Colombia: After peace deal collapse, analysts forecast economic consequences

Bogota: Everything was ready: once approved, Colombia’s peace deal would trigger a financial windfall, boost the economy and encourage investment. Then the “no” vote won. After Colombians went to the polls and shot down a potentially historic accord that would have ended 52 years of armed conflict between the government and FARC guerillas, the country was left in limbo. President Juan Manuel Santos had promised that the peace deal represented “the best investment” possible for the country, and the international community agreed. The World Bank announced in January that it had granted Colombia — Latin America’s fourth largest economy — $1.4 billion to finance its peace efforts. The European Union was on board too — about to send nearly 600 million euros ($661 million) to support implementation of the peace agreement. And the United States had set aside some $400 million towards a post-conflict Colombia. [caption id=“attachment_3049316” align=“alignleft” width=“380”] File photo of Juan Manuel Santos. Reuters[/caption] But then everything crumbled. Voters narrowly rejected the peace deal in an 2 October referendum, saying “no” to an agreement reached between Santos’s government and the Revolutionary Armed Forces of Colombia (FARC) after four years of negotiations in Havana. Critics of the accord complained among other things that it went too easy on the rebels. Now “there is considerable uncertainty. All this will remain frozen until the horizon clears. Everything will depend on what the three parties are willing to give up — the government, FARC and the ’no’ camp,” economist Cesar Ferrari, a professor at Javeriana University, told AFP. While Colombia has seen average 3.9 percent growth in the last decade, falling oil prices have weakened this trend. Growth forecasts for 2016 have been revised downwards, from three to 2.5 percent. The government in Bogota, which had placed its bets on the peace deal’s passage, had already calculated the post-conflict benefits: under the deal, the country would see additional annual growth of 1.1 to 1.9 percent, thanks to better security and increased investment in tourism, mining and agriculture. Santos, who won the Nobel Peace Prize last week, is now racing to negotiate a new deal acceptable to both the FARC and the opposition. The government has also announced that separate peace talks with a smaller rebel group, the National Liberation Army (ELN), will open on 27 October. According to the IMF’s director for the Western Hemisphere, Alejandro Werner, whose organization renewed an $11.5 billion line of credit to Colombia in June, positive effects “will not materialize” before the conflict’s end. Reintegration of FARC guerillas in civilian life, as specified under the peace agreement which was signed on 24 August, is a costly task. According to the Senate, this and other provisions from the agreement would cost around $31.4 billion over the course of 10 years, a sum that represents a third of the country’s 2017 budget. Meanwhile, markets have reacted well to the news of Colombia’s jilted peace push, with only slight hiccups. “The end of the peace process will take a little more time… but the Colombian economy will continue to be exactly the same,” Finance Minister Mauricio Cardenas told AFP. That is, at least for the short-term. Analysts warn that the impact could be much greater in the medium- to long-term if political uncertainty continues, and could delay the adoption of tax reforms, itself a controversial issue. In the event of a severe delay, ratings agencies, which consider the tax overhaul necessary to revive the economy, could lower Colombia’s sovereign debt rating. “The outcome of the Colombian referendum is negative for its credit history. The peace accord’s narrow defeat underlines a polarized political landscape that will undermine the government’s ability to push through further reforms,” warned Samar Maziad of Moody’s.