Analysis AUGUST 19, 2016 | 09:45 GMT
Resolving the decadeslong conflict with the Revolutionary Armed Forces of Colombia (FARC) will provide Colombia with more investment opportunities. But investment, especially in mining and hydrocarbons, will still be limited for at least the next five years.
The process of demobilizing FARC forces will be inherently complex. That, coupled with falling global commodity prices, will keep the amount of foreign capital invested in Colombia from growing very quickly.
No matter who wins the next presidency, Colombia’s main geopolitical challenge will be to extend its control over rural areas and to connect them to the rest of the country. Until that happens, the growth of the mining, tourism, agribusiness and hydrocarbon sectors will be encumbered.
Analysis
Colombian President Juan Manuel Santos hopes by year's end to finalize a peace deal with the Revolutionary Armed Forces of Colombia (FARC) that would end five decades of conflict. The deal could open rural parts of Colombia for business, including for mineral extraction, tourism and agribusiness. But even if the peace agreements are implemented — they will be put to a public vote first — fostering the stability and trust needed to maximize industry will not be easy.
The Original Conflict
Since its founding in the mid-19th century, Colombia has been shaped by two competing ideological forces: conservative and liberal. As in most of Latin America, the conservatives were made up of the wealthy landed elite, who tended to believe in a strong central state that could protect their interests. The liberals, on the other hand, believed in a decentralized state and advocated higher international trade. In time, the conservatives emerged as the dominant political actors and remained so for more than a century — until liberal politician Jorge Eliecer Gaitan challenged the status quo.
Gaitan spent 20 years fighting for land reform and social inclusion in Colombia, but it was his assassination in 1948 that intensified the struggle in the country, ushering in the civil war known simply as "The Violence." The liberals and conservatives fought their battles in Colombia's hinterlands before eventually agreeing to a power-sharing agreement in 1958 that was backed by the Catholic Church and the country's commercial elites. Not everyone, however, was ready to settle the dispute or to lay down their arms. Liberal militia leader Manuel Marulanda, unhappy with the deal, aligned himself with the Communist Party and founded the FARC to continue fighting for the liberal cause.
Since then, the FARC and other rebel and paramilitary groups backed by competing groups and interests have fought vicious guerrilla battles with each other and with the government. There have been repeated attempts to disband the factions and to establish lasting peace, and some groups have been effectively dismantled. Coming to a peace agreement with the FARC, however, has proved difficult. But now, after four years of negotiations mediated by Cuba, FARC leaders and the Colombian government reached a deal. To be implemented and finalized, however, it must also be approved by the Colombian people. If the deal wins approval, Colombia's rural areas will become more accessible than they have been for the better part of a century, and Bogota will begin considering how it can attract foreign investment to the regions.
Open for Business
Colombia is an attractive market for investors in the extractive, agriculture and service industries. Though low global oil and commodity prices have hurt several Latin American countries, Colombia has grown by an average of 4 percent annually since 2000 and is forecast to grow by 3 percent this year, largely because it was able to secure ample contracts before the global economic downturn.
Colombia has undoubtedly suffered from low oil prices. Its oil exports decreased by more than 40 percent in the first quarter of this year compared with the same period last year. But because the hydrocarbon sector accounts for less than 5 percent of Colombia's gross domestic product, the economy was not completely devastated. As oil prices rise, Colombia will again become an important energy producer. In the meantime, low oil prices may actually help Colombia's future prospects.
State energy company Ecopetrol will continue to privatize to lower costs. Currently, Ecopetrol plans to auction 20 production assets, including its stake in regions such as Catatumbo, Llanos, Putumayo and in the Magdalena Middle and Upper valleys. In June, Ecopetrol raised more than $100 million by selling its stock in the Bogota Energy Co., and in May, Ecopetrol received a five-year, $300 million loan from Export Development Canada, representing about 50 percent of its 2016 budget. And because Ecopetrol's 2015-2020 strategy is to more efficiently and sustainably operate its assets, the company will likely continue to auction off other parts of its operations. In short, Ecopetrol will seek substantial investment in the next few years.
