The new president will have his wings clipped by the coalition’s weak position in the legislature and a desire for revenue to finance his spending plans.
Colombia's president-elect Gustavo Petro and vice-president-elect Francia Marquez receive their credentials as elected president and vice-president. Photo: Reuters
The rise of the left across Latin America was once again affirmed on June 19, when Gustavo Petro, an economist, senator, and former guerrilla fighter, swept to victory in a run-off vote against Rodolfo Hernández to become Colombia’s first left-wing president.
Replacing Ivan Duque on August 7, Petro will attempt to implement a tax-and-spend, environmentalist and – concerningly – anti-market agenda. Public-sector jobs are promised for anyone unemployed, free university education and other social welfare priorities to be partly financed by raiding private pensions.
Backed by his vice-president Francia Márquez, an environmental activist, the new agenda also features putting an end to hydrocarbons production. That is a worthwhile aim, of course, given climate change, but bearing in mind the exports revenue Colombia earns from oil and mining, implementing it too quickly could prove costly.
Meanwhile, Colombia can now be expected to form closer relationships with left-wing countries, such as neighbouring Venezuela. This might invariably lead to a deterioration in relations with the US and other market-friendly partners.
Colombia was once the darling of Latin American investors seeking decent returns at moderate levels of risk, due to its relatively strong institutions and market-friendly, orthodox policymaking.
In 2020, before the pandemic struck, the country was lying 44th in Euromoney’s global risk rankings. It has since slipped to 52nd, with some further decline expected.
Worryingly, even before the outcome of the elections was known, scores for most of Colombia’s political risk indicators had deteriorated, along with quite a few structural risks, and notably the scores for employment/unemployment and government finances among the economic risk indicators.
The latter will plausibly see a bigger hit now that Petro is at the helm.
The president-elect has at least tried to assuage market nerves by announcing that he will appoint a centrist finance minister. José Antonio Ocampo does not lack experience either. With a doctorate in economics, he operated in the same role briefly in the 1990s under Ernesto Samper. He was also director of the national planning department, minister of agriculture and more recently he has served two senior roles at the United Nations.
That alone may not be enough to calm investors contemplating a new ball game and that fact would appear to be reflected in Euromoney’s latest quarterly survey, the results of which are soon to be released.
One of the survey contributors is Mauricio Tola, an economist and credit risk manager at Banco Internacional Ecuador, who keeps a keen eye on developments in Colombia.
He notes the fact that Petro plans to increase tax collection by 5% of GDP, raising more from higher income earners and by reducing tax benefits.
There could be an opportunity for investors in sectors such as tourism, construction and infrastructure, and others offering non-tradable products- Mauricio Tola
Given also that his proposals involve discouraging public and private investments in the oil, gas and mining industry – to decrease the dependence of the economy on this sector – “investors could be affected by a lower return, as well as impediments to expanding their investments in the oil industry”, he says.
Of course, such policies to improve tax collection and diversify income sources are commendable. Yet in the short term, “they would postpone new investments, decrease employability (already affected by the pandemic) and could deteriorate the country’s credit outlook”, says Tola, who adds that they would also affect GDP growth and the balance of payments in the medium term.
A fiscal deficit of some 6.5% to 7% of GDP could be expected, too, he says, in a situation of credit tightening, considering the increase in international interest rates and its negative effect on capital into emerging markets.
With a larger deficit, barriers to the oil sector expanding and difficulties accessing international debt, the value of the currency would be expected to depreciate.
Yet all is not lost. Considering the president will have policies to expand aggregate demand, “there could be an opportunity for investors in sectors such as tourism, construction and infrastructure, and others offering non-tradable products”, says Tola.
It should be noted, too, that Petro’s coalition lacks a majority in parliament, which will make it harder to legislate without some dealmaking. What is more, the central bank is defiantly independent and there is no realistic prospect of infiltrating other state institutions that are led by Duque’s appointments.
In any event, Tola believes it will be difficult to meet the tax-collection target and because the government will need a higher income to cover more public expenditure, it seems plausible to expect slower changes to the oil sector as it represents one of the most important sources of income for the country – and the oil price is high.
Neither does it seem realistic to expect any big impact on foreign relations, which will continue to be led by a pragmatic desire for exports revenue. One positive spin-off is the fact the new president would be closer to non-formal military groups established around the South Pacific Colombian coast.
“This could open opportunities to make agreements with these armed groups and to improve political stability in the country,” Tola says.
Given all that, investors should be concerned but not frantic, although a deciding factor will be how successful the new president manages the economy, while reducing poverty. With inflation around 9%, it will be challenging.