Colombia: Peace deal with the FARC at risk as Iván Duque is elected

20 August 2018

Iván Duque won Colombia’s presidential election and will take office in August 2018. While Colombia’s power sector will benefit from Duque’s pro-business policies, his pledge to amend the peace deal with the Fuerzas Armadas Revolucionarias de Colombia (FARC) increases the risk that demobilized guerrillas will return to arms.

Security Environment

Iván Duque, the candidate for the right-wing Centro Demócratico party, was elected president in June 2018 following a second round run-off against leftist opponent Gustavo Petro. Duque campaigned as a critic of the November 2016 peace deal that ended Colombia’s 52-year conflict with the FARC rebels. While Duque will only seek to revisit aspects of the deal that he considers too lenient and a return to open conflict is unlikely, his proposals increase the risk that demobilized guerrillas will return to arms.

Duque’s government is also likely to adopt a hard-line approach in talks with the Ejército de Liberación Nacional (ELN), the country’s remaining rebel group. As a result, a peace agreement with the ELN remains unlikely and the risk of terrorism may rise. After negotiations between the government and the rebels stalled in April 2018, a suspected ELN attack on an electrical tower in southwest Colombia reportedly left over 250,000 people without electricity.

Assets at particular risk of ELN attacks include oil pipelines and electricity distribution towers in Antioquia, Arauca, Norte de Santander and Nariño provinces. Colombia’s armed groups, including the Clan del Golfo, have seized territory formerly controlled by the FARC and pose a significant kidnap risk. In January 2018, ELN rebels in Saravena kidnapped an oil worker employed by Colombia’s state oil company, Ecopetrol; the individual is reportedly still being held by the rebel group.

Trading Environment

Duque’s election is likely to ensure continuity with the orthodox economic policies of his predecessor, Juan Manuel Santos. Colombia’s economy is beginning to recover as oil revenues rise, and real GDP growth is forecasted to increase from 1.8% last year to 2.6% in 2018. Higher oil and mining output is likely to reduce Colombia’s current account deficit to 2.6% of GDP in 2018, and government debt-to-GDP is forecasted to reach 48.5% in 2018 before falling slightly to 47.6% in 2019. Colombia’s external position is supported by large foreign currency reserves of USD 45.4 billion and the fact that around two-thirds of government debt is denominated in local currency.

Duque has promised to cut regulation and improve the competiveness of the extractives industry. His proposal to cut corporation tax from 33% to 21.9% is also likely to attract investment. However, if approved, the proposed tax cuts will place pressure on Colombia’s budget deficit. The pace of fiscal consolidation has slowed and Colombia relaxed its medium-term targets in June 2018. This year’s fiscal target of 3.1% of GDP remains unaltered and is likely to be met. However, Colombia’s original aim of reducing the fiscal deficit to 1.0% of GDP by 2022 will now not be achieved until 2027.

Investment Environment

The outlook for the power sector is broadly positive. Net power consumption is forecasted to increase from an estimated 61.7 TWh in 2017 to 67.9 TWh in 2020. Due to the dominance of drought-susceptible hydropower, there are opportunities for energy sector diversification. Coal-fired power generation is forecasted to grow by an average of 5% per year between 2018 and 2027, while the share of natural gas in thermal power generation will gradually rise to 15.8% in 2027, up from 13.5% in 2018.

There is a moderate risk of contract alteration in Colombia and enforcement can be protracted. Duque has promised to combat corruption and irregular contracts approved by the Santos administration are likely to be suspended or cancelled.

Colombia: Peace deal with the FARC at risk as Iván Duque is elected president
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