Colombia: Infrastructure sector to outperform

04 September 2017

Implementation of a peace deal with the Fuerzas Armadas Revolucionarias de Colombia (FARC) will continue in the remainder of 2017, although dissident FARC militants and the Ejército de Liberación Nacional (ELN) will still pose security threats. Colombia’s infrastructure sector will perform well in the coming years, given robust investor interest in the country’s public private partnership model.

Security Environment 

Death and injury risks associated with the insurgent group FARC will continue on a downward trajectory in 2017. In June 2017, FARC completed the disarmament process under the terms of the peace agreement, having handed over around 8,000 weapons and 22,000 kg of explosives. Most FARC members are abiding by the peace process, with the group guaranteed 10 seats in Congress until 2026. However, a small number of dissidents will pose a security risk. On 18 August 2017 six police officers were injured when suspected FARC members deployed an improvised explosive device (IED) near a coca crop eradication area in Guaviare. 

The ELN insurgent group still poses security risks, despite the beginning of formal peace talks in February 2017. A three-month ceasefire proposed in July 2017 has not been implemented, after a government precondition that ELN stop kidnapping civilians was rejected. The ELN claimed responsibility for an IED attack on 19 February 2017 in Bogotá, which killed one police officer and injured 23 individuals. The target of the attack was specialist police unit ESMAD. Most at risk are government buildings and energy infrastructure in ELN strongholds. This includes the Caño Limón-Coveñas pipeline, which has been the target of over 30 IED attacks between January and June 2017. 

Trading Environment 

Colombia has a strong track-record of meeting all of its debt obligations, and this lowers the sovereign credit risks facing foreign investors. The country’s ability to meet repayments is strengthened by access to a USD 5.5 billion Flexible Credit Line (FCL) from the International Monetary Fund. Colombia’s debt position is well insulated from exchange rate pressures, as 90% of government debt is held at a fixed rate and 64% is local currency denominated. 

However, there are some downside risks to Colombia’s sovereign creditworthiness. Whilst the debt burden is moderate and stable at around 45.5% in 2017, debt affordability is deteriorating. The ratio of interest payments to revenues has increased from 16.0% in 2015 to a forecasted 19.3% in 2017. Implementation of the peace deal will also weigh on the fiscal position, as the government has committed to public works and community subsidies in FARC territory, costing an estimated USD 45 billion over the next decade. 

A new tax regime, introduced in January 2017, will stabilise the fiscal position. Under the new system, value-added tax has risen to 19% from 16% and the tax base has been expanded. The changes contributed to a 7.4% y-o-y increase in revenues in Q117. This will help to reduce the fiscal deficit to 3.5% of GDP in 2017, from 3.9% in 2016.

Investment Environment

Colombia’s infrastructure sector will be a regional outperformer in the coming years, driven by investor interest in a robust public-private partnership (PPP) model. The USD 25 billion 4G Highway Concession programme will also ensure elevated investment in Colombian roads, and is expected to increase GDP by 1.5% during the construction phase. As a result, construction sector growth is forecasted at 4.2% in 2017. 

However, there are moderately elevated risks of contract alteration, particularly where contractors fail to meet expected service levels or make timely progress. In February 2017, the National Infrastructure Agency announced its intention to review or cancel the Pacific Railway concession, following the operator’s suspension of services on the line. Similarly, in December 2016 the Civil Aviation authority initiated a legal challenge against contract holders for development projects at Tumaco, Asto, Flandes and San Andrés airports, citing a lack of progress. As a result, foreign investors should be aware of the potential for contract revisions where progress on projects is slow.

* If in a challenging sector, such as mining, pricing will rise to 1.5% p.a

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Colombia, India and Paraguay, all of which have been the subject of recent enquiries from JLT's client base.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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