On Sunday 29 May, Colombia will hold presidential elections. These may lead to the triumph of Gustavo Petro, from Pacto Historico, as the country’s first leftist president or to the continuation of the current economic model if Federico Gutierrez, from the conservative coalition Equipo por Colombia, wins. In the last week, Rodolfo Hernandez, a right-wing businessman with no prior experience in politics, has also joined the race.
In Colombia, if no candidate receives more than 50% of the votes, the top two candidates go to a ballot. If required, the second round is scheduled for 19 June. Recent polls indicate that it is unlikely that any candidate will win in the first round.
This year’s election has been labelled as an election for change. Soaring inflation, the inability of previous governments to tackle deep social problems, poverty, unemployment and the repercussions of the Covid pandemic are prominent in voters’ minds and have led to a demand for political renovation.
The results from the Congressional elections last March added an extra layer of complexity. Congress is now highly fragmented. Petro’s Pacto Historico has the largest representation, but only 18% of votes in the Senate and 15% of the votes in the Lower House. In the event of a victory for Petro he will need the support from minority parties to govern.
A positive economic context
The economic backdrop in Colombia is positive. After a pick-up in GDP of 10.6% in 2021, the IMF expects Colombia to grow by 5.8% in 2022, the highest in the region and more than double the average of 2.3% GDP growth expected for South America. Growth in 2022Q1 was strong, at 4% quarter-on-quarter. This was attributed to solid domestic demand. However, high inflation, which surpassed 9% year-on-year and the tightening in monetary policy carried out by Banrep, the Colombian central bank, will slow growth in the second half of this year.
Uncertainty on policies
While the economic backdrop is relatively upbeat, there is uncertainty arising from the different policy proposals of the two frontrunner candidates.
Regarding energy policy, Gutierrez intends to continue most of the policies implemented by recent governments and promote projects to explore the production of blue hydrogen in Colombia to reduce dependency on fossil fuels. Petro also aims to promote renewable energy sources and he intends to not renew existing contracts for oil exploration in Colombia. This has sparked fears among investors and doubts from centrist voters who view this approach as too radical.
Both candidates agree on the need for a pensions reform, an improvement of the tax system and a modernization of the healthcare system. However, they differ on their approach to fiscal spending. Petro wants to promote tax reform to implement a more progressive tax system. In contrast, Gutierrez wants to promote fiscal austerity and more efficiency in public spending. He aims to reduce gross debt to 60% of GDP from 65%, aiming to recover the country’s investment grade status which was lost in July 2021.
The uncertainty generated by the election seems not to have affected domestic asset prices. Equities had a strong start to the year, with the MSCI Colombia index up 5.7% year-to-date, in line with returns in Brazil and Peru. Colombian 10-year government bond yields currently trade at 11.5%. However, in contrast to Brazil and Mexico where parts of the yield curve have inverted, the domestic yield curve remains steep, highlighting a healthier economic scenario.
Overall, we maintain a positive view on Colombia which would benefit from a continuation in orthodox economic policies to contain inflation and promote growth.
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