February 24, 2017    4 minute read

Colombia: Long-term Strength and Short-term Improvements

From Conflict to Growth    February 24, 2017    4 minute read

Colombia: Long-term Strength and Short-term Improvements

Colombia’s rejection of a peace deal with FARC rebels in the October 2016 referendum accelerated an already growing awareness of Colombia, its peace process, and the country’s abundant opportunities. This is a country that is healing generation-old wounds – formerly through President Alvaro Uribe’s effective assault on the FARC rebels, and latterly by President Juan Manuel Santos’ approach towards the rebels with a well-publicised peace accord.

Besides clear political progress, Colombia’s economic position remains strong in the medium and long-term, improving on an underwhelming 2016.

2.3% The EIU’s forecast for Colombia’s growth in 2017

2016 showed a slowdown in Colombia’s GDP growth, coming in at just 1.6% (down from 3.1% in 2015, and 4.4% in 2014. But according to Economist Intelligence Unit (EIU) forecasts, Colombian GDP growth will reach 2.3% in 2017 and 3.2% in 2018.

Higher growth levels will likely come about due to three factors: higher international prices for oil, greater levels of domestic infrastructure spending, and more private domestic investment.

Fuelling Colombia’s Growth

Oil is crucial to this assessment. This is because Colombia’s main exports are in petroleum. This market has seen large price shocks over the past year. However, this cyclical shift in lower international demand for oil should ease in 2017.

It is true that disruptions caused by terrorist attacks to the country’s oil infrastructure by the leftist Ejército de Liberación Nacional guerrillas have played a role in the lower supply of oil. However, falling international oil prices since the latter part of 2014 have played a larger role in the local industry’s performance, leading to the closing of newly unviable wells and reductions in investment.

The EIU projects figures of exports of goods of $36.9bn in 2017 and $39.8bn in 2018, building on $32.7bn in 2016.

Infrastructure Paves the Way

Infrastructure expenditure growth is another significant part of this return to higher growth. Through public-private partnerships, the government is receiving increasing support for the ‘4G’ infrastructure project, an ambitious eight-year, $24bn plan to deliver 5892km of roads, bridges, and tunnels, responsible for 80% of internal travel in the country, which will completely overhaul existing systems that are not fit for purpose.

200,000 New jobs to be created by the 4g infrastructure project

This project is expected to increase GDP by an additional 1.5% per annum and add 200,000 directly-related jobs, with a further 250,000 indirect jobs. This project is wholly consistent with the direction of travel of Colombians enjoying more middle-class living standards now demanding and anticipating these sorts of technical improvements. The ambitious project will be a prominent vehicle for growth over the next decade.

Solid Fundamentals

Finally, there will be an acceleration in private investment. Gross fixed investment saw a disappointing 2% drop in 2016. The EIU’s statistics outline an expectation of 2% growth in 2017 and 3.4% in 2018. This is very much in line with lower levels of consumption.

Fundamentally, Colombia’s economic performance is strong. Investor confidence remains high, and total foreign direct investment has seen a fivefold jump in direct investment (from $2bn to $10bn per year) since 2001. Colombia needs to continue to make meaningful reforms to secure its status as Latin America’s star. Previous reforms have transformed Colombia, as Newsweek puts it, from “a crime and drug-addled candidate for failed state to a prospering dynamo.”

A final peace settlement that is accepted by all actors, most notably the people, will be the greatest fillip possible for Colombia’s economy. The World Bank, for example, has argued that had Colombia not been entrenched in civil conflict for the last 20 years, “income per capita could have been 50% higher.”

The major determinant of Colombia’s future success, therefore, remains how its civil conflict ends. Peace would be a boon for the nation’s war-ravaged farming and agricultural sectors, and further signal that Colombia is safe for international investment.

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