COLOMBIA - Report 01 Apr 2019 by Juan Carlos Echeverry, Andres Escobar and Mauricio Santa Maria

President Iván Duque’s objection to six articles of the Special Peace Jurisdiction (JEP) Act has created a Brexit moment for Colombia. Duque had two alternatives: first, even if he disliked the peace agreement, he could have accepted it, and have tried to impose the rule of law. This would have “brought peace to peace,” and moved on with the Santos administration’s bequest. The second alternative, to repudiate the law and reinitiate a peace process with the FARC, would lead to huge institutional and political costs. The president kind of took both routes.

The rejected articles must now go back to Congress, to find a new wording satisfying to the president’s lawyers and party members. But neither the government’s fractured coalition nor the opposition has the votes to either approve or discard the new texts, generating a political limbo that obfuscates the Duque administration’s leadership. Hence, JEP-XIT is starting to look like BREXIT.

We think realpolitik should have prevailed. The government should have approved the JEP Act, while strengthening attorney general and governmental proceedings. This is currently interpreted as ex-president Álvaro Uribe and Centro Democrático being back in the Duque administration’s driver’s seat. Even if that is an exaggeration, the whole episode looks like a high price to pay for nothing.

The independent committee of the fiscal rule proved receptive to the government’s request for a larger deficit deviation on account of the fiscal costs associated with the migration from Venezuela and decided to allow for a higher deficit this year (2.7% instead of 2.4% of GDP), and next year (2.3% instead of 2.2%). In light of these announcements, is Colombia going to keep its current debt ratings in place? We think the likelihood of Fitch and Moody’s downgrading Colombia to where S&P is currently at, i.e. just one notch above investment grade, has risen, but, as always, it all depends on the strategy to implement the necessary adjustments down the line, both on the revenue and on the expenditure sides.

Markets rightly perceive Juan Pablo Zárate as one of the sharpest, most pragmatic and influential Central Bank board members, in discussions around monetary policy moves. Our takeaway from his presentation in Medellín in March is that he’s made a case for staying put for now. On the external side, unsurprisingly, he sees no demand pressures. He also posits that expected tamer Fed moves improves financial conditions for emerging markets, which in turn has fostered a rebound of portfolio flows, helping the CB raise international reserves to $50.5 billion. Inflation expectations are seen as well anchored. However, we do not completely rule out the possibility of rate hikes this year.

There’s no doubt that the economy is recovering, if mildly, at just 2.7% growth for 2018. We expect recovery to continue in 2019, mainly driven by mining and oil, to 3.3% –3.4% by yearend.

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