Santos To Win Re-Election But Security Concerns To Remain High

BMI View: We believe that Colombian President Juan Manuel Santos will win re-election on May 25, though a first-round victory is highly unlikely. We expect that achieving a peace agreement with the Farc will be at the top of Santos's second term agenda, but do not see a long-lasting peace agreement being reached this year and believe that rising smaller criminal organisations will be an increasing concern for the government and firms operating in the country.

We see favourable results for Colombia's ruling coalition in legislative elections on March 8 and a presidential election on May 25. Regarding the legislative elections, we expect the ruling Partido de la U/Partido Conservador coalition to lose some seats but retain its dominance in both houses (currently it holds 80 of the 102 seats in the senate, and 139 of 165 seats in the house). The main challenge to the ruling coalition will come from the newly-formed Centro Demócratico party, headed by former president Álvaro Uribe, who is running for a seat in the senate and is expected to win. Uribe is a fierce critique of President Juan Manuel Santos, and Uribe's traditionally high level of popularity could successfully sway some current members of the ruling-coalition to shift sides to the Centro Demócratico. That said, Uribe's investment-friendly policies are broadly in line with Santos's positions, meaning that risks to policy continuity are low.

Regarding the presidential election, we expect President Santos to win re-election, though a first-round victory, which requires at least 50.0% of the vote, is highly unlikely. According to a February poll, Santos has 28.0% of voting intentions, up from 26.0% in the same poll in September. Santos's strongest challenger is former minister of finance Óscar Iván Zuluaga from the Centro Democrático, though 8.0% of the respondents would vote for him support according to the February poll. We believe that the lack of enthusiasm among voters, with 23.0% of voters undecided according to the poll, would favour Santos in a second round given that the opposition remains highly divided.

Santos Preferred, But Not Enough To Avoid Second Round
Colombia - Results Of IPSOS Poll On Voting Intentions For The Presidential Election

Santos To Win Re-Election But Security Concerns To Remain High

BMI View: We believe that Colombian President Juan Manuel Santos will win re-election on May 25, though a first-round victory is highly unlikely. We expect that achieving a peace agreement with the Farc will be at the top of Santos's second term agenda, but do not see a long-lasting peace agreement being reached this year and believe that rising smaller criminal organisations will be an increasing concern for the government and firms operating in the country.

We see favourable results for Colombia's ruling coalition in legislative elections on March 8 and a presidential election on May 25. Regarding the legislative elections, we expect the ruling Partido de la U/Partido Conservador coalition to lose some seats but retain its dominance in both houses (currently it holds 80 of the 102 seats in the senate, and 139 of 165 seats in the house). The main challenge to the ruling coalition will come from the newly-formed Centro Demócratico party, headed by former president Álvaro Uribe, who is running for a seat in the senate and is expected to win. Uribe is a fierce critique of President Juan Manuel Santos, and Uribe's traditionally high level of popularity could successfully sway some current members of the ruling-coalition to shift sides to the Centro Demócratico. That said, Uribe's investment-friendly policies are broadly in line with Santos's positions, meaning that risks to policy continuity are low.

Regarding the presidential election, we expect President Santos to win re-election, though a first-round victory, which requires at least 50.0% of the vote, is highly unlikely. According to a February poll, Santos has 28.0% of voting intentions, up from 26.0% in the same poll in September. Santos's strongest challenger is former minister of finance Óscar Iván Zuluaga from the Centro Democrático, though 8.0% of the respondents would vote for him support according to the February poll. We believe that the lack of enthusiasm among voters, with 23.0% of voters undecided according to the poll, would favour Santos in a second round given that the opposition remains highly divided.

In his second four-year presidential term, we expect Santos to focus on reaching a peace agreement with the country's main left-wing insurgent group, the Fuerzas Armadas Revolucionarias de Colombia (Farc), though we believe that achieving a long-lasting agreement this year is unlikely ( see 'Domestic Politics Crib Sheet', January 17). Regardless of the outcome of the peace talks, the Farc has become an increasingly disjointed organisation, and believe that there is a risk that dissidents will join smaller crime-organisations, which could see theft and extortion rates head higher in the coming years.

