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. - Source: Coface

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.

Strengths

  • Ports on two oceans
  • Large population (almost 50 million)
  • Plentiful natural resources (coffee, oil and gas, coal, gold)
  • Significant tourism potential
  • Cautious economic policies reinforced by the OECD membership
  • Institutional stability
  • Healthy banking system

Weaknesses

  • Sensitivity to raw material price movement and the 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 labor and poor productivity
  • Cumbersome legislative, judicial and administrative systems; corruption
  • Structural unemployment, poverty and inequality, deficient educational and health care systems

Current Trends

Upturn in Growth in 2018 but Remaining Below Potential

Following two years of weak growth, economic activity has been picking up again in 2018. The stabilized inflation, fallen below the target level set by the central bank (2-4%), should enable the bank to maintain its rather expansive monetary policy (key lending rate at 4.25% at end July 2018). This should help to stimulate household consumption and corporate investment, both of which are also benefiting from reduced political uncertainties linked to elections, and, for the latter, from the rise in oil prices. An increase in public expenditure – by municipalities and governorates in particular – is also expected to further add to growth. However, despite the extensive road construction programme using the public-private partnership "Cuarta Generación de Concesiones viales" (2012-2035) aimed at catching up on transport infrastructure, and the latest public investment-enhancing programme Colombia Repunta (2017-2018), construction activity is struggling to get back on track. This is weighing on construction materials. Food, automotive, and household chemical products are benefiting from vivid consumption. Services, such as retail trade, transport, accommodation, and restoration are also doing well. 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). Moreover, the economy is still growing at a rate below its potential (estimated by the IMF at 3%), still far from its pre-2015 performances.

Public and External Accounts that Benefit from Rising Oil Prices

The 2016 tax reforms (VAT raised from 16% to 19%, extension of the tax base, simplification of the tax regime) are beginning to bear fruit, resulting in increased receipts and a reduction in the deficit. This is compounded by the increased rate of growth in 2018 and higher oil revenues (0.6% of GDP). From 2019 onwards, the deficit reduction, combined with the economic recovery and stabilization of the interest burden (2.9% of GDP and 16% of public expenditure in 2018), should make it possible to stop the increase in the public debt.

In terms of the external account, both the recovery in oil prices and the increase in other exports, as well as tourism, should further reduce the trade deficit in goods and services (2.8% of GDP in 2017), despite the rise in imports of capital and consumer goods. The increase in remittances from expatriate workers (2.1% of GDP), boosted by the relatively positive conditions in the United States, will be balanced by the rise in repatriated dividends by foreign companies (2.6%) driven by the increase in their profits. The current account deficit should, therefore, be reduced. It will remain financed by foreign direct investments (3.2% of GDP in 2017), which continue to increase foreign exchange reserves (currently more than one year of imports and 2.5 times the short-term external debt). Total external debt represents 40% of GDP, 15% of which is its public share. This relatively favorable situation, reinforced in May 2018 by the two-year renewal of the IMF's precautionary line of credit (USD 11.4 billion), has largely contributed to the Colombian peso's resistance against the US dollar since the beginning of 2018.

Problematic Implementation of the Peace Agreement and its Transitional Justice

Ivan Duque of the Centro Democratico party (center-right) won the second round of the presidential elections in June 2018 (54% of the vote) against left-wing candidate Gustavo Petro (42%), a former guerrilla. Although his party does not have an absolute majority, Mr. Duque will be able to command right-wing majorities in both houses of Congress when his party takes office on the 7th of August. Like his predecessor, he will have to deal with the arrival of Venezuelan refugees (already more than a million in border regions), the revitalization of the economy and fiscal consolidation, and the implementation of the peace agreement with the FARC, adopted by Congress in late 2016. During his campaign, Mr Duque pledged to change the peace agreement by increasing reparations for victims, by demanding that FARC leaders convicted by the Jurisdicciá½¹n Especial para la Paz (JEP) be ineligible to the ten parliamentary seats reserved for candidates of the new FARC party (Fuerza Alternativa Revolucionaria del Comun), and by suppressing the amnesty for drug traffic for political purposes. However, any such changes would likely be subject to further negotiation, voting, and approval by the Constitutional Court, which must already rule on the law governing the JEP. For its part, the opposing party complains of delays in the social reintegration of combatants, the lack of redistribution of land, the lack of redesign of the rural cadastre and multiple murders of its local officials. In addition, armed groups are violently trying to regain control of the drug traffic, which has surged after being abandoned by the FARC. This could lead the Colombian authorities (under pressure from the United States) to resume aerial eradication with glyphosate, at the risk of alienating local communities. Furthermore, a thousand FARC dissidents have reportedly not surrendered their weapons and are suspected of committing further crimes as well. Negotiations with the ELN, the other guerrilla movement that is carrying out violent actions, remain laborious.

Source:

Coface (07/2018)
Colombia