Colombia’s Raw Peace Could Open New Era of Higher Growth

 

August 26, 2016 [COLOMBIA, FARC, PEACE]
Charles Roth


Resolution to the long conflict isn’t certain, but a diminished FARC and post-conflict spending programs improve the odds for peace. The next step: a national referendum on the deal.

Colombian National Congress and Capitol

Colombia’s government has signed a peace accord with the Revolutionary Armed Forces of Colombia (FARC), Latin America’s oldest Marxist insurgency, possibly paving the way to end more than half a century of conflict in the Andean nation. Official estimates put the toll of those killed at more than 220,000, with millions more displaced. Peace, and the ensuing peace dividend, would no doubt be the crowning, if somewhat tainted, achievement of President Juan Manuel Santos.

While the cessation of hostilities raises the prospects for a sustained rise in potential economic growth, it comes at some cost, as those responsible for much bloodshed and many crimes will effectively secure amnesty if they confess before truth-and-reconciliation tribunals.

Economically, peace will be an unmitigated positive. A study by Colombia’s planning ministry last December estimated that annual foreign direct investment could triple to $36 billion from $12 billion with a resolution to the conflict, as consumer and business sentiment would improve sharply amid a reduction of insecurity and crime in areas where the FARC has a presence. The deal could ultimately boost potential economic growth in the resource-rich country, which is slightly bigger than Texas and California combined, by nearly two percentage points to almost 6%.

But the challenges to the accord’s completion on the ground are significant. Not all FARC factions may be on board. To lure them as well as those Colombians with reservations about the deal, the government has committed to spending up to a reported $40 billion to compensate victims, build out rural infrastructure, substitute the FARC’s reliance on narco-trafficking with legal agricultural products and integrate FARC fighters, the vast majority of whom have never known gainful employment, into civil society. That’s a lot of money at a time when hydrocarbon prices remain at depressed levels, and Colombia’s top exports are oil and coal.

Yet it may be feasible, given the government’s adroit economic management. As Thornburg’s Pablo Echavarria wrote in January, Colombia’s fiscal reforms, flexible exchange rate and major free trade agreements have helped the economy adjust. And disbursements as a result of the deal would no doubt be made over time, as the accord’s terms are met. The resources won’t, however, come from military spending, at least initially, Finance Minister Mauricio Cardenas has suggested. Since 2000, Colombia’s defense spending, which ran over $12 billion in 2015, has ranged roughly around 3.5% of gross domestic product, according to the World Bank, the most in Latin America behind Brazil. As the FARC has a history of buying time to regroup and resume its insurgency, the government would be wise to maintain its military superiority, with nearly 500,000 members split between the army, navy, air force and police, and all with associated intelligence services. Both the U.S. and E.U. consider the FARC a terrorist organization, and in recent decades it has become viewed less as an ideologically driven rebel movement than a crime syndicate, financing itself via drug trafficking, kidnapping and ransom. It has pressed children into its ranks, which now number between 6,000 and 7,000, down from some 20,000 in 2000, security forces estimate.

Colombians are set to vote on the deal, which was brokered by the Cuban government, in an October 2 referendum. It doesn’t include the much smaller National Liberation Army, another nominally Marxist insurgency. Polls suggest that the vote will be close, as FARC fighters who confess to war crimes will effectively be on parole and required to perform community service for up to eight years. Given all the damage and terrible suffering the FARC has caused, many Colombians, including former President Alvaro Uribe, who aggressively took the fight to the FARC and did so much to weaken the group, don’t see this as a just outcome. But perhaps just as many will welcome the possibility that peace takes hold.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit our literature center. Read them carefully before investing.

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

The performance data quoted represents past performance; it does not guarantee future results.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

Please see our glossary for a definition of terms.