July 23, 2018 – This post was written by Ramiro Sugranes, Research Intern for Latin America
In line with FSG’s base case, the young conservative senator Iván Duque defeated Gustavo Petro—the far-left candidate—in a polarizing run-off Colombian presidential election held on June 17th. The 13-point victory secured by Duque appeased many in the business community who feared a major shift in Colombia’s economic model. On August 7th, the reins will be handed to Duque, a market-friendly technocrat who promises to reinvigorate growth and revise parts of the monumental Peace Accord with the FARC rebel group.
Here is what MNCs can expect from Ivan Duque’s incoming government:
- Peace Accord revisions will be prioritized in 2018: Duque was propelled to victory by taking a hard-stance against the current peace deal—a central theme of his campaign. Duque promised to bring justice to the agreement, which he views as being too lenient on former criminals. This issue is set to take the main stage in Congress for the remainder of 2018. However, Duque will have to walk a thin line between his campaign promises and the deal’s fragility. In addition, Duque will likely begin his administration in 2018 by trying to push comprehensive pension reforms, and decentralizing the natural resource royalties’ system.
- Major fiscal reforms will likely be held off until 2019: Although plans for a fiscal overhaul were also central in Duque’s political crusade, major reforms will likely be held off until after the peace dealings. This means it is more likely than not that Duque will need to wait until 2019 to pursue certain fiscal measures such as lowering corporate tax rates, simplifying and digitalizing the tax system, cracking down on tax evasion, reducing overall expenditure, and adjusting Colombia’s fiscal rule.
- A lurch towards the Uribismo of the past: Duque is seen as the protégé of the former Colombian president Álvaro Uribe who handpicked the new president-elect as the leader of his party, Centro Democrático. Although Duque denies allegations, many speculate that the former president is pulling all the strings. As Duque’s cabinet has begun to take shape, many familiar faces from the Uribe era have surfaced including the former Finance Minister, Alberto Carrasquilla, who will return as Finance Minister. If Uribe’s apparent influence stands, it will have key implications for issues such as the US-backed drug war, the Venezuelan crisis, and the Peace Accord that was fervently opposed by Uribe. This could affect the business environment if more drastic peace deal changes are forced by Uribe.
Multinationals should monitor the following signposts to assess the success of Duque’s government in the short to medium-term:
- Peace Accord outcomes: MNCs should track the results of the peace deal revisions, which will be an early indication of Duque’s failure or success in promoting his agenda. Duque could secure a major political victory if he can make changes to the accord, satisfying his supporters. However, he will need to do so without inciting violence or else this will complicate security perceptions in Colombia and thus weigh on investment and growth.
- Congressional support: MonitorDuque’s ability to push his agenda through Congress and build support. Duque’s coalition is expected to be strong enough in congress to advance reforms. However, two significant parties (Partido de la U and Cambio Radical) have recently joined to form what, for now, is the strongest congressional coalition asserting a centrist stance. Whether they will eventually form an alliance with Duque, stand as independents, or act in opposition to the president’s agenda—especially on the most contentious issues—remains to be seen. MNC’s should monitor these congressional dynamics as they will affect the pace and shape of any reforms to come.
- Growing fiscal deficit: Executives should understand that the administration will need to contain government debt or risk a sovereign debt credit rating downgrade, which would reduce investor confidence in the market.
- External factors: Monitor global oil and mineral prices which could deal a blow to Duque’s agenda to enhance the performance of the extractive sector as well as the economy, which heavily depends on natural resource exports. In addition, multinationals should be tracking how well Duque’s administration can deal with the growing humanitarian crisis in Venezuela as Colombia continues to receive increasing numbers of immigrants.
Actions to Take
- Have a plan of action to incorporate reform results into your company’s strategy—especially on the tax front
- Evaluate how growing uncertainty and violence spurring from Peace Accord revisions could affect your business
- Revisit the role of Colombia in your regional portfolio, as a more business-friendly environment could unearth new opportunities
- Ensure that you are properly resourcing your government affairs team to engage with the upcoming transition
FSG will continue to track key developments as Duque’s agenda materializes to discern the effects on the macroeconomic and business landscape. For more in-depth briefings FSG clients can contact their Client Services Director. Not a client? Please contact us to learn more.