Colombia peace deal brings hope for FDI

The Colombian government’s historic peace deal signed on September 27 with left-wing rebel group FARC could open the door to growth and increased capacity for investment.

Colombian president Juan Manuel Santos announced that the peace agreement would usher in economic growth and social recovery for the country after more than 50 years of conflict, during which an estimated 260,000 people have been killed and more than 6 million displaced.

The breakthrough deal signals the start of a long road to recovery, say analysts, as Colombia currently has 9% inflation and a rapidly growing fiscal deficit. The country has also suffered as a result of China’s slow growth and the dampened global demand for commodities, as it relies heavily on oil, coal, gold and coffee exports.

Starting in 2013, greenfield FDI project numbers have steadily fallen, according to greenfield investment monitor fDi Markets. It reports that 2013 saw a decade peak of 139 projects, followed by 96 in 2016, 74 in 2015, and 28 in the first half of 2016. The coal, oil and gas sector saw the highest investment by far in terms of capital expenditure.

Hope of an instant economic boost is premature, with further slowdown predicted as the country adjusts to lower oil price. However, observers say over time the economic benefits of peace will help Colombia overcome the current challenges.

“Investors crave certainty. Political risk is always a concern in emerging markets, so for Colombia putting this conflict behind it is a major milestone that should further accelerate FDI and investor confidence generally in the market,” said Michael Camuñez, CEO of ManattJones Global Strategies, a Latin America-focused advisory firm.

“Not only internal reforms, but the deepening of its bilateral trade relations with North America, as well as regionally through the Pacific Alliance, should bode very well for Colombia. Of course, the agreement must be ratified and the long-term process of reconciliation and reintegration must take place. But the peace accord will only solidify a positive trajectory,” added Mr Camuñez.

Tourism and rural areas in particular are predicted to benefit from the country’s newfound peace. In a report, Alberto Ramos, head of Latin American economics at Goldman Sachs, said: “The economic peace dividend is expected to materialise gradually, through higher tourism and domestic and foreign investment, particularly in less safe, remote areas of the country, and the rotation of budgetary resources from the military apparatus into other more productive areas, such as physical and social investment in neglected rural areas plagued with armed conflict.”