Given the scale of the internal conflict in Colombia, it would perhaps not be unreasonable to expect more investor excitement at the prospect of a peace deal. More than half a century of conflict with the Farc guerrilla group has claimed more than 220,000 lives and victimised more than seven million.
Yet Colombia’s government bonds and currency have traded more or less in correlation with oil prices for nearly two years as traders place more emphasis on the impact of lower commodities than any perceived benefits of a peace accord.
Among the international investor community, there is a school of though that says the so-called “peace dividend” — the economic benefits of a reduction in violence — has already happened.
One head of research at a sovereign debt fund says he is “sceptical” about the positive impact of the peace deal and expects just a “minor reaction”.
“People have known for years that Colombia is a safer place,” he says. “The conflict has been waning for a while now so I think the effects have been seen.”
It is true that levels of violence are well down from the start of the decade, thanks in part to a huge military effort waged against the Farc by former president Álvaro Uribe as well as the demobilisation of paramilitary groups.
In the last decade, Colombia has experienced increased levels of investment and tourism , earned solidly investment grade credit ratings and, according to the World Bank, lifted six million people out of poverty.
THE CONFLICT CONTINUES
Yet — although it may be hard to imagine for those business travellers whose visits to the country revolve around the new high-rise office blocks and thriving restaurant and nightlife scenes of Bogotá and Medellín — Colombia remains a country in conflict.
“I don’t think it is right to say that the effects of the peace dividend have already been mostly felt,” says Ana María Ibáñez, dean of the economics faculty at Bogotá’s prestigious Los Andes University. “Firstly, although violence has decreased in the last decade, the armed conflict has continued in many regions and these regions have extremely low productivity — particularly in agriculture.
Moreover, says Ibáñez, the conflict has caused not only destruction but also uncertainty.
“Where there are armed groups, threats and extortion still exist in spite of the reductions in violence,” she says.
The disparity in the levels of wealth and security enjoyed by different regions of Colombia is characteristic of this divided country. Ibáñez was one of the co-authors of a book published earlier this year, The Social and Economic Costs of the Conflict in Colombia, which looks at exactly who has suffered most from the conflict and how the costs have been felt.
As the introduction to the book points out, “although the country suffers high costs caused by the armed conflict, these costs are concentrated in a disproportionate manner within certain groups of society.”
Increases in investment have not been proportional either. Most of the uptick in FDI in the last decade has been in the hydrocarbon sector as the government facilitated private investment to make the most of high oil prices. And Ibáñez argues that the increase was more to do with a change in regulations than the dynamics of the conflict.
“In agriculture and service industries investment has remained low,” she says.
COMMODITY COSTS
But one thing is signing a peace accord; another is implementing peace. Amid a host of challenges is how to finance a costly process, including victim reparations and infrastructure costs.
Low oil prices have forced the government into austerity just when it most needs money. Consequently, the government has been seeking funds from abroad to help fund peace.
Analysts at research firm Global Risk Insights warned in December that Colombia lacked post-conflict funding, claiming the country was unlikely to receive more than $6bn in international grants to finance peace over the next 10 years and putting the total cost at $90bn.
But there is some scepticism surrounding some of these outlandish estimates.
“Although the peace deal may require increased spending, especially to accommodate the investment needed in rural areas, the government has already been investing — to the extent of 1% of GDP — in areas like victim reparations,” says Erich Arispe, senior director at Fitch Ratings. “We expect that part of the spending will come from increased government revenues.”
Daniel Velandia, chief Colombia economist at Andean investment bank Credicorp in Bogotá, says he does not expect costs to be greater than 1% of GDP and does not think it will be too difficult to raise that money through a planned tax reform.
And if market fears about more external debt being required are true, the country’s conservative macro-economic policy of recent years means it should not be an issue.
“If more external financing is required and the government’s debt to GDP ratio has to increase by say 0.2% or 0.3% to finance the peace deal, I don’t think it is too serious,” says Velandia.
Fitch, which affirmed Colombia’s BBB rating and stable outlook in December, sees encouraging signs in the government’s fiscal management.
For Arispe, the important thing — should peace require external financing — is that it goes “hand in hand” with a commitment to fiscal consolidation.
