Low international crude prices continue to exact their toll on Colombia. The finance ministry is forecasting GDP growth at 3.6% this year, and while that’s a full point below 2014, it’s a decidedly rosier outlook than Colombia’s central bank and international agencies, which predict expansion between 2.5% and 3.2%.

Analysts agree that there are positive elements behind the growth, including a depreciating peso, but the market consensus is skeptical.

“I think 3% is very optimistic. We still have not seen reflected in consumption and investment the strong shock from the decline in oil revenue,” says Joaquín Barreto, portfolio manager in Colombia for Black River, an asset management firm. “We were in trouble with oil at $60 a barrel, we are in even bigger trouble with oil around $50 a barrel.”

The size of current account deficit, which is now close to 7% of GDP, has also prompted close attention. While the deficit is expected to decrease later this year, it did compel the government to propose slashing spending for 2016, including significant cuts in public investment and freezes in general expenses and public sector salaries.

Finance Minister Mauricio Cárdenas called for a “policy of austerity”, when he submitted the budget to Congress for approval in mid-July. Public investment through state companies in 2016 will be just shy of $15 billion, an 11% drop from this year.

The fall in oil prices, combined with the impact of the government’s tax reform last year and rising concerns in the business community about the ongoing peace negotiations with the Revolutionary Armed Forces of Colombia (FARC), are troubling. These elements are tempered by a healthy consumer confidence, a popular infrastructure program and a hopeful outlook on the impact of a weaker peso on the manufacturing and agricultural industries.

Crude troubles

The ramifications of tanking oil prices are spread wide in Colombia, from deterring investment to a continuing depreciation of the peso.

The slim gains in oil output for Colombia, which derives about 20% of its government revenues from the resource, have been directly undercut by lower prices. “The oil price shock is hitting and will hit Colombia very hard. It has been the hardest hit in the region, with the exception of Venezuela,” says Edward Glossop, an emerging markets economist focused on Latin America at Capital Economics in London.

The decline in oil prices is wreaking havoc on trade, with export revenues in May reaching $3.35 billion, down nearly 40% from the $5.5 billion in the same month last year. Export earnings were down 38% in the first five months of the year. Imports declined on average 18% in both April and May, marking the worst two months on the record in this decade, according to the state statistics agency, DANE.

“Mining and oil represent more than 80% of Colombian exports, which is why the collapse of oil prices means a steep decline in growth,” says Walter Molano, managing partner and head of research at US-based BCP Securities.

The lack of any major discoveries, the decline of the country’s oil reserves, which are estimated to last no more than a decade, and security issues are also keeping investors at bay. The FARC and a smaller guerrilla group, the ELN, have attacked pipeline infrastructure 49 times this year, according to the Colombian oil producers’ association.

Foreign direct investment in the first half of the year was $6.85 billion, down 13% year-over-year. Separately, portfolio investments were down 28% in the same period, totaling $4.25 billion.

Declining oil prices are also the root cause of the major depreciation of the peso, which started collapsing in 2014 and fell nearly 30% in the first eight months of 2015 to stand near a 12-year low against the dollar. The depreciation had been welcomed, but the steady decline and big drop in July — just above 8% — has started to create concern about inflation.

A lower peso is good, says Rupert Stebbing, managing director of equities at Bancolombia, “as long as inflation is not imported”. He adds that it “would be much more beneficial if the industrial sector had more to export”.

Dutch disease

The Colombian peso had been gaining ground for nearly a decade. More recently, the currency skyrocketed due to huge windfalls from crude oil prices topping $100 a barrel and a rally sparked in March 2014 when JPMorgan increased the weight of Colombia’s peso-denominated debt in its bond index. The move generated huge inflows and the peso’s value jumped.

Inversely, the peso started its decline when the bottom fell out of oil prices and JPMorgan trimmed its weighting of the local currency instruments in its index.

President Juan Manuel Santos’ government has been bullish on the peso’s depreciation, seeing it as a necessary boost to the country’s manufacturing industry and its exports. An increased manufacturing output and the anticipated boom in agriculture have not materialized, however and analysts fear that Colombia is dealing with a classic case of the Dutch disease, as foreign currency inflows into the extractive sector over the past decade have undermined the industrial sectors.

“Manufacturing has flatlined since 2007 while the economy grew on average by 5% annually. Now, we are not going to see an increase in manufacturing just because there is a weak peso,” says Glossop.

Constraints in the labor market and on capital goods will keep manufacturing from becoming the avenue to growth forecast by the government, Barreto says. A turnaround in manufacturing is possible because of the lower peso, but it won’t be significant in the short-term.

