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
- Cautious economic policies
- Institutional stability
- Healthy banking system
- Sensitivity to raw material price movement and US economic situation
- Shortcomings in road and port infrastructures
- Problematic security situation due to drug trafficking
- Relatively undiversified economy
- Size of the informal sector (60% of jobs)
- Shortages of skilled labour and poor productivity
- Cumbersome legislative, judicial and administrative systems; corruption
- Structural unemployment, poverty and inequality, deficient educational and health care systems
Upturn in Growth in 2018 but Remaining Below Potential
Following two years of weak growth, economic activity is likely to pick up again in 2018. The slowing of inflation, expected to fall below the target level set by the Central Bank (2-4%), should provide the bank with more room to continue its relaxation of monetary policy. This will help stimulate domestic demand – and household consumption in particular – thanks to low interest rates. An increase in public infrastructure investments is also expected to further add to growth. Under its Agenda 4G transport infrastructure program, the country is working towards rectifying its deficiencies in this area. Although behind schedule, these projects will help open up certain regions, particularly rural areas, taking advantage of the recent peace treaty signed with the guerrilla organization Revolutionary Armed Forces of Colombia—People’s Army (FARC-EP). These investments should benefit the construction sector, alongside the vitality seen in the agricultural sector that is being stimulated by rising coffee prices and favorable weather conditions. The financial sector is also expected to do well, bolstered by low interest rates. The trade balance is not expected to make any contribution to growth as the increase in coffee (volume and price) and oil (price) exports will not compensate for the increase in imports (strength of domestic demand). However, despite these improvements, the economy is still growing at a rate below its potential (currently estimated by the government at 3.9%), held back by low levels of confidence among investors and consumers, despite a slight improvement since the peace treaty.
A Strict Budget Policy Generating Revenues
The 2016 tax reforms (VAT raised from 16 to 19%, extension of the tax base, and simplification of the tax regime) are beginning to bear fruit, resulting in increased receipts and a reduction in the deficit. The increased rate of growth in 2018 should make it possible to end the countercyclical fiscal measures implemented by the government to stimulate the economy. The central bank is likely to further relax its monetary policy following the surprise reduction of its key lending rate in October 2017 to 5%, made possible thanks to slowing inflation. Another cut to rates is expected in 2018, even if the reduction in the differential with US Federal Reserve key rates is likely to limit the scope of this. This same reduction in the differential rate, together with the degree of uncertainty surrounding the congressional and presidential elections scheduled for March and May 2018 respectively, is liable to drive the Colombian peso down. This is likely to limit any appreciation of the peso resulting from relative increases in oil prices.
In terms of the external account, the price of oil, which remains unfavorable, will continue as a drag on the balance of trade in goods and services (-4.7% of GDP in 2016) faced with rising imports (strength of domestic demand). The increase in remittances from expatriate workers, boosted by the relatively positive conditions in the United States, should help hold the current account deficit steady. This deficit is mostly being financed by foreign direct investments (3.2% of GDP in 2016) and other portfolio investments (1.6% of GDP).
Uncertainty in the Political Situation
The political situation is dominated by the disagreements arising from the peace treaty with FARC-EP, approved at the end of 2016. The legislative measures needed for its application have been held up in Congress, with the mutiny of former President Álvaro Uribe, who was opposed to the treaty. The scope for action by President Juan Manuel Santos is severely restricted as he approaches the end of his term of office in August 2018. The next presidential elections will be extremely fragmented (26 possible candidates). At the time of writing, Sergio Fajardo (center-left, former Governor of Antoquia and Mayor of Medellin, running as an independent) and Vargas Lleras (Cambio Radical, Vice-President until March 2017) are leading the polls. The newly created FARC (Fuerza Alternativa Revolucionaria del Comun, a successor to the FARC-EP) party, led by Rodrigo Londoño, has published its list of candidates for the congressional elections (March 2018) for the seats allocated to it under the peace treaty. This announcement stirred up much debate as a considerable number of the candidates were former guerrilla members awaiting the outcome of legal action. In addition, negotiations with the National Liberation Army (ELN), the other guerrilla organization, are ongoing following the implementation of a ceasefire last September – another area of uncertainty.
In terms of the business climate, there are many outstanding corruption cases, including the most recent ones of Francisco Ricuarte (Head of the Supreme Court between 2008 and 2012) and Bernardo “Ñoño” Elías (majority Senator). At the same time, security threats associated with drug trafficking and organized criminal gangs, are also undermining the business climate.