This week featured two shockwaves that will reverberate throughout the Colombian economy for years to come. The first struck Thursday with the signing an historic ceasefire that ended more than half-century of conflict with the Revolutionary Armed Forces of Colombia (FARC). While a final peace accord still must be signed — and ratified by a national vote — the country has set itself up to potentially become a more secure and less-violent place.
The gradual progress towards that goal over the past 15 years has already added billions in economic growth and foreign direct investment. The rest of the world has begun to realize that what was nearly a failed state in the late 1990s has become one of the region’s most vibrant economies. And this monumental laying down of arms can add a definitive sign of hopefulness for the economy in addition to the obvious social leap forward it represents.
In the short term, if an accord can be reached and approved by popular referendum, it may stave off a tax hike. Just this week, Colombia President Juan Manuel Santos issued a warning that the country would need to raise taxes, amid sagging oil revenue, to continue funding the war if it cannot be ended. “It’s been said we’ll raise taxes to pay for peace, but it’s the opposite,” said Santos. “If the war continues we’ll have to raise taxes to finance it. War is more expensive.”
The bigger outcome is how peace will set the stage for greater economic growth. The Institute of Economics and Peace says the nation spends more than $100 billion per year to fight violence, and a 2014 study from the Bogotá-based Conflict Analysis Resource Center found that the annual GDP growth rate could double under peace.
Colombian Finance Minister Mauricio Cárdenas touted some other ambitious numbers earlier this month at an economic forum held by the Council of the Americas in Bogotá. If peace is reached, the economic growth it creates, on top of the ongoing 4G national infrastructure overhaul, will bring the per-capita GDP in Colombia to $17,600 by 2026 — a vast jump from the $7,900 in 2014, per the World Bank.
The other side of the coin is the cost of peace. It is hard to put a precise number on what it will take to pay for victim compensation, brining the displaced back to their homes, land reform, reintegrating former combatants into society, and other post-conflict programs. It will be high, however, and one Colombian senator put the minimum price of peace at $44 billion over a decade.
But regardless of the ultimate cost, most agree that the upside of peace will far outweigh the logistical costs that come with ending the conflict. The ceasefire has, and will continue, to spur harsh political fights throughout the nation, but investors are largely in agreement about the positive economic gains that should follow Santos signing an agreement to end hostilities with FARC.
Less than 24 hours later, the United Kingdom’s made even larger news by voting to leave the European Union. While the global financial fallout is unlikely to match the worst projections from before the referendum, stocks across the world took a beating in the first day of this new reality, and the English pound suffered an unprecedented drop.
Analyst firm Capital Economics stresses that the world is not in for a repeat of 2008. “Once the dust has settled, the global economic implications of the UK’s vote to leave the European Union are likely to prove much less dramatic than many had suggested during the past few weeks,” said Andrew Kennington, the firm’s senior global economist. “The adverse effects on the UK itself and the direct impact on other European economies should be small. And there may be some offsetting benefits for the global economy, including looser monetary conditions. However, the long-term political consequences could turn out to be far more significant.”
The financial implications have already been significant, however, and Brexit’s effect on oil prices will continue to shape Colombia’s short-term revenue. Brent crude fell 4.9% today (and was down as low as 6% in intraday trading) to close at $48.41 per barrel. While the one-day fall is meaningful, the larger concern for Colombia is that oil’s six-month rally might be over for the foreseeable future.
The commodity, which makes up roughly two-thirds of Colombia’s exports, hit a low of $27.88 USD on January 20 this year before steadily climbing for the past six months. It hit a high of $52.51 USD on June 8 and brought hopes to the nation that more gains could be ahead in the second half of the year. But now, with so much global uncertainly surrounding the United Kingdom and European Union, many analysts believe that is unlikely any time soon.
“The significantly higher risk aversion is likely to make it hard for prices to regain the $50 per barrel mark in anything like the near future,” said Commerzbank analyst Carsten Fritsch from Frankfurt, Germany, in a statement.
Global oil giant BP highlighted the fact that, one day after the vote, nobody knows what the future will hold. That doesn’t imply a looming plummet, but it also doesn’t offer much solace. “It is far too early to understand the detailed implications of this decision, and uncertainty is never helpful for a business such as ours,” said a BP representative.
Colombia cannot do anything overnight to change its reliance on oil, and as a result it could further fallout in the terms of its exchange rate. The peso nosedived along with oil prices starting in the fall of 2014 and hasn’t recovered nearly two years later. The currency devalued from around 1,900 pesos to the U.S. dollar in August 2014 to a high of 3,436 to the dollar in February 2016. It has gained some strength back since then, settling around 3,000 to 1 in mid-April — and the peso has actually gained slightly since the Brexit vote results came in.
But other regional currencies have taken a big hit. The Mexican peso, also heavily tied to oil prices, hit a record low today while falling more than 7% in value compared to the U.S. dollar. The Brazilian real fell 2% despite recently reaching a 2016 high. And the Chilean peso also tumbled to undo recent gains. So, after seeming to stabilize in recent months, the fate of Colombian peso once again looks uncertain.
Then comes the long-term political fallout from Brexit that Capital Economics suggests will be the biggest long-term bombshell. Many are already speculating that Scotland, which wants to remain in the EU, will hold a vote to leave the United Kingdom. Northern Ireland voters were similarly uninterested in leaving the union. And since the results were tallied, right-wing politicians in France, the Netherlands, and Poland have called for referendums to let the people decide their future in the European Union.
The road ahead is long, with the U.K. divorce and its coming new trade deals still years away. But a world in which free trade is curbed and global capital is tighter could adversely affect Colombia’s hope to regain the high GDP growth rates it reached earlier this decade.
Before the vote, Capital Economics, according to CNBC, listed Colombia along with South Africa, Peru, and Turkey as countries that may be “hardest hit” by Brexit. With current account deficits above 4% of GDP, it says each will be be constrained if financing becomes harder to come by in the global market.
“These are the economies that are most reliant on external financing and capital outside of their country for spending,” said Capital Economics. “Any acceleration in foreign outflows could really hurt these countries.”
The downside risk of Brexit cannot overshadow the historic agreement to lay down of arms. This week has brought undeniable hope to a nation of almost 50 million. But a new reality, that of a Colombia finally at peace, will now have to built on top of a global economic and political foundation that just became a lot less stable.
(Photo: Colombia President Juan Manuel Santos (L) and FARC chief Rodrigo Londoño (R), along with Presidente de Cuba, Raúl Castro (C), display the ceasefire agreement they signed in Havana on June 23. Credit: Juan David Tena/SIG)