Santos Preferred, But Not Enough To Avoid Second Round
Colombia - Results Of IPSOS Poll On Voting Intentions For The Presidential Election

Three Scenarios For The Outcome Of Farc Peace Talks

We see a high risk of greater attacks on oil pipelines in the coming months, as the Farc attempts to gain leverage in the ongoing peace negotiations with the government, which began in the fall of 2012. Indeed, attacks on pipelines have increased dramatically from 31 in 2010 to 259 in 2013, which has weighed on the profitability of majority state-owned energy company Ecopetrol, and will likely continue to do so ( see 'Ecopetrol Striving To Write A New Chapter For Colombia', March 6). While the secretive nature of the closed-door peace negotiations make the outcome hard to predict, we present three possible scenarios below.

Agreement Reached Before The Presidential Election (Highly Unlikely): While initially President Juan Manuel Santos announced that he expected to achieve a peace agreement with the Farc before the election, at one point setting a soft deadline of November 2013, this is a highly unlikely event. Indeed, the negotiations have only delivered two preliminary agreements out of six items on the agenda, and a rushed peace deal is unlikely as it would be prone to significant political backlash in light of the coming election, given strong opposition to the negotiations by influential political figures such as Uribe and Zuluaga.

Agreement Reached Within Santos's Second Term (Plausible): While we believe that a peace deal is unlikely in 2014, it is plausible that Santos will secure a deal within his second four-year term. Santos's political legacy is highly dependent on the peace talks, which increases pressure for him to compromise on issues such as immunity or a reduction in prison terms for Farc members in order to reach a behind the door agreement with Farc negotiators to demobilise. That said, even if an agreement with Farc negotiators was reached, there is no guarantee that all Farc factions will agree with the terms, and attacks to infrastructure could continue. Moreover, in the event of a peace deal with the Farc other insurgent groups, such as the Ejercito de Liberación Nacional, which mostly targets multi-nationals, would likely step up attacks to demand a similar negotiating process with the government.

Peace Talks Fail (Plausible): Ongoing attacks on pipelines could build pressure for Santos to return to a hard-line approach against the Farc and abandon the current negotiations. In addition, lack of concrete results could create social and political fatigue towards the current peace process, especially as controversial aspects of the process, such as political participation and legal charges, will likely be drawn-out for a long period. This would particularly be the case with Uribe in the senate, given his strong opposition to the ongoing peace negotiations and his heavy influence in Colombian politics. If peace talks are abandoned, we would expect an immediate uptick in attacks and a sharp deterioration in investment sentiment towards the country.

Attacks To Continue To As We Approach Elections
Colombia - Attacks By Left-Wing Insurgents

Crime Will Remain A Rising Concern For The Next Administration

Regardless of the outcome of the peace process, we expect crime to remain a rising concern for the next administration and firms operating in the country. Indeed, a clamp-down on left-wing insurgent groups in recent years has seen former members join smaller organised crime groups, known as BACRIMs, which are involved in cash-generating activities such as theft and extortion. While Colombia's homicide rate has decreased in recent years, theft and extortion rates have been on the rise ( see chart below). We expect this to continue, especially if members of the Farc continue to demobilise. However, even in face of rising crime rates, which are not considered to be particularly high by Latin American standards, we expect Colombia to remain a generally attractive foreign investment destination in the coming years, given the government's market-friendly inclination and the economy's robust growth potential.

Enter graphic title
Colombia - Crime Rates By Type, cases per 100,000 population

Risks To Outlook

There is a modest risk that Santos will not get re-elected, especially if the opposition successful unites behind Zuluaga in an expected second-round election. If Zuluaga were to win, we would expect the Farc negotiations to be abandoned, as he, like Uribe, favours a hard-line approach against left-wing insurgents. Under such a scenario, we believe investment sentiment towards Colombia will rapidly deteriorate in fear of an uptick in attacks by the Farc.

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