Colombia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Ports on two oceans
- Large population (almost 50 million people)
- Plentiful natural resources (coffee, oil and gas, coal, gold)
- Significant tourism potential
- Institutional stability
- Sensitivity to commodity price movement and the economic situation in the U.S.
- Relatively undiversified economy (in terms of manufacturing)
- Shortcomings in road and port infrastructures due to historically low levels of investment
- Problematic security situation because of drug trafficking and illegal mining, as the 2016 peace agreement is slowly implemented, particularly in the countryside
- Structural unemployment, poverty, and inequality; deficient educational and healthcare systems
A partial economic rebound for Colombia in 2021
Colombia registered its first COVID-19 case on 6 March 2020 and the government declared a lockdown on 25 March. Subsequently, the quarantine ended on 1 September 2020, but some restrictive distancing measures were maintained. Because of the containment measures and the collapse in external demand, and despite the stimulus implemented to smooth the negative shock on households and businesses, the country was still highly impacted by the virus. Moreover, the sharp drop in energy commodity prices also took its toll on GDP, since fuels and extractive industry products account for roughly 56% of total exports and 10% of GDP (according to figures of 2019). In 2021, the economy will partially rebound. Household consumption should be supported by the gradual improvement in the job market and low inflation. Furthermore, gross fixed investment is expected to benefit, to some extent, from the development plan launched by the government in August 2020 named Compromiso por Colombia, which aims at generating USD 30 billion (9% of 2019 GDP) in public and private investments (encompassing existing infrastructure, clean energy generation, and rural development), as well as creating one million jobs. Finally, external sales are likely to improve thanks to the recovery of global activity and relatively higher energy prices. Risks to the recovery scenario are related to the evolution of the COVID-19 pandemic, the behavior of oil prices, and the risk of a new round of social protests.
Current account deficit set to widen in 2021, fiscal deficit will remain elevated
The current account deficit narrowed in 2020, thanks to a reduced income deficit amid a strong contraction of profits linked to foreign companies operating in the country. On the other hand, the services and trade deficits remained quite stable, with the latter account reporting large drops in both imports and exports. Meanwhile, FDI registered a sharp slide and was probably not able to fully cover the current account deficit. In order to meet the external financing needs, the government issued bonds on international markets and mainly contracted long-term credits with foreign multilateral banks. As a reference, total external debt stood at 53.6% of GDP in July 2020, up from 42.7% of GDP in December 2019, with 29.6% of GDP public-owed and 23.9% private-owned (up from 22.8% and 19.9%, respectively). Moreover, the non-resident holding of local-currency government bonds is another risk factor (around USD 21.5 billion or 7.7% of GDP). As such, to improve the country´s external pillars, the government assured the expansion of the Flexible Credit Line with the IMF from roughly USD 11 billion to USD 17.3 billion. In September 2020, foreign exchange reserves stood at USD 56.9 billion (covering approximately 16 months of imports). In 2021, the current account deficit will widen, as domestic demand will resume (increasing imports and foreign companies´ profits), which should offset the rise in exports supported by higher external demand and relatively better oil prices. Conversely, the higher economic momentum will support a rebound in FDI, which will recover its role as a major current account financer. Regarding the fiscal accounts, the COVID-19’s negative shock led the Fiscal Rule Advisory Committee to suspend government deficit limits in 2020 and 2021, giving the authorities additional fiscal space to face the consequences of the crisis. That said, the fiscal balance should not strongly recede this year.
Elevated political risk amid weaker social indicators and episodes of violence
The popularity of President Ivan Duque fell to 31% in October 2020, from 52% in April 2020. This sharp drop was induced by the political wear and tear caused by the quarantine, the social consequences of the crisis, and the uptick in violence. After the mass protests in Q4 2019, social tensions regained momentum in September 2020 because of the death of a student in police custody. This led thousands of people to protest against police brutality and to demand institutional reform. Furthermore, a large number of social organizations and trade unions also resumed their protests in October 2020, condemning violence (namely the assassination of social leaders) as well as the government’s social and economic policies. Indeed, in early November 2020, thousands of former FARC guerrillas rallied in the country to protest against the murder of 236 ex-combatants since the 2016 peace agreement, who were victims of paramilitaries and criminal gangs. Meanwhile, the government condemned the mass killings, but, at the same time, downplayed their recent rise and defended security forces. Overall, the recent rise in social tensions is reducing the government’s political capital, blowing the chances of passing important reforms (including the tax reform).