The mining sector, which accounts for about 2 percent of Colombia's GDP, has been particularly hurt by global economic trends. The industry had been accustomed to receiving billions of dollars worth of foreign direct investment. In 2015, however, that investment fell to less than $550 million. The decline is partly attributable to lower gold prices, but it is also linked to high infrastructure investments made over the past decade, which are one-time costs. Still, the news is not all bad. According to the Colombian Mining Association, production of gold was up by 18 percent — almost 3,700 kilograms (about 8,100 pounds) — in this year's first quarter compared with the same period last year.
In fact, gold production is helping bolster the sector against the decline of nickel and coal production, the country's most important minerals. In a global context this matters because, unlike coal and nickel, which are more inclined to global fluctuations, gold has largely maintained its value since mid-2013. As a result, once the FARC conflict ends, departments that have gold reserves will benefit, including Choco and Narino.
There will also be ample room for investment in Colombia's agriculture sector, which accounts for about 6 percent of GDP. According to one government report, 65 percent of Colombia's 11.3 million hectares of farmland is not used. The production of agricultural goods, including coffee, corn and poultry, is set to grow by double digits before 2020. This means that Amazonas, Antioquia, Cordoba, Valle del Cauca and Cundinamarca departments will benefit greatly from agribusiness-related investments and that Colombia is well poised to become one of the world's top food exporters.
Tourism is another sector ripe for foreign investment. Recent market research shows the industry grew by 16 percent in 2015. Bolstered by a weak peso and improved security overall, the tourism industry is expected to continue its expansion: In 2015, there were about 2 million international arrivals; by 2020, international visitors are forecast to increase to 3 million. Most of them will visit to take advantage of the country's health- and ecological-related tourism.
Limiting Factors
The investment landscape in a post-conflict Colombia will be limited by both short- and long-term problems. Dilapidated and inefficient infrastructure will constrain the hydrocarbon industry. The country's more than 8,000 kilometers (4,970 miles) of crude oil pipelines are inadequate to transport the approximately 1 million barrels per day of oil Colombia currently produces. The reliance on tanker trucks to transport crude will continue to reduce competitiveness, and the lack of development of the industry's supply chain will ramp up production costs, reducing profit margins. More important, besides being at the mercy of global oil prices, Colombia's harsh physical geography will limit any energy-related infrastructure projects, since the more difficult the terrain, the more expensive infrastructure becomes.
Oil exploration has also declined. According to the latest drilling report by the Colombian Chamber of Goods and Oil Services, at the end of June 2016, only 20 of Colombia's 210 oil rigs were active. The report warned that the country's oil reserves could dry up in the next 5 1/2 years. This is because substantial investment in the sector, and especially in exploration, is needed. Exploration has thus far been limited by conflict; though Colombia may officially be nearing a peace deal, it is no guarantee that the areas of possible exploration will actually become safer. Kidnapping, drug trafficking and other criminal activities could still hurt business, especially in Meta, Arauca, Putumayo and Narino departments.
Apart from safety concerns, criminal activity could dampen investment in other ways. Almost 90 percent — worth about $3 billion — of Colombia's gold production comes from illegal mining. And it is a problem across sectors. Recently, Colombian President Juan Manuel Santos tasked Energy and Mines Minister German Arce to fight illegal mining. The supreme court also just introduced a new mechanism to enable communities to report illegal mining operations and to require the verification of labor and environmental conditions before a mining license is awarded. This means that any foreigner willing to invest must have a holistic corporate social responsibility program in place, specifically when it comes to social inclusiveness policies, to reduce potential conflict with disgruntled communities. Otherwise, community-led sabotage will remain a risk.
The biggest challenge to the expansion of agriculture, aside from the high costs associated with land development, is the possibility of land reform, which is a term of the FARC peace deal. Thousands of displaced Colombians are demanding that their land, appropriated by guerrilla and paramilitary forces, be returned. Water scarcity will be another factor that agricultural companies will have to consider: The Magdalena and Cauca river basins support more than two-thirds of the country's population but contain only 13 percent of the country's available water. Inadequate infrastructure and uncertainty around how militia groups will dismantle will continue to be the most important limiting factors in the hospitality and management sector, reducing the places that tourists can visit.
Lead Analyst: Diego Solis
Latin America Regional Director
STRATFOR - Global Intelligence
P.O. Box 92529
Austin, Texas 78709-2529
Phone: 512.925.8631
diego.solis@stratfor.com | www.stratfor.com
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