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The signing of a ceasefire agreement ending five decades of civil war is nothing short of monumental, but laying down the weapons will not fully resolve the issues and will most likely lead to fiscal repercussions with the economy already under pressure.
Trigger happy: weapons are being dismantled but the economy is still caught in the crosshairs
The consensus reached between the government and Farc rebels represents a political coup for president Juan Manuel Santos in his sixth year in office, by bringing to an end more than three years of difficult negotiations and 52 years of civil strife.
It is now up to the Supreme Court to decide whether to seek a popular referendum endorsing the deal, but the demobilization and disarmament of rebels is immediate.
This will enhance Colombia’s internal stability and it might also give the country a temporary lift, boosting business and consumer confidence.
However, dig down beneath the superficial gloss and Colombia is still facing huge economic and political problems weighing down its country risk rating.
On a score of 58.03 from a maximum 100 points, Colombia has become riskier on a 12-month basis in Euromoney’s country risk survey, contrasting with its longer-term trend improvement.
Saddling a raft of tier-three sovereigns (one of five categories of risk in Euromoney’s survey), Colombia is backpedalling, having slipped to 46th from 186 countries surveyed since climbing last year to 39th.
As an oil and nickel producer, among other principle exports, the economy is suffering from the commodity price collapse causing the peso to depreciate, and there are also negative effects of the El-Niño weather phenomenon.
Food prices are rising sharply, pushing year-on-year inflation up to 8.2% in May.
The central bank has responded with a three-percentage point rise in its policy interest rate, including a 25 basis points hike in June, to 7.5%, adding to the cost of borrowing.
The authorities are naturally keen to talk-up economic prospects with GDP growth coming in at 2.5% year-on-year in the first quarter. However, that is below the historical trend over the past decade, and the current-account deficit was $3.4 billion, or 5.6% of GDP in Q1, despite being better than expected.
Disconcertingly, the government finances indicator is one of the risk factors downgraded since last year with alarm bells pealing in response to Colombia receiving a precautionary credit line from the IMF, just in case it is needed.
Public debt has risen sharply in recent years from 38% of GDP in 2013 to 51% at the end of 2015, with the combined public-sector deficit widening from 0.9% of GDP to 2.8% during the same period. It is expected to climb further in 2016, above 3%, says the IMF.
Catalina Tobón, head of strategy at Skandia in Bogotá, certainly has concerns about fiscal sustainability.
“The fiscal accounts are very tight for the next five years,” she says. “Even with fiscal reform, we have no clarity how the government will finance the peace process and my concern is that other criminal bands will emerge after the peace process so defence expenditure will increase even further in some regions of the country, particularly in big cities.
“From the political side, the risk of impunity is higher right now. Colombians are very concerned about the possibility that narco-terrorists will have room in Congress, so corruption will increase even more.”
Colombia already scores just 3.9 out of 10 for corruption, one of the lowest-scoring risk factors comprising its total risk score. Its capital-access score is lower, too, compared with a year ago.
The peace deal is a good thing on one level, but political risks remain. Investors must also keep a careful watch on how the economy performs.
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