How should MNCs untangle Colombia’s complicated political landscape before 2018 elections?

 Last week, Colombia’s magazine Semana released its latest presidential poll that shed light on the political landscape in Colombia. The results showed a deeply fractured electorate that divides its preferences within a constellation of candidates. Sergio Fajardo, the former mayor of Medellín, and Germán Vargas Lleras, the former vice president of Juan Manuel Santos, are leading the pack with 21% and 12.5% of vote intentions, respectively. In FSG’s view the results point to a still open field with no one clear-cut front runner.

Key impacts of electoral uncertainty

The uncertainty around the outcome of the upcoming presidential election is critical as Colombia still has an open question around the peace agreement while also facing a fragile economy that has been weakened after several years of low global oil prices.

With respect to the peace agreement signed with the FARC in 2016, which was non-binding, the outcome of this upcoming election has the potential to affect the accord as it currently stands. The political division around this question today is still significant, particularly now as Congress is debating the Special Peace Jurisdiction (SPJ) law proposed by the Santos government. The law is considered the cornerstone of the peace accord implementation, as it will dictate the legal consequences for those committed perceived crimes during the conflict.

On the economic side, a slowdown in domestic demand in the form of modest consumer spending and slow investment inflows in the oil and mining sectors have created downward pressures on economic growth. While the Central Bank has reduced its key policy interest rate, (currently at 5.25%) commercial banks have been reluctant to pass on lower rates to consumers and businesses amid higher default-risk perceptions. In this environment, the next administration will have the opportunity to make key decision that will directly affect economic activity in the short-term, including possible stimulus measures and tax hikes.

It is too soon to call for a winner since the political battle has just begun

At the current moment, there is no clear leader in the election. FSG, however, believes that the candidate most likely to win the presidency is the one that will be able to adhere most closely to the following points:

  • Demonstrated a clear platform including anti-corruption measures and the implementation of the peace accord: Corruption scandals and the post-conflict management will be at the top of the list of Colombia’s voters in terms of important campaign issues.
  • Avoid new corruption scandals or links to corruption scandals: Any scandal that might come out and affect a candidate, including a frontrunner, might decrease his/her chances or derail their campaigns. Such an example can be seen with Oscar Iván Zuluaga, who went into a run-off with Juan Manuel Santos in 2014, but is now being investigated in connection to the Odebrecht campaign contribution scandal.
  • Put forward a clear economic plan for the country: With sluggish economic growth, voters and markets alike are looking for certainty in the economic horizon and will be looking for a candidate that they believe will drive near-term economic growth.
  • Garner support from a political coalition: Colombia’s political system is seriously questioned by Colombian voters, registering disapproval levels of over 75%. Consequently, anyone seeking the presidency has better chances outside the traditional political party structures, rather than becoming the standard-bearer of one. That said, independent candidates will need the backing of larger political parties through a coalition. This has caused major candidates (Sergio Fajardo, Germán Vargas Lleras, Gustavo Petro, and Claudia López) to adopt a hybrid method of collecting signatures to become independent candidates. This way they can reach out to a larger constituency. However, to win they will need the support of their former political parties, which makes coalition-building a key to this election.
  • Create clear “No” or “Yes” coalitions: Coalitions will likely be formed around “no” and “yes” platforms regarding the peace accord than anything else, which is why it is highly likely that whoever is in the runoff will receive the blessing of every other political faction that shares that same belief. For example, Vargas Lleras would likely receive the support from the Uribe-Pastrana “No” coalition in the second round despite having to compete against Iván Duque and Marta Lucía Ramírez, one of whom will represent the “No” coalition in the first round.

How to monitor the situation

MNCs should consider monitoring the specific policy platforms to be outline by the candidates in the upcoming months, including the following:

  • Track tax reform proposals and create contingency plans regarding potential business impact: After the 2016 tax reform, tax collection should have been increasing by 5.0% per month, but in reality, they are only increasing by 0.8%. Tax reform is a topic that candidates will have to explain, the sooner the better, because Colombia’s fiscal situation alongside the weak business confidence due corruption scandals, is holding back investment on key infrastructure projects (the Fourth Generation “4G” public-private partnership “PPP”) necessary to improve Colombia’s competitiveness and attract foreign investment.
  • Monitor proposals to generate jobs and consider how your company can participate in new stimulus measures: Colombia’s unemployment rate is around 9.1%, but with an estimated 2.2 million unemployment and high levels of informality, Colombia’s consumer spending will not take off without jobs creation, in spite of low Central Bank’s policy rates and eventual decrease in consumer lending rates. With a tax reform on the horizon, expansion of the VAT to other goods, and Argentina and Brazil awakening and becoming more attractive to foreign investment, Colombia will have to be creative to create new jobs in the current environment.

In the meantime, multinationals operating in Colombia should work to tighten payment terms with customers, communicate clearly with channel partners to ensure they are well capitalized, and review customer segments to identify those that are at higher risks for lower demand should uncertainty escalate. FSG will continue to track developments in the lead of to next year’s presidential elections and their impact on the local economy.

For our latest updates and insights, FSG clients can visit the client portal or contact their Client Services Director for more in-depth briefings.

Not a client? You can purchase the 2017 Latin America Outlook report from our online store. Please contact us to learn more.

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