Under its fiscal rule, Colombia had flexibility to increase its deficit as oil prices declined. But “the government has sent an important message by saying it would mark a line in the sand and comply with the 3.6% target in 2016”, says Arispe.
The conflict hardly comes free, either.
“Yes, the economy has enjoyed a dividend from lower violence over the past decade,” says Velandia. “But remember that the country still spends a lot of money on the conflict in rural areas, on military security, on repairing infrastructure.”
SHORT TERM COSTS, LONG TERM BENEFITS
Perhaps the financing worries are generated by the likelihood that the benefits of peace are not going to be visible in the short term, casting doubt on finance minister Mauricio Cárdenas’ assertion that peace will pay for itself.
Velandia admits he is still not even considering the peace agreement in his economic forecasts as he does not predict an immediate impact. “In the short term there will be costs, in the medium to long term we should see benefits,” he says.
With extra costs just as the public purse feels pressure, there have been arguments that the timing of the peace deal is not ideal. Furthermore, the process must go through a plebiscite and the president’s popularity — and thus the potential success of the plebiscite — is highly dependent on the economy.
But Velandia says you could also see the peace process as very timely.
“Rating agencies see the approval of peace as key to the approval of a tax reform that will help the country adjust to low oil prices,” he says.
If estimating costs of the peace process is tough, estimating the potential benefits is even harder. Initially, finance minister Mauricio Cárdenas said that peace would increase potential GDP by 1% per year, while by 2015 President Santos was claiming a 1.5% improvement.
Then a report from the economic planning department estimated potential GDP would go from 4% to 5.9%. Away from the government, most Wall Street economists have been sceptical of these numbers.
Much of the focus among economists has been on a potential improved investment climate — and this certainly seems to be the potential benefit that will be easiest to both pull off and measure. “Even if all we see is a stop to attacks on the country’s infrastructure, there still has to be a positive impact,” points out Velandia.
The Credicorp economist believes the main benefits will come from a reduction in the perception of risk in certain sectors — including agriculture, mining, oil, infrastructure and energy — and real improvements to investor confidence.
Indeed, after meeting Santos in Washington in February, IMF chief Christine Lagarde highlighted that the peace process would “enhance the climate for investment and growth”.
But ensuring the full benefits of the peace process is not as simple as clearing away the guerrillas and welcoming the world to plough money into the countryside. “The process needs to be accompanied by other reforms, such as in agriculture, that incentivise large scale investments in certain sectors,” says Velandia.
INVESTMENT IN HUMAN CAPITAL
Moreover, successfully transitioning to a more peaceful country and ensuring the benefits stretch to the whole population is arguably a harder task than signing the accord. “For the peace agreement to really bring economic benefits, the transition has to be made in such a way that avoids guerrilla fighters becoming armed gangs as has happened in parts of Central America,” says Ibáñez.
Capitalising on the peace deal requires “real state presence and investment” so that conflict regions become productive, she says.
Several chapters of Ibáñez’s new book look at such a diverse range of arenas affected by the conflict — from small farmers, to the decision making of companies, to mental issues in the local population — that it makes attempts to put an exact percentage on the benefits of peace look, quite frankly, silly.
What is clear is that it is also futile to separate the human cost of the conflict from the economics. Look for benefits beyond just an improved investment climate and the idea that the “peace dividend” has already occurred in Colombia seems even more out of touch.
One statistic provided by Ibáñez is particularly revealing. Studies have shown that the conflict has reduced the average length of a person’s education by 0.7 years, she says. “Given that average education increased by 2.5 years between 1980 and 2010, it’s the equivalent of losing six years of progress,” she says.
“Economic benefits will not just come from the opening up of different sectors to more investment but from improvements in human capital.”
Maybe the lack of investor excitement derives from a need to see immediate returns. Even for private equity investors with five to seven year horizons, nothing is likely to happen in that period that will affect the “feasibility of an investment”, according to Miami-based investment consultancy firm Septima Capital Partners.
“It will be a long process, at least a decade, before the economic impact of the peace agreement is fully capitalised,” concludes Ibáñez.
Yet after waiting more than 50 years for peace, for the Colombian people waiting another 10 to see the economic benefits should be more than worth it.