“The theory (of depreciation) says that it is good for manufacturing and agriculture, but exports have not grown. These sectors have suffered for 10 years under a strong peso and expecting them to recuperate overnight makes no sense. It will happen, but not soon,” Barreto says.

Crops and conflict

Agriculture remains a tricky issue for Colombia. The government had hoped for a big boom in agriculture with resolution of the five-decade conflict with the FARC and expansion of the country’s transport infrastructure. Talks with the FARC, which were supposed to take months, continue to drag on and attacks, while fewer, have kept investors cautious. Infrastructure has improved and is set to meaningfully advance by the end of the decade, but projects have taken longer to materialize.

Scrapping restrictions on the accumulation of land by agribusiness is critical for agriculture, Barreto says. The government, however, faces stiff opposition from farmers’ groups and from Congress to any modifications that could be seen as increasing land concentration. Colombia has one of the most inequitable land distribution systems, with less than 1% of the population owning more than 60% of the prime farmland, according to the US Agency for International Development.

Questions mount

The peace negotiations with the FARC are vital to agriculture. Negotiations to end the 50-year conflict began in October 2012 with President Santos forecasting that they would wrap up in just a few months. While that timeline expired, Santos centered his hard-fought 2014 re-election campaign on sealing a deal.

The talks entered a critical stage midway through 2015 after a series of FARC attacks killed soldiers and civilians and targeted energy infrastructure, especially pipelines. The FARC announced a ceasefire in early July and Santos followed suit at the end of the month with his own announcement, ordering an end to air strikes against FARC camps as a way of “de-escalating” the conflict.

Government and FARC negotiators resumed meetings in Havana, Cuba, that same month in an effort to jump-start the talks. The government has said that it wants a deal by November, but confidence is waning.

Juan Fernando Ramírez, a member of the Colombian chapter of the Pacific Alliance Business Council, says there is a growing division in the private sector about the talks.

“Santos needs to make a decision and stick to a date to end this. The private sector has lost patience and the investment and growth are starting to suffer. The president needs to weigh the political benefits he hopes to achieve against the economic benefits this will have,” says Ramírez.

Fewer Colombian businesspeople followed Santos to Peru for the most recent presidential summit of the free-trade group Pacific Alliance, a result of falling confidence in the government, Ramírez says. “There is a great deal of disappointment today.”

Market analysts are also skeptical of a resolution as FARC leaders will likely reject any proposal that would involve imprisonment. “There is no chance for an amnesty. The FARC leaders do not want to go to jail, but this is unavoidable. The new four-month timetable is for Santos to save face. He will say that he gave the FARC all the chances necessary, but they did not comply,” Barreto says.

Potential for growth

While the decline of oil prices and lingering peace talks have taken some of the shine off of Colombia’s economy, bright spots remain. Colombia will register one of the higher growth rates in Latin America this year and forecasts for 2016 are somewhat better.

The IMF has Colombia’s growth picking up to close to 4% in 2016, up from 3% for this year. Capital Economics, which is on the low end of the spectrum for this year with a forecast of 2.5% growth, sees the economy recovering to above 3% in 2016.

Colombia is well positioned to strengthen exports and boost internal production, even if the impact will not be immediate, Ramírez says. “The Colombian economy is not only about oil, as is the case in Venezuela. We have a wide range of exports that will continue to expand.”

The government position that the peso depreciation will lead to a faster turnaround in the manufacturing sector as Colombians opt for domestic products instead of more costly imports is also accurate, Ramírez says.

Infrastructure is imperative and even the sharpest critics believe that the Santos government is moving in the right direction. “The 4G project has a very good legal framework, good design and is functioning well. It will compensate somewhat for a decline in oil and mining,” says Barreto.

The $25 billion investment program includes improving roads and ports. The government expects several projects, such as dredging the Magdalena River to create a new riverway, to transform transportation and spur investment in manufacturing. The $600 million project will allow large cargo ships to move along a 560-mile stretch from the Caribbean to the outskirts of Bogotá and is set for completion by 2020. The finance ministry expects increased river transport to add up to a point to GDP growth by allowing minerals, oil and consumer goods to be moved by barge instead of overland, saving time and money.

Tim Groser, New Zealand’s trade minister who was in South America in July for the Pacific Alliance summit held in Peru, says Colombia was doing the right things to get through international turbulence.

“Colombia has amazing potential. It still has some tough issues of a security nature and for economic development, but I see it as a very dynamic country,” Groser says. LF