As of late, political risk has not weighed as heavily as expected on investment flows into Colombia. The strong rise in oil prices this year (+50% for a barrel of WTI crude year-to-date) coupled to the country’s distance from the Ukrainian conflict and the Central Bank’s more aggressive stance since January (+300 bps rate hikes) have helped support investment inflows and have trumped, so far, concerns over the high level of uncertainty surrounding the upcoming presidential election (1st round on May 29th). Foreign direct investments (FDI) in the hydrocarbon sector (2/3 of total FDI on average) have continued to recover quite strongly and have not been fazed by the possible interruption of new oil and gas developments – proposed by poll-leading candidate Gustavo Petro
Colombia’s public finances have come under the spotlight in recent years amidst recurrent adverse external shocks, rising social spending pressures, ongoing challenges in raising revenues, persistent (optimistic) biases in fiscal planning and, as of late, the back loading of fiscal consolidation plans following the Covid-19 shock. The rapid progression of the public debt ratio and the capacity for future policy adjustment have, in particular, become points of concern and have, since the summer 2021, materialized in Colombia losing its investment grade status
Colombia is Latin America’s 4th largest economy and 2nd most biodiverse country in the world. It has abundant natural resources including oil, coal, coffee, flowers, gold, emerald, nickel, silver, sugarcane etc. Agriculture (6.3% of GDP) is diversified and a large employer. The economy also has a sizeable industrial sector (about 27% of GDP) with strong manufacturing activities in textile, food products, automobile assembly, cement production, refined petroleum and chemical products. In 2019, Colombia gained admission to the OECD (formalized in 2020), a testimony to its efforts towards structural reforms in recent years.
Over the past decade, Colombia’s macroeconomic performance has been one of the strongest in Latin America. Growth has averaged 3.3% over the period and inflation has largely been under control. Economic performance however remains strongly tied to commodity prices as evidenced by the country’s severe macroeconomic adjustment in 2014-15 following the crash in oil prices. While fiscal accounts have gradually become less dependent on oil revenues, external accounts have continued to rely a lot on hydrocarbons: oil and coal products still make up about 50% of exports, and direct investment is also highly concentrated in extractive industries. Exposure to the United States (Colombia’s largest trading partner) and episodes of large capital outflows also constitute sources of vulnerability in the economy.
