the financial sector, electronic billing implementation and higher taxes on beer and carbonated soft drinks. Nevertheless, three modifications made from the original 2018 bill could jeopardize the fiscal account sustainability in the next few years. These are the creation of three days each year in which no VAT will be charged, a VAT refund for the poorest 20% of the population (encompassing roughly 2.8 million citizens) and reduced healthcare contributions for some pensioners (gradual reduction from 12% to 4% in 2021).