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Colombia Politics May 2018

Colombia: Colombia gears up for presidential election, with center-right candidate the favorite to win

Colombia is set to hold the first round of its important presidential election on 27 May. In the likely event that no candidate garners more than 50% of the vote, the race will move to a second round on 17 June. According to the latest polls, centre-right candidate Iván Duque of the Democratic Center (Centro Democratico) is maintaining a lead over left-wing candidate Gustavo Petro, a former guerrilla. Although the two candidates are expected to face off in a second round run-off, the likeliest outcome is a victory for Duque, whose business-friendly stance is conducive to higher growth. A win for Petro could generate more economic uncertainty due to his plans to raise taxes and shift away from oil towards agriculture.

A frail economy and a string of corruption scandals have swayed voters to the opposite ends of the political spectrum, away from the ruling centre-left Social Party of National Unity (Partido Social de Unidad Nacional). Reflecting the dominant view held among market analysts, Quinn Markwith, Emerging Markets Economist at Capital Economics, commented that, “The election certainly looks like Duque’s to lose. In terms of his policies, lower taxes (including corporate taxes) on his watch would help to boost investment and consumer spending.” The economy has been severely beset by the sharp oil price slump of 2014–2015 and a program of austerity imposed by the ruling party. Andrés Langebaek Rueda, Chief Economist at Grupo Bolívar, shares a similar view: “As a pro-business candidate, he [Duque] should generate greater investor confidence, which would result in greater growth”. However, Duque’s opposition to the 2016 peace accord with FARC rebels could “generate a resurgence of violence and insecurity in the country, which in turn would generate fears among investors”. Nevertheless, Rueda expects that “most of the agreements will remain in force”.

While Duque and Petro both favor slowing the pace of trade liberalization and are united against signing more free trade agreements, which have failed to yield the intended benefits, Petro’s overall economic agenda stands in stark contrast to Duque’s. Petro’s proposed program focuses on diversifying the economic structure away from extractive industries and the renegotiation of free trade agreements; implementing a tax overhaul, including a measure to tax owners of unproductive fertile land; and launching policies aimed at reducing the widening gap between rich and poor. Quinn Markwith of Capital Economics sees a Petro presidency being “characterised by a shift towards looser fiscal policy, state intervention and a more fragile balance of payments”; this outcome could steer the economy off onto an unsustainable path. He states that “the ‘anyone but Petro’ vote should be strong enough to ensure Duque beats him to the presidency”.

After the economy expanded at the slowest pace in eight years in 2017, available data for the first quarter of the year is showing signs of a turnaround. This includes a surge in retail sales amid declining inflation, which has bolstered consumers’ real purchasing power. Economic growth is expected to pick up as political uncertainties fade and oil prices continue to climb. Along with the recent increase in oil prices that has significantly improved the country’s outlook, Quinn Markwith of Capital Economics expects that the recovery over the coming years will be supported by “lower inflation and recent interest rate cuts [which] should bolster domestic demand too”. Whoever emerges at the helm of power will be tasked with a serious challenge to revive the economy’s lost shine and break from its high dependence on oil.

The Central Bank foresees the economy growing 2.7% this year. Panelists participating in the LatinFocus Consensus Forecast project that GDP will expand 2.6% in 2018, which is unchanged from last month’s forecast. For 2019, panelists expect GDP to grow 3.0%.

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