In the second round for the presidential elections on 17 June, right-wing Ivan Duque won decisively and unsurprisingly against leftist former guerrilla Gustavo Petro. It was a highly polarised campaign from two candidates on the furthest extremes of the political spectrum. Duque will be sworn in on 7 August and is likely to enjoy a working majority in parliament thanks to the crucial backing of former president Álvaro Uribe whose Democratic Centre party controls an important block of congressional votes.
Impact on country risk
Economically, Duque is expected to continue Santos’ orthodox policies. He will inherit a moderate public debt of around 50% of GDP and is likely to continue fiscal consolidation (the fiscal deficit is estimated at -2.7% of GDP in 2018). Therefore, Duque’s promise to cut corporate tax rates might be tricky despite countermeasures such as clamping down on tax evasion and cutting public spending. Furthermore, Duque wants to slash red tape and reduce legal uncertainty for foreign investors looking to enter the oil and mining sectors. Indeed, the next president is likely to support these sectors but greater regulatory scrutiny of proposed and existing projects is likely. Moreover, Duque has pledged to return Colombia to an annual real GDP growth of 4.5% thanks to, among other things, infrastructure investments. Since 2015 – after the oil price dropped – the fourth-largest Latin American economy has seen rather sluggish GDP growth rates (real GDP growth of 2.7% is expected in 2018).
Duque faces numerous challenges. Colombia’s eastern neighbour Venezuela is imploding, triggering large migrant flows across the border. At home, coca cultivation and cocaine production is booming as organised crime gangs move into areas previously occupied by the Revolutionary Armed Forces of Colombia (FARC). And despite the FARC peace deal, parts of Colombia are still under the control of left-wing guerrillas. Furthermore, Duque is very critical of the FARC peace accord, which can trigger violent tensions. Nevertheless, a 2017 constitutional court ruling will prevent him from scrapping the peace deal but there is scope for modification of parts of it (e.g. via a referendum) while Duque can toughen the transitional justice system for former FARC members. Lastly, oil production is falling amid lower investment while Colombia’s debt-to-GDP ratio has risen to roughly 48% at the end of 2017 coming from 22% at the end of 2012.
The short-term political risk is in category 2/7 with a stable outlook. The country enjoys a relatively moderate level of external short-term debt while foreign exchange reserves are comfortable (covering around 7.5 months of imports in March 2018). The medium-/long-term political risk is in category 4/7. Colombia’s moderate rating reflects its relatively elevated external debt and debt service vis-à-vis current account receipts, the modest current account deficits, and the importance of oil and coal (together representing around a third of current account receipts) as sources of export revenues. The outlook on the medium-/long-term political risk is negative and depends on the materialisation of the positive macroeconomic forecasts in the coming years.
Analyst: Jolyn Debuysscher - J.Debuysscher@credendo.com