Colombia mulls way forward as peace deal fails

Colombia has never been closer to ending the bloody conflict with the Revolutionary Armed Forces of Colombia (better known as Farc), which has weighed on the country’s development for the past 52 years. However, a peace agreement struck by the government of president Manuel Santos and the Farc leadership in late August failed to clear the final hurdle, a popular referendum on October 2 to uphold or reject the deal.

The ‘No’ campaign – supported, among others, by former president Alvaro Uribe – won with a very slim majority of voters (50.2%) although turnout was just 37.44%. The result jeopardises four years of negotiations and turns upside down Mr Santos’s strategy for his final two years in office, including a key fiscal reform.

The setback for the president comes just as Colombia struggles to come to terms with the end of the commodity boom that made its fortune in recent years, but also reiterated the country’s dependence on its generous endowment of natural resources.

Referendum setback

The government had repeatedly hailed the Farc agreement as the beginning of a new, bright chapter in Colombia’s troubled modern history, and peace was expected to reap strong economic dividends and add new momentum to the country’s waning economic cycle.

“I believe the initial impact is more likely going to be in the order of a 1% additional growth,” finance minister Mauricio Cárdenas told fDi Magazine in early September. The referendum result is now likely to produce the opposite effect. The Colombian peso depreciated by more than 3% as soon as the results came in, adding pressure to an already deteriorating economic cycle.

In August, the government revised downwards its growth estimates for 2016 to 2.5%, from 3.1% in 2015, which represents the lowest rate since 2009 as falling oil and mining prices are phasing out the main engine of growth of the Colombian economy. IMF expects the Colombian economy to slow to 2.1% growth in 2016, according to its latest estimates published in the World Economic Outlook in October.

“The referendum result, combined with the slowdown in the economy this year, may complicate the government’s strategy of outlining its fiscal adjustment plans,” credit rating agency Standard & Poor’s said following the referendum. “Such plans, which remain to be specified, and the prospect of their approval in Congress, will be important for our assessment of Colombia’s sovereign creditworthiness.”

The government was betting on a successful referendum to gain the political space for manoeuvre that it needed to pass a fiscal reform to cover an estimated 24,000bn pesos ($8.1bn) deficit, mainly caused by dwindling fiscal revenues from the oil and mining sectors. Although the details are still being worked out, the reform is also intended to redistribute fiscal pressure more evenly between businesses and individuals in order to free up money for investment and development away from the natural resources sector.

Need to diversify

“We have a clear fiscal challenge and the government has already adjusted by tightening the belt on fiscal spending and investment,” says Felipe Jaramillo, head of national investment promotion agency ProColombia. “Any crisis brings along new opportunities. This one forced us to speed up the diversification process of the national economy.”

Colombia has historically been highly dependent on the development and export of its natural resources. Foreign and local capital initially focused on agriculture productions such as bananas, then moved on to oil and mining as soon as local, commercially viable deposits came to light. However, foreign investment inflows are now gradually moving away from the extractive sectors, adding substance to the government’s long-publicised diversification efforts.

Total foreign investment into non-oil sectors reached more than $7bn in the first half of 2016, making up almost 85% of total inflows as investments into the oil sector did not go beyond $1.28bn, according to figures from the Bank of the Republic, Colombia’s central bank.

The sale of the government majority stake in power generator Isagen to a group led by Canadian Brookfield Asset Management for 6500bn pesos helped to shore up figures in non-oil sectors, but investment inflows also remained robust in the manufacturing and services sector, continuing a trend that has emerged in the past few years.

On the other hand, investment into Colombian greenfield projects has been hit harder by the country’s challenging economic environment. The number of announced greenfield projects fell to 36 in the first nine months of 2016, from 52 a year earlier, according to greenfield investment monitor fDi Markets. In terms of capital expenditure, committed investment fell to $631m in the period, from $1.5bn in the same period of 2015.

Low global footprint

The government is also looking to deepen and diversify the international footprint of Colombian companies. Because of the traditional dominance of large corporations focusing on extractive sectors, combined with growing opportunities in the domestic market, only 0.3% of Colombian companies export their products or services on a systematic basis.

This puts the country behind its Latin American peers and way below the developed country average of 9%, as measured by Confecameras, an association that represents Colombia's chambers of commerce. And most of the country’s traditional export channels lead to neighbouring markets such as Brazil, Ecuador and Venezuela, which are all economies that have been highly compromised by the commodity slump and internal political troubles.

“We have to make the most of our trade agreements working with businesses across the country to achieve better productivity and innovation,” trade, industry and tourism minister María Claudia Lacouture said during an investment forum organised by local investment promotion agency Invest in Bogotá in September.

Under Mr Santos's presidency, Colombia signed a number of free-trade agreement (FTAs) with key trade partners such as the US, the EU and South Korea, and is currently negotiating new FTAs with other major economies such as Japan and Turkey. The trade ministry launched a plan for productive development earlier in 2016 to identify the products with high value-added potential and thus support their development, with a view to boosting non-oil and non-mining exports to $30bn by 2018.

“Colombian companies have to join the global value chain,” says Mr Jaramillo. “We need to export products with higher value added to become less vulnerable to the ebbs and flows of the commodity market.” At the same time, the peace process was meant to end Colombia’s vulnerability to the uncertain and costly conflict with Farc.

Both parties have now reiterated their commitment to stick to the ceasefire, continue the peace process and devise an updated proposal to submit to a new referendum. However, Mr Santos’s political status appears highly compromised and the feasibility of his original agenda, including the peace agreement as well as the fiscal reform, suddenly hangs in the balance.