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
- Relatively undiversified economy (in terms of manufacturing)
- Shortcomings in road and port infrastructures due to historically low levels of investment and difficult topography
- Problematic security situation because of drug trafficking and illegal mining, as the 2016 peace agreement is implemented slowly, particularly in the countryside
- Structural unemployment, poverty, and inequality; deficient educational and healthcare systems
A strong economic rebound in 2021 despite temporary negative setbacks caused by social protests
After social protest movements and a peak of new COVID-19 cases reduced GDP in Q2 2021 compared to the previous quarter, activity has resumed in Q3 2021, as demonstrations have faded, and thanks to the still present stimuli measures and the ongoing economic reopening process. Regarding COVID-19, as of September 2021, 31.3% of the population was fully vaccinated and 48.7% had received at least one dose. Moreover, the increase in household consumption is the main driver of economic recovery. Retail sales rose by 36.7% year-on-year (YoY) in Q2 2021. Consumption has also been favoured by the gradual recovery of the labour market (14.4% of unemployed people in June 2021 vs. 20% in June 2020). Conversely, inflation has accelerated in recent months reaching an annual rate of 3.97% in July 2021 (above the centre of the central bank´s 3% target), due to higher food and energy prices, as well as goods shortages caused by temporary protest barrages. As a response, the monetary authorities could start tightening the policy rate in H2 2021, from the current 1.75% per year rate. Recovering commodity prices and global activity have favoured exports. The total amount of exports from January to June 2021 increased by 19% YoY but was still 11% below the same period in 2019 (due to the slow recovery of oil and coal production). Finally, gross fixed investment is expected to benefit, to some extent, from the development plan launched by the government in August 2020 named Compromiso for 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). However, recent social protests and the proximity to the May 2022 presidential elections could cause some investment postponements.
Widening current account deficit and still high budget deficit
The current account deficit will widen in 2021, mainly driven by a faster recovery of imports (in part due to the peso depreciation since the beginning of the year) compared to exports (recovery in commodity exports like coal and oil, although benefiting from higher prices, is subdued) and a deterioration in the income deficit (due to higher foreign companies´ profits repatriation). Concomitantly, FDI should improve thanks to stronger economic momentum, but will still not be enough to fully cover the current account shortfall. Foreign currency reserves stood at USD 58.9 billion in July 2021 (covering approximately 12 months of imports). Moreover, to strengthen the country's external foundations, the government increased the IMF Flexible Credit Line from about USD 11 billion to USD 17.3 billion (USD 5.4 billion withdrawn in December 2020). While total external debt has slightly decreased as a share of GDP in early 2021 (51.7% in May 2021, of which 30.2% owed by the public sector and 21.5% by the private sector) compared to end 2020 (due to a higher denominator), it remains above the pre-crisis December 2019 level (42.7%). Regarding fiscal accounts, the negative shock inflicted by COVID-19 led the Advisory Committee on Fiscal Rules to suspend the limits for the public deficit in 2020 and 2021, thus giving the authorities additional fiscal room for manoeuvre. S&P and Fitch downgraded Colombia’s sovereign rating to junk (from BBB- to BB+) in May 2021 and July 2021, respectively, following the government´s failure to advance with a broader tax reform that would help to curb rising public debt, while allowing to increase spending on social protection, health, education, infrastructure, etc.
Political risk remains high as the May 2022 presidential election approaches
The popularity of right-wing President Ivan Duque (Centro Democratico party) fell to 16% in June 2021, from 31% in October 2020. This sharp drop was induced by the political wear and tear caused by the proposed tax reform, the social consequences of the crisis and the rise in police violence. Widespread violent protests were triggered on 28 April 2021, after the announcement of a tax reform aimed at increasing the VAT on some basic goods and broadening the personal income tax base. Although President Duque withdrew the proposal a few days after the unrest started, demonstrations only lost strength in June 2021. However, after a month's pause and talks between the Strike Committee and the government, Colombians took to the streets again on 20 July, when a reviewed USD 3.95 billion tax reform (35% less than the April version) was sent to the Congress (albeit the new bill will not affect most taxpayers). On the same day, the National Strike Committee also presented 10 bills on addressing the social and economic crisis. On 26 August, a new protest took place to support these 10 bills. The political climate will thus remain high in the run-up to the May 2022 presidential election. Initial polls suggest that the left-wing previous Mayor of Bogota, Gustavo Petro, who lost the runoff to Duque in the previous election, is strongly competitive for next year´s presidential race.