Colombia’s new president brings economic continuity – but could risk peace with hard line on rebels

The business community has welcomed Iván Duque’s election as new president of Colombia as an element of continuity for the relatively business-friendly policies of his predecessor, Juan Manuel Santos, but the future of the peace agreement with the Revolutionary Armed Forces of Colombia (FARC) rebel group now hangs in the balance and with it, social harmony across the country.

“For the economy, it’s fantastic news,” Sergio Guzman, Colombia lead analyst for consultancy Control Risks, tells fDi Magazine. “Duque is not [runner-up Gustavo] Petro, and he promised to cut fiscal spending, reduce taxes for large companies, [and has] already committed to continuing Santos’s infrastructure programme and investment in the extractive industries. But his election makes an already fragile peace agreement even more fragile.”

As largely expected, the conservative Mr Duque got elected with 54% of the votes in the second round of the elections held on June 17, while opponent and political nemesis Mr Petro got no more than 42% of the votes.

Bringing certainty

Mr Duque’s performance swept away any uncertainty over the continuity of Colombia’s pro-business economic agenda (the Organisation for Economic Cooperation and Development agreed to the country’s membership in May). Had Mr Petro – typically seen by Colombian liberal environments as a threat to the status quo for his leftist agenda and his membership in the 1980s of a revolutionary group – clinched the presidency, many believe this would have been at risk.

“Duque guarantees an element of policy continuity,” says Alberto Ramos, head of Latin America Economic Research at Goldman Sachs. “The main risk was that policy direction would be in jeopardy, given that Duque and Petro have very different views.”

Mr Duque has been elected on a platform that promises to stimulate the economy by cutting fiscal pressure on businesses without compromising the fiscal consolidation programme initiated by Mr Santos, and framed in the so-called fiscal rule. This sets targeted fiscal deficits at 3.1% and 2.4% of gross domestic product for 2018 and 2019 respectively, from 3.6% in 2017. Mr Duque is betting that lower fiscal pressure will boost domestic and foreign investment.

Foreign direct investment grew to $14.5bn in 2017, according to central bank figures – up by 4.8% from a year earlier, and on its way back to the record levels of over $16bn touched at the height of the 2013-14 commodity boom (although investment concentrated in the extractive sectors).

“The next administration will have to tackle issues of creating new opportunities for investment,” says Samar Maziad, a vice-president and senior analyst at credit rating agency Moody’s. “In the past there has been a lot of investment going into the commodity sectors. That’s picking up again, but it’s important to stimulate FDI in other areas. One would be implementing the peace agreement to stimulate investment in other areas.”

Controversial stance

Yet a key pillar of Mr Duque’s platform entails major changes to the contentious peace agreement sealed between Mr Santos and FARC. Among other things, he is proposing to renegotiate the terms of civil life rehabilitation and the right to hold seats in the senate for former FARC members.

Mr Duque’s position on the agreement – which mirrors that of his most valuable political ally, former president and congressman Álvaro Uribe – and his tough approach to peace talks with other rebel groups such as the National Liberation Army (ELN) risk polarising the population further – and perhaps even affecting the feasibility of his economic agenda in certain areas.

“Likely social unrest is going to increase, as well as social discontent with the extractive industries because the peace agreement gave many people a feeling that they could take part in the public governance at a local level, but Duque now sees things differently. Extractive industries still account for the bulk of Colombian exports, and they will be exposed to any change in social risk,” said Mr Guzman.

In the past, rebel groups targeted major infrastructure belonging to the oil and gas and mining industries. In 2015, for example, FARC blew up a 350km trans-Andean oil pipeline, causing an environmental catastrophe and tens of millions of dollars of losses for state oil company EcoPetrol.

Elevated risks

“The implementation of the peace agreement with FARC may now become a source of uncertainty,” credit rating agency Fitch wrote after the general election. “An augmented uncertainties as the deal implementation might increase political polarisation, impact the confidence of investors and, eventually, create risks for economic growth.”

Yet Mr Duque’s approach may yet pay off without major setbacks. “I don’t think the situation will reach a point where he continues to abandon the implementation of the peace deal to a point where that will generate significant social strife and undermine the economy of policy implementation,” says Mr Ramos at Goldman Sachs.

Colombia also faces a growing migrant crisis at the border with Venezuela, and the cultivation of cocaine and drug traffic are reportedly out of control since the demobilisation of FARC, together with the rise of a myriad of small rebel groups that are increasingly devoted the drugs trade. The recovery of oil prices may work to the benefit of the new president, but he has a long road ahead to secure peace and economic growth for the country.