YEAR IN REVIEW

Colombia 2016 | DIPLOMACY | YEAR IN REVIEW

Colombia has a spring in its step. The signing, in August 2016, of a peace deal with the FARC sent the strongest message yet that the country is open for business.

Peace talks with the FARC, a leftwing guerrilla movement in conflict with the Colombian government since the 1960s, have been followed closely in recent months, no less so than by a large international investment community that has long eyed the potential the country holds. The signing, then, in August 2016 of a peace deal following extensive talks in Cuba is likely to be a watershed moment for the Colombian economy, not to mention society.

The talks took place amid a global downturn in commodities prices, which have impacted Colombia's state revenues, as well as currency depreciation, to which many EMs have been subjected in recent quarters. GDP came in at $292.08 billion in 2015, up 3.1%, slower than the growth of 4.6% witnessed in 2014. The World Bank predicts growth of 2.7% for 2016, before a period of recovery begins in 2017. The regional average GDP growth figure for 2015 was -0.94%. Another key indicator put unemployment at a record low of 8.9% following labor and wage reforms. In inflation terms, the figure hit 5.01%, beyond the 2-4% target range of the country's central bank as slowdown in China, the US, and Europe hurt exports despite the peso-dollar exchange rate reaching as high as COP3,052 as of end-1Q2016. In terms of the impact of oil prices, as well as other commodities in distress, the government set its target deficit for the central budget at 3.6% of GDP in 2016, having managed a narrower deficit of just 1.6% of GDP between 2013 and 2015. Declining state revenues from previously reliable sources of cash such as oil and coal have also led to a CAD of 6%, triggering alarm bells. Other effects that plummeting oil prices have had on the economy include a Standard & Poor's revision to its outlook on Colombia during 2016, giving the country a long-term foreign currency rating of BBB, but rating its local currency sovereign debt BBB+. Standard & Poor's maintained its A-2 rating for short-term Colombian-issued local and foreign currency debt, a reflection of the demonstrated ability of Colombian monetary policy to mitigate economic challenges using such tools as its floating exchange rate.

Yet despite fiscal concerns, the government has begun to invest heavily in infrastructure in recent years, based mainly on the PPP Law of January 2012. The much-lauded Fourth Generation (4G) program, launched in 2014, foresees investment of $50 billion in transport infrastructure development, half of which will go to the road network—80% of the country's current internal transport is currently road based. The plan will slash journey times around the country and facilitate the quicker transport of goods between industrial zones and ports.

The 4G project is especially timely as lasting peace with the FARC, which is set to be put to a popular referendum in the coming months, opens up formerly inaccessible regions of the country to investment and development. Indeed, many of the territories occupied by the FARC and other groups are rich in natural resources, offering a lifeline to local communities in these relatively undeveloped areas.

One sector that will receive a boost as weapons are laid down is hydrocarbons, with Colombia's current proven reserves of 2 billion barrels of oil set to run out in six years. In June, the head of the oil industry's union said Colombia will need about $7 billion in investment annually over the next 10 years to boost oil exploration and production, a process that should be eased with risk of rebel attacks on infrastructure diminished and transport infrastructure improving. Mining is also set for a heyday and enjoys popular support around Colombia as an employer of around 1 million people. Colombia is the largest producer of coal in Latin America and fifth in the world, and is also one of the largest Andean producers of gold. Gold could also be entering a “golden" era, as measures to end illegal mining (80% of all gold mining in the country is carried out illegally), driven mostly by leftwing rebels, take hold and open up the sector to investment. President Santos has even offered for illegal mines to apply for licenses and carry out impact studies.

Positive developments in the political sphere have also attracted the attention of another sort of observer: the tourist. The tourism sector already contributes over $17 billion to GDP and is expected to reach $17.5 billion, or 6% of GDP, in 2016. Now, looking to put its reputation for violence behind it, Colombia's limit is the sky. Medium term, the government hopes to grow the sector by 15% over the next decade, and present the culture, landscapes, architecture, cuisine, and biodiversity that make the country a unique place to visit as well as do business.