Colombia: Economy And Politics

Colombia’s economy is now clearly showing signs of a cyclical upswing. Following a slump caused by a mix of lower oil prices, delayed macroeconomic adjustment to lower prices, political uncertainty associated with approval of a peace accord with FARC rebels, election related uncertainty and the natural consequences of a lame duck administration. Most of the headwinds are now turning into tail winds and the economy is beginning to respond positively.

In particular, retail sales, a classic cyclical indicator, rose much more than expected in January, when demand for goods rose at a more than solid pace of 6.2% year-over-year (versus 1.2%, expected). A cyclical upswing at this point is likely to be sustainable for a number of reasons.

First, the improving growth outlook in Europe and the greater emerging markets should ensure that global GDP growth rises as well, which in turn provides support for oil prices, which still matters a great deal at the margin to the performance of the Colombian economy. Secondly, inflows are returning to EM local markets of which Colombia will receive a share, in turn helping to ease domestic financial conditions and reigniting demand. Third, inflation has been slowing and the Colombian peso is cheap, so Colombia’s real effective exchange rate is competitive. This should help net exports and therefore growth. “Colombia looks set to elect a business friendly president later this year, which is likely to unleash a great deal of pent up investment,” Jan Dehn, head of research at Ashmore Group explained.

Market-friendly Duque Takes The Lead

Investment has been sluggish of late due to the lame duck status of the Santos Administration and more recent concerns that Gustavo Petro, a left-wing former mayor of Bogota, could win the upcoming presidential election. However, Petro-related fears were eased somewhat following parliamentary elections, which saw the business friendly centre-right parties gain greater influence in the Legislature.

Importantly, both the “Left” and “Right” within Colombian politics have held primaries and the clear winner in the centre-right presidential primary was Ivan Duque, a protégé of former President Alvaro Uribe. Duque’s policies are likely to be market friendly. The Left also held primaries, which saw Gustavo Petro lock up a convincing win, but crucially Duque received almost twice as many votes as Petro, which makes Duque the clear favorite to win the first round of the presidential election scheduled for May 27 2018.

The main uncertainty surrounding Duque is his close affiliation with Uribe, who has expressly stated his desire to dissolve the FARC peace accord. If Duque wins and if he decides to challenge the peace process then foreign investors will likely react badly, because they will see a dissolution of the peace accord as a regressive move, motivated more by personal grievances rather than the national interest.

Photo Credit: Reuters