Colombia: A Failed Peace And The Impending End Of The Economic Dream

Includes: BNO, GXG, USO
by: Caiman Valores

Colombia's Santos government reached a peace agreement with the FARC in 2016.

Despite the deal Colombia's civil conflict has yet to end.

The promised social and economic benefits of peace have failed to materialize.

It was only late last year when the 32nd president of the Republic of Colombia (GXG) eagerly announced the end of Latin America’s longest running insurgency and peace with the crisis riven country’s largest insurgent group, Las Fuerzas Armadas Revolucionarias de Colombia-Ejército del Pueblo, or FARC. This supposedly brought an end to the 53-year armed conflict and garnered Santos the 2016 Nobel Peace Prize.

It was heralded as a victory for the people of Colombia that would significantly bolster the Andean nation’s economy as well as deliver greater opportunity, stability and wealth for the conflict weary Colombian people. Just over a year later not all is where it was promised to be and in this series of articles I will be taking a closer look at Colombia, the issues it is facing and whether the nation can truly reach its potential.

Peace is shaping up to an economic disaster

So far many of the promises that were made have failed to materialize and the growing insecurity in many parts of the country, rising corruption and stalled economic growth which along with the estimated $44 billion price tag for peace has left the government fiscally strained.

According to some sources the peace deal would boost Colombia’s economic growth to as high as 6% annually and triple foreign investment. Yet these figures have proven to be nothing but a mirage.

For 2015 Colombia’s gross domestic product or GDP expanded by 3.1% year over year but that plummeted to 2% for 2016 and while it will rise for 2017 it won’t be anywhere near the ambitious targets postulated by the Santos administration. By the second quarter 2017 GDP had inched up by a mere 1.3% year over year which was a 10-basis point increase over the first quarter and the equivalent quarter in 2016. Unsurprisingly, the IMF only expects Colombia’s GDP to grow by 1.7% for 2017 or 30 bps lower than 2016 and then accelerate to 2.8% in 2018.

These figures are far lower than the ~ 6% annual growth that Santos and his ministers claimed peace would generate. The marked decline in economic growth has led to a fiscal shortfall for the Santos government.

For 2016 Bogota’s fiscal deficit came to 3.9% or 30bps higher than that predicted earlier in the year. The government is aiming for a 3.6% fiscal deficit for 2017 but there are signs it could be worse than expected. The fiscal deficit is forecast to fall to 3.1% in 2018 but many analysts see this as being overly optimistic as much of Santo’s economic policies and numbers have been in recent years. The reason for this protracted weakness is the government’s over-reliance upon oil (USO)(BNO) and coal mining to drive exports and economic growth.

Data from DANE, the Colombian government’s statistical service, shows that minerals and petroleum were responsible for 45% of the total value of all goods exported by Colombia during the second quarter 2017. That makes the mining and petroleum industries important income earners for the Colombian government despite them only being responsible for 6% of GDP.

The 2017 figures represent a significant decline in the volume of mining and petroleum exports in recent years that can be attributed to the oil and commodities slump which began in 2014. For that year mining and petroleum exports made up close to 60% of the value of all good exported from Colombia and that precipitous decline has contributed to Bogota’s ongoing fiscal shortfalls.

However, sharply weaker oil prices are not solely to blame. There has also been a marked drop in investment in Colombia’s petroleum industry which has caused production to decline.

According to data from Colombia’s national hydrocarbon agency the ANH, between 2014 and June 2017 average daily production declined by 15% to 856,957 barrels, well under the million barrels a day needed to support the government’s budgetary requirements. It is this marked decline in oil output coupled with Colombia only having sufficient proven reserves to support another ~ 5 years of oil production at current rates that is the real motivation for Santos sealing peace with the FARC.

You see, it is estimated that only around a third of Colombia has been explored for petroleum and many of the oil rich areas of the country were in territory once controlled by the FARC.

The government has attempted to fill the gap left by oil by promoting investment, manufacturing and tourism to the give the economy the much-needed shot in the arm to boost growth. While the sharply weaker Colombian peso caused by weaker oil prices and the deterioration in export volumes has sparked an uptick in foreign direct investment, which for 2016 rose by 16%, compared to 2015 it is still 16% less than 2014.

Despite the government’s efforts manufacturing is also in decline. In 2014 it was responsible for 11.2% of GDP but that has declined to 10.8% and appears to be deteriorating further.

The only bright spot has been a sharp uptick in tourism driven by the peace deal. According to March 2017 data from the Colombian government tourism has multiplied almost three-fold since 2006 with an ever-greater volume of tourists flocking to the country, regretfully in many cases for its seedier pleasures.

Unfortunately, the significant increase in tourism is not paying the dividend that many within the government or business expected. The reason is that Colombia has become the preferred destination for sex, drug and party tourists in Latin America. That sees major cities, notably Medellin, Cali and Bogota filling with legions of men of all ages looking for a good time. This has sparked an insatiable demand for prostitutes and cocaine, which is having a corrosive effect on a society already deeply challenged by poverty and extreme inequality.

World Bank data shows that Colombia’s Gini coefficient is 53.5, indicating that it is the second most unequal country in Latin America after Honduras. The severity of inequality and poverty in Colombia is emphasized by the fact that roughly 55% of the population is surviving on the minimum wage of $246 per month or less. I have previously seen statistics from local aid organizations operating in Colombia’s second largest city Medellin which show that roughly half of the population lacks the income to be able to eat more than twice a day.

Peace has delivered an economic and social mirage

It is difficult to see any significant improvement in Colombia’s economic outlook, despite the peace with the FARC, until a range of structural economic and social issues including endemic poverty, corruption and violence are resolved. Those issues will more than likely remain on the backburner with the Santos government proposing to slash spending on social programs in its 2018 budget by 5% compared to 2017.

Clearly, the dividends of peace have yet to materialize and when they do they won’t be as great as promised while only an elite few will benefit.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.