Circling a Deal

COLOMBIA - Report 28 Aug 2015 by Veronica Navas and Mauricio Santa Maria

A FARC deal may be close, and the focus has turned to intense public discussion over how a deal might be finalized and executed. Yet the difficulties still seem substantial: these basically boil down to political disagreement over whether a special “mini-congress” might be created to ratify any deal; and how the guerrillas will turn over their weapons and be politically reinserted into Colombian society. President Juan Manuel Santos has categorically rejected the idea of allowing the FARC to participate in a rewriting of the constitution; the other key issue is whether or not the ex-guerrilla leaders will serve jail time. But we doubt any referendum will take place in the end.

There’s still some uncertainty over how deeply oil shock will affect the private sector, and therefore, general economic activity. Predictions vary widely: the government continues to project 3.6% growth this year, while the Central Bank has (again) cut its GDP growth forecast, to 2.8% from 3.2%. Leading economic indicators encourage us to side with the Central Bank. We now project 2.8% expansion in Q2, and 2.9% GDP growth for 2015, down from our original annual estimate of 3.3%.

Our reasoning includes the weak performance of mining, due to continued guerrilla attacks on oil pipelines, modest construction growth and slower growing investment. We do expect growth to recover somewhat in 2016, to ranging between 3% and 3.5%. Manufacturing should benefit from the Cartagena Refinery, and the weaker currency should eventually help exports enter new markets. Private investment in the 4th Generation road project should boost the construction sector.

The peso has hit a historic low. Falling down toCOP/USD3,238 to the dollar after depreciating by 66% over the past 12 months, it’s one of the world’s worst-performing currencies, now unflatteringly included in JP Morgan’s “Fragile Five.” Finance Minister Mauricio Cárdenas is keeping his cool, arguing that the benefits of a weaker currency outweigh the costs.

The external negative forces are rather clear: these are effects of plunging oil prices, and plunging Chinese stocks. External drivers will continue to exert downward pressure on the COP, and other emerging markets currencies in 2016. The main hope is for the Colombian government to offer a credible fiscal strategy, in order to regain the markets’ trust.

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