Companies Shouldn't Fear Petro in Colombia's Elections

Businesses should prepare, not panic, ahead of the critical presidential poll, writes Theodore Kahn, a senior analyst at Control Risks in Bogotá…

By Theodore Kahn, a senior analyst in Control Risks, Bogotá

A lot will be at stake when Colombians head to the polls later this year. The presidential election will likely come down to a closely fought run-off on June 19 between two candidates with dramatically different visions of the future. Gustavo Petro, a left-wing Senator and former mayor of Bogotá, wants to overhaul Colombia's economic and social model by abandoning fossil fuels and mining, increasing state support for local industry and farmers, and strengthening the government’s role in health and social security. Federico Gutiérrez (known as “Fico”), a centre-right former mayor of Medellin, is pitching stability and continuity in contrast to Petro’s promise of radical change. His campaign is playing off longstanding fear of the left in a country that saw a decades-long guerrilla insurgency and has witnessed first-hand the effects of Venezuela’s economic implosion.

The election comes after several tumultuous years. Since 2019, Colombia has been rocked by massive protests, and the social and economic disruptions of the pandemic sent nearly 4 million people into poverty. In recent months, inflation has dealt a new blow to vulnerable households, with food prices more than 20% higher than a year ago. The next president will have to address this complex social panorama, while also facing fiscal constraints, a fragmented Congress, and a deteriorating security environment in many parts of the country.

While many companies and investors are worried about the implications of a left-wing government, Colombia’s key challenges—and business risks they entail—will remain regardless of who wins the election. Companies should understand how these factors will interact with the actions of different potential governments to create specific risks to their business.

Petro and political uncertainty

Petro’s platform envisions major policy and regulatory changes in several areas. First, he wants to phase out oil and mining production by ending licenses for oil, gas, and mineral exploration. He also proposes a slate of industrial policy measures such as tariffs and public subsidies to promote domestic agriculture and industries. On social policy, Petro would look to increase the role of the government in the provision of health services and pensions, at the expense of private actors. To pay for all this, he wants to overhaul Colombia’s tax system, increasing the effective personal income tax rate for the wealthy and eliminating exemptions and benefits for certain industries and companies.

What will Petro do?

In the extractives sector, the executive could stop issuing new licenses for oil, gas, and mineral exploration without congressional approval. A Petro government could also create regulatory barriers to mining and hydrocarbon projects by establishing more demanding rules for prior consultation of local communities and stricter environmental requirements. On trade policy, the executive has the power to set tariff levels and impose non-tariff barriers to limit imports. While such changes could be challenged in the courts and through international dispute settlement mechanisms, these processes often take years to be resolved. Oil and mining companies and importers, especially of food and clothing, would face heightened regulatory risk under a Petro government.

In other areas, however, Petro would face opposition from a fragmented Congress, where his Historical Pact coalition will lack a majority. His health plan, which would cut out the so-called Health Promotion Entities (EPS) from the insurance market and greatly expand the government’s role in providing health services, would almost certainly be blocked by centrist and centre-right parties. On tax and pension reform, some version of his proposals could win legislative approval, but that will require serious negotiation and compromise from the government. An administration led by Fico would face governability challenges too. His coalition will also lack a majority in Congress, and left-wing parties will be staunchly opposed to his agenda. Business-friendly reforms would likely struggle to gain congressional approval. Still, businesses will likely face changes to the corporate income tax in 2023 regardless of the election outcome. A tax reform will be necessary during the first months of the next government, and both leading candidates propose eliminating exemptions and special benefits that favour some industries and firms.

Social unrest

Social discontent will remain a driving force in national politics. The groups behind the protests in 2019 and 2021 will be relevant actors on the national stage regardless of who wins the presidency. Petro is clearly the candidate who represents their demands. If he becomes president, social groups will expect progress on issues such as improving access to health and education, supporting small farmers, and tackling corruption. These high expectations could lead to renewed social unrest if Petro’s agenda is blocked by Congress or the courts. In this scenario, Petro would likely call for demonstrations in support of his policies—and against the institutions he views as obstructing social transformation.

If Fico wins, the risks of social risk will be even more acute. The social groups who took to the streets in 2019 and 2021 will view a Fico presidency as a continuation of the Duque administration and will likely question the legitimacy of his election in light of recent concerns over the impartiality of Colombia’s electoral authorities. Protests against the new government would be likely from election day onwards.

The macroeconomic context

Colombia’s next president will inherit a challenging macroeconomic scenario. The pandemic caused the fiscal deficit and public debt to surge in 2020 to 7.8% and 64.7% of GDP respectively, leading  two major credit rating agencies downgraded Colombia’s sovereign debt to junk status in 2021. Meanwhile, the Colombian peso lost 14% of its value over the course of 2021, amid concern over the fiscal situation and uncertainty over the election.. Inflation accelerated at the end of 2021 and reached 9.2% year-over-year in April 2022 - the highest level in over 20 years.

Petro has raised alarms with comments about changing the structure of the Central Bank’s board of directors and using monetary emission to finance social expenditure. However, we believe the bank’s autonomy and technical orientation will be maintained. In addition, any attempt by Petro to raid off-budget funds to ramp up spending would likely be checked by institutional constraints. Still, uncertainty surrounding Petro’s policies could cause further depreciation of the peso in the second half of 2022, which would exacerbate inflationary pressures. Macroeconomic risks will not disappear if Fico is elected, either. His vague proposals on taxes and spending create doubts over his seriousness about addressing the precarious fiscal situation. Under either scenario, deficits and debt levels are likely to remain well above pre-pandemic levels for several years, pushing up borrowing costs.

What should companies do?

Our first piece of advice to companies and investors is not to panic over the possibility of a left-wing government. We do not foresee a loss of macroeconomic stability or radical change in the economic model under a Petro government. Of course, that does not mean there are not risks for the business environment over the next four years. But we believe the key risks have as much to do with the underlying social and economic context as they do with the policy decisions of the next government. While they will be present regardless of who wins the election, these risks will manifest themselves in different ways and on different timeframes depending on the makeup of the next government.

Companies should therefore prepare to monitor risks and develop contingency plans for these different scenarios. They should begin by identifying the most relevant risks for their business and the factors that will determine whether that risk will materialize or not. Based on this, companies can establish indicators that help them monitor whether a particular risk is more or less likely to arise and develop relevant mitigation measures. This approach will allow businesses to respond to key risks in a measured and proportionate way without forgoing the opportunities that Colombia will continue to offer.