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Colombia Elections: Continuity or Radicalism?
Two top candidates present vastly different economic agendas.
BY JOACHIM BAMRUD
As Colombia’s presidential elections scheduled for May 29 get closer, the once-dominant position of leftist Senator and former Bogota Mayor Gustavo Petro has weakened and he now faces a strong rival in Francisco “Fico” Gutierrez, a right-of-center former mayor of Medellin.
On Wednesday, Fico received support from the Liberal Party, which is considered to have the strongest party machine in Colombia, holds most seats in the Lower Chamber and is among the top three parties in the Senate. Already, Fico counted the support of four other parties, including the Conservative Party (the largest in the Senate, along with Petro’s Historic Pact, and the third-largest in the Lower House) as well as Partido de la U, Cambio Radical and the ruling Democratic Center party.
According to a poll by CNC
If no candidate wins more than 50 percent of the vote, a second round of elections will be held on June 19. With Fico’s support from the Liberal Party and the other four parties he stands a good chance of beating Petro in a second round.
Whoever wins will have to face a divided Congress, although Fico is in much better shape than Petro in terms of passing legislation. Petro’s Historic Pact group has 16 seats in the 108-member Senate, while the five parties that support Fico have a clear majority of 66 seats. In the 187-member Lower Chamber, Petro’s party has 25 seats, while Fico can count on a total of 104 seats from the parties that support his candidacy.
Latinvex talked to two experts on how a Petro or Fico victory would impact Colombia’s economy: Alberto Bernal, Miami-based Chief EM and Global Strategist at XP Investments, and Carlos Caicedo, London-based Associate Director for Latin America Country Risk at S&P Global Market Intelligence.
GUSTAVO PETRO VICTORY
Caicedo: The lack of detail of Gustavo Petro’s economic policies makes it very difficult to pinpoint how a government under his leadership would operate. Sometimes, his statements on economic policymaking sound more like slogans than a well thought plan. His mantra is to move the Colombian economy from an extractive (oil and mining) to a productive model (industrialization and agriculture development). Through the campaign his hostility towards the oil and mining industries has stood out. He has said that on day one he would issue a decree suspending oil exploration; this, if applied as outlined, would impact negatively on GDP growth, private investment, and the country’s fiscal position. Oil is not only the country’s main export, but also a major generator of tax revenue as well as of royalties for the provinces. Petro has underestimated how important royalties are for the funding of health, education, and public infrastructure at regional and local levels. He has not explained how he would find alternative sources of funding. This poses the risk of civil unrest and legal challenges from governors and local authorities if health and education provision is affected.
On manufacturing and agriculture Petro would favor import substitution policies, a model Latin America implemented in the 1960s, without much success. On agriculture, he flagged three main pillars: seizure of unproductive land, increase in taxation on under exploited large rural properties to force owners to either produce or sell the land to the state to be redistributed among poor rural families. Also, subsidized credit for small farmers. This would be complemented a with an import tariff scheme that protect domestic production. These protectionist policies will also be extended to manufacturing. This would clash with free trade deals already signed by Colombia. Petro is certain to seek renegotiation of the Free Trade Agreement with the US, Colombia’s main trade partner and source of FDI.
However, the outlined policies would generate marked legal and regulatory uncertainties. This and the hostile stance towards oil and mining would most likely result in capital flight, worsening of the fiscal situation and in turn further sovereign credit downgrades. Under this scenario the current account deficit would widen, and the peso would depreciate sharply, exacerbating the country’s foreign debt burden. Petro has also indicated he would seek to change the policy orientation of the Central Bank, saying that the bank’s focus should be fostering economic growth rather that fighting inflation. This will have adverse consequences for monetary policy, most likely resulting in higher inflation.
Petro will also favor investment in renewables and public infrastructure; however, with a deteriorated business environment and marked legal uncertainty it is difficult to see foreign investors considering Colombia as a good option.
Having said that it is unlikely that Petro would be able to implement his most radical policies since he would lack a majority in Congress, where he will struggle to secure support. Also, it is highly likely that the Supreme Court and the Constitutional Court would act as a counterbalance. The opposition and the business sector would use that avenue to challenge measures regarded inimical to the national economic interest. The most likely outcome would be political stalemate rather a radical shift in policy.
On security, under Petro one of the major concerns is that cooperation with the US would suffer and most likely drug trafficking would increase. Key to counternarcotics is international cooperation and sharing of intelligence. it is highly unlikely that the US would be willing to share intelligence with a government, whose leader has publicly stated its strong anti-US stance. Also, there are serious doubts that the heads of the Colombian Army and the Police would be comfortable with a leader like Petro, a strong critic of them. This would pose significant hurdles for a coherent security policy.
Bernal: 1. Very high level of market uncertainty until it becomes clear who will take over the finance ministry post and how aggressive his "change" agenda will prove to be. A Petro presidency will be received very poorly by financial markets and business people. 2. Among the VERY problematic economic policy ideas of candidate Petro:
(a) the intention to for practical purposes destroy the private sector capitalization pension system. This would have massive repercussions on the performance of Colombia local markets, and it would imply a major shift on long-term fiscal dynamics, as the government would now be liable for paying pensions to the public under a pay-as-you-go framework despite the population at large becoming much older and with fewer kids being born.
(b) Stop new oil exploration and restrict oil exports. This idea is so crazy that I don't even know where to start.
(c) Give "real independence" to the board of directors of the Central Bank. To me this means taking off the board orthodox economists and naming, I don't know, anthropologists or something to the board. It is unclear if he can do that.
(d) Making the government the employer of "last resort" for younger folks. This is utopic, as the cost of employing all unemployed youngsters would prove impossible to finance.
(e) printing money to finance public spending.....Argentina and Venezuela all over again. The good news is that I don't think this is a viable proposition, as taking away the independence of the Central Bank requires a constitutional reform.
FICO GUTIERREZ VICTORY
Bernal: If Fico wins, the markets will show a massive relief rally. I would not be surprised to see the USDCOP trading at least 10% stronger from pre-election levels. Fico will follow an economic policy that dovetails with the one that Duque is leaving. Fico will need to focus on boosting government revenues (combat evasion hard) and reducing obstacles to the creation and growth of private enterprise. Markets should NOT expect Fico to deliver aggressive reforms at the onset of his administration, because of the very complicated social environment that continues to plague the country.
Caicedo: With Gutierrez the most likely scenario would one of continuity, with ample support for oil, mining, and renewables. He would also put a marked emphasis on social housing and 4G and 5G infrastructure. His proposal on taxation, however, lacks specifics, mentioning only that he would increase revenue by tackling tax evasion head on, while avoiding new levies on the middle class. He is also likely to put emphasis on poverty reduction, and unlike the Duque administration he would seek the implementation of the peace process with the FARC. Also, under Gutierrez, peace negotiations with the ELN are feasible. This bodes well for improved security.
However, compared to the Duque administration, Gutierrez would have a weaker government block in Congress and a very powerful leftwing opposition parliamentary block. This would make it difficult to implement a free-market agenda, be tax, pension or labor reforms. Gutierrez also would have to pay extra efforts to negotiate key legislation such as the national budget and would have to resort to pork and barrel spending to obtain something approaching a working majority in Congress. Also, crucially, under Gutierrez close relations with the US would be preserved, a crucial feature for both internal security and the combat against drug trafficking.
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