Country Report Colombia
Colombia is moving closer to achieving peace with the central FARC-command, after president Santos won the second round of the presidential elections. Meanwhile, the economy is booming, presenting both challenges and opportunities.
Strengths (+) and weaknesses (-)
(+) Strong macroeconomic track record
Colombia has been able to deal well with the large political and economic shocks it has been exposed to. Since 2000, the country has taken an orthodox policy route, resulting in decreasing (public) deficit and debt levels.
(-) Dependence on commodity exports
The level of diversification of the Colombian economy is relatively low and the country is dependent on the export of a narrow range of commodities, which makes the country vulnerable to commodity price fluctuations.
(-) Presence of guerrilla movements and criminal groups
Guerrilla movements and criminal groups continue to control some parts of the country. This results in security risks.
(-) Inadequate provision of infrastructure
The level of infrastructure development is relatively low, which constrains the growth potential of the economy.
1. Elections results are in favour of the peace process
Two major elections were held this year, first the congressional elections in March, followed by the tightly fought presidential elections in June. The incumbent, centre-right president Juan Manuel Santos managed to garner sufficient support in congress, while holding on to the presidency. Santos’ victory is very much a positive sign for the peace process initiated by him in October 2012 with the FARC and ELN movements.
Four years ago, Santos succeeded the immensely popular president Uribe, who had backed Santos in those elections. This time around, Uribe backed the winner of the first round in the presidential elections, right-wing politician Óscar Iván Zuluaga, as he did not agree with the peace process as set up by Santos, with much of the criticism focusing on the amnesty that is to be given to the FARC fighters. Even though the amnesty is widely criticised, Santos was able to pull off a victory after attracting support from the left, who back the peace process but do not like the stringent macroeconomic policies of the Santos government. All-in-all, whereas the peace process is backed by a majority in congress, the government probably has to do concessions on economic policy to get the leftist votes.
What should be kept in mind is that FARC is not the centrally led left-wing guerrilla movement it was at its inception. For one, FARC has entered into criminal activities such as drug trafficking, extortion and kidnapping, which have all been very lucrative to the organisation. Second, the Uribe government was highly effective in fighting FARC to the point that is was no longer a nationwide security threat, damaging the control lines within FARC. Finally, the authority of the central command within FARC is increasingly being challenged. In several regions attacks from several FARC “Fronts” have been condemned by the central command. In case the peace process with FARC is successful, the government will still need to deal with scattered “Fronts” fighting their ideological and criminal battles.
2. Good economic environment for policy making
The first quarter growth number surprised on the upside, with growth moving to 6.4% y-o-y. Next to that, inflation has remained below 3%, although it has been moving slowly upward. As the central bank estimates that the economy is etching closer to reaching full capacity (supply side), the still high consumer loan growth is no longer on a downward trend (demand side) and international economy activity is again gaining pace (demand side), it worries about the effects on inflation. Therefore, over the past three months, the benchmark interest rate has been raised gradually from 3.25% to 4% in June.
For the government, there is also an upside. Given high growth numbers, relatively low inflation and a reducing rate of unemployment, the fiscal position is improving. According to current estimates, the fiscal deficit will remain low at close to 1% of GDP resulting in a continuous decline of the public debt to 40% of GDP. This allows the government to address several social issues that have come to the fore in the last 12 months (see below). Furthermore, given the likely necessity to work with the left-leaning parties in congress, the possibility to initiate social investments will be helpful to the peace process as well.
Not only left-leaning parties will ask the government for more attention to the social issues in the country, several pressure groups have also staked their claim recently. In August 2013, farmers and artisanal miners paralysed the country in a long strike. Also, indigenous groups have fought the government over mining concessions granted in their lands. Attacks with exploding devices on oil pipelines have cost the national oil company an estimated USD 220m, as the local tribe in the affected area did not allow for repairs to be made. The explosives have likely been placed by one of the FARC Fronts.
The Santos government will need to convert the macroeconomic success into social success. It is already investing heavily in the country’s infrastructure, creating jobs and dealing with one of the main impediments to growth. Nonetheless, it will need to do more in terms of investing in the supply side of the economy in order to facilitate further growth, also in the peripheral areas of the country. This will have the side-benefit of helping the economy to diversify, and lift the long-term growth perspectives of a country that is – apparently – currently reaching its short-term output growth ceiling.
Colombia’s exports primarily consist of energy products and the country thus has a relatively small economic base. Oil (product) exports account for more than 50% of exports and oil revenues account for 18% of the revenues of the central government. In early 2013, a structural fiscal rule has been introduced, which limits the structural deficit to 2% of GDP. Colombia has run continuously current account deficits of roughly 3% of GDP. In particular the income deficit is sizeable. However, in recent years the current account deficit has been more than covered by large inflows of FDI. These large inflows, which are partially explained by investment in the extractive sector, are likely to continue in the coming years. The FARC and ELN guerrilla movements and criminal groups continue to pose security risks in Colombia. However, the level of violence is much lower than in the nineties and the guerrilla movements no longer pose a systemic risk. Even by Latin American standards, inequality remains very high in Colombia and the majority of the labour force works in the informal sector. Furthermore, Colombia’s infrastructure is underdeveloped. However, democracy is well-entrenched in Colombia and the quality of its macroeconomic institutions is relatively good. The level of dollarization in Colombia is very low, which allows some flexibility in exchange and monetary policy.