Qualified Mandate for Peace

The 2014 presidential election was billed as a referendum on the peace process initiated by the incumbent, Juan Manuel Santos, aimed at ending a decades-old armed conflict with leftist guerrillas. At a run-off contest held in June, Santos defeated Oscar Ivan Zuluaga, who advocated the alternative of continuing to pursue the total defeat of FARC on the battlefield. On a reported turnout of less than 48% of eligible voters, Santos claimed slightly less than 51% of the vote, compared to 45% for Zuluaga. But while President Santos has been given the chance to continue with the peace process he initiated, there is reason to question the accuracy of his assertion that his victory amounts to a “mandate for peace.” Even many voters who support the peace process in principle are reserving judgment on the issue until the exact terms of the peace are known. That is not insignificant, as Santos has promised that any final peace deal will be presented to the electorate for an up-or-down vote in a national referendum. In any case, talks are continuing, and entered a new stage in late August, when, for the first time, active military commanders sat down with FARC leaders at the negotiating table in Havana to begin discussions of the process for disarming and demobilizing the rebel forces once a peace agreement is in place. The participation of the Colombian generals is a sign of the government’s optimism that a comprehensive peace agreement is within reach. Nevertheless, the deal is far from done. President Santos has set a goal of finalizing a peace agreement by the end of the year, but FARC negotiators have suggested that the process is very likely to extend into 2015. Most Colombians will probably grant the president the benefit of the doubt as long as the talks continue to produce tangible progress. President Santos currently enjoys a strong political position, having pulled together a center-right coalition that provides his government with majorities in both legislative chambers. However, Uribe remains a powerful and influential figure who can be expected to compete aggressively for the allegiance of center-right lawmakers, and he could enjoy substantial success on that score if security or economic conditions worsen significantly. A potential source of risk on the latter score has emerged in the form of widespread drought conditions that have resulted in the death of livestock, damage to crops, the degradation of arable land, and shortages of potable water. Climate experts have warned that the onset of the weather phenomenon known as El Niño, which typically reaches its peak in the October–December period, could prolong the drought conditions into 2015.

Political Obstacles Will Hamper Economic Performance

The Santos administration’s National Development Plan (NDP) is based on three pillars—economic development, environmental management, and national security. Successful poverty reduction and economic diversification will hinge on increases in state revenues and substantial inflows of FDI, which, at least in the near term, will necessarily be concentrated in the extractive sectors. The NDP was greeted with skepticism by environmentalists and indigenous groups, which noted the inherent contradiction of pursuing a program of sustainable development that relied on the significant expansion of extractive operations. Likewise, social disquiet has become more evident. The administration will be able to address the sources of tension as long as Santos retains the backing of a sizeable majority in the Congress, but his flexibility will become more limited as the approach of the next election cycle in 2018 strains the unity of the center-right alliance. The growth outlook for the forecast period will be affected to a great extent by the degree to which the potential of the free-trade agreements with the US and the EU is realized. That said, the fracturing of the government’s legislative majority will limit the scope for action to bolster confidence in the country’s long-term fiscal stability or generate substantially higher levels of investment in non-extractive sectors. Consequently, real GDP growth is forecast to average 4.2% per year through 2019.

                              Forecast Summary

SUMMARY OF 18-MONTH FORECAST


REGIMES & PROBABILITIES
Center-Right Coalition 55% Divided Government 30% Centrist Coalition 15%
RISK FACTORS CURRENT  
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Investment
Equity Moderate SLIGHTLY LESS Same Same
Operations Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Taxation Moderate SLIGHTLY LESS Same Same
Repatriation Moderate Same Same Same
Exchange Low Same Same Same
Trade
Tariffs Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Other Barriers High SLIGHTLY LESS Same Same
Payment Delays Moderate Same Same Same
Economic Policy
Expansion Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Labor Costs Low Same Same Same
Foreign Debt Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST


REGIMES & PROBABILITIES
*Divided Government 45% Center-Right Coalition 40% Centrist Coalition 15%
RISK FACTORS BASE  
Turmoil Moderate SLIGHTLY MORE SLIGHTLY LESS SLIGHTLY LESS
Restrictions
   Investment Moderate Same LESS SLIGHTLY LESS
   Trade Moderate Same SLIGHTLY LESS SLIGHTLY LESS
Economic Problems
   Domestic Moderate SLIGHTLY MORE Same SLIGHTLY MORE
   International Moderate Same SLIGHTLY LESS Same
   * When present, indicates forecast of a new regime

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