In this alert, we look at Colombian President Gustavo Petro’s first months in office and the outlook for his reform agenda in 2023. We discuss the implications for U.S.-Colombia relations and for doing business in the country.
- Petro’s election has led to a reconfiguration of power structures in Colombia and a change in the way policies are designed and implemented. The administration has a statist bent and views the private sector’s role as less prominent than prior administrations. There is less emphasis on attracting investment.
- This year will be crucial for Petro’s reform agenda and for his party, Pacto Histórico. The government’s energy transition policy and labor, health care, and pension reforms will shape Colombia’s economy in the decades to come and companies will need to be on notice that coming changes may be profound.
- The Biden and Petro administrations have made efforts to find common ground. But the change of leadership in the House of Representatives, the proximity of the 2024 U.S. presidential election, an emboldened Florida GOP, and implementation of controversial reforms in Colombia could test the relationship in 2023.
- Security remains a key concern for companies doing business in Colombia and conditions have deteriorated in the past few years. Progress on peace negotiations and the government’s new crime and drug policies will determine whether conditions improve.
Petro’s First Months in Office
“Today begins the Colombia of the possible. Today begins our second opportunity,” Petro told a cheering crowd in Bogotá on August 7. His inauguration as President of Colombia, he said, marked the end of Gabriel García Márquez’s One Hundred Years of Solitude for the Colombian people. The election and orderly transition to a left-wing former guerrilla president and the first Afro-Colombian vice president in the country’s history showed the strength of Colombia’s democracy, one of the oldest and most stable in the Americas.
In his first months in office, Petro succeeded in forming a formidable coalition in Congress, passing a landmark tax reform, and getting Congress to approve his framework for negotiations with illegal armed groups. He also struck a land reform deal with the country’s cattle ranchers association, which is headed by a long-time political opponent.
Petro’s election has led to a reconfiguration of power structures in Colombia and a change in the way policies are designed and implemented. He picked activists for key posts, including in the energy, health, labor, and environment ministries. Ideology seems to play a larger role than in prior administrations.
Petro’s use of executive power has stirred controversy. In the name of controlling inflation, the administration recently froze 2023 toll rates for road projects and took control of independent, technical energy and telecommunications regulators in order to control prices.
Five months after taking office, Petro remains popular. A December poll shows his approval rating at 48%. Meanwhile, the opposition remains weak and lacks a strong leader. So far, it has not found its footing or built an alternative to Petro’s powerful change narrative.
Outlook for 2023: Decisions on Energy Transition and Labor, Pension, and Health Care Reform
This year will be crucial for Petro’s reform agenda and for his party, Pacto Histórico. Decisions on energy transition and a series of reforms will have big implications for the country’s economy. The administration will pursue labor, pension, and health care reforms that promise to change the structure of key sectors and the rules of the game. Petro supporters will demand that the government deliver on its change promises and alleviate the effects of high inflation in 2022 or else face damaging protests. In a challenging domestic and international economic environment, the government will face fiscal pressures to fund its promises.
The first half of the year will be busy on the legislative front. In addition to the reforms above, the administration will need to get the National Development Plan approved. This is a key bill that defines the administration’s key policies and investment priorities. The administration also has announced plans to introduce more than 30 bills, including a budget addition and mining code and political system reforms.
In the second half of the year, attention will focus on local elections in October. These elections will test Pacto Histórico. If successful, it could become a new political force with the ability to dominate Colombian politics for years to come and seek even deeper reforms.
The government has said its labor reform will seek to limit the use of outsourcing and contractor arrangements and increase overtime pay. It will also seek to regulate employment by digital economy companies. In 2021, Congress reduced the statutory working hours, with the change entering into force this year. Businesses operating in Colombia likely will face the most significant changes to their labor relationships in twenty years.
The health care reform could potentially reshape Colombia’s system, which is considered one of the best in Latin America and has attracted foreign investment in recent years. The reform would shift management of the system’s funds from the private sector to the government. In health policy – and particularly in drug policy – the administration may seek to move closer to the “Global South” framework and away from the “North’s” positions on health care issues, including intellectual property protection.
In pensions, the government has said it intends to unify public and private funds and subsidize a “pension bonus” to three million older adults with no coverage. Although experts agree the current system needs reform, there are concerns about the fate of private funds, the sustainability of the pension subsidy, and use of the system’s resources.
Petro’s plans on energy have generated the greatest uncertainty. During the campaign, he promised to accelerate decarbonization of Colombia’s economy and not award new oil and gas contracts. Oil and gas represent 3.3% of Colombia’s GDP and 40% of its exports. Majority state-owned energy company Ecopetrol provides a significant percentage of the government’s revenues. So far, the administration has sent contradictory messages on energy policy. Energy Minister Irene Vélez has said the administration will uphold Petro’s campaign promises, while Finance Minister José Antonio Ocampo has stated that the government is studying the best course of action and that a transition will take at least 15 years.
Many investors and international analysts see the government’s decision on energy transition as key to the country’s economic future. Bank of America recently stated that the country was facing a “credibility shock” and J.P. Morgan warned of a “self-perpetuating confidence crisis.” Although Colombia grew about 8% in 2022, unemployment is falling, and Ecopterol had record results last year, the government will face a more challenging economic environment this year. Inflation reached 13% in 2022 and GDP growth is projected at only 1.5% in 2023.
This year will clarify the government’s view on the role for the private sector. Petro has pledged to reindustrialize Colombia and transition out of what he calls an extractivist model, based on oil and mining. This new industrial policy calls for the state to have a larger role, not only in guiding economic and sectoral policy, but also as a key player in the economy. Petro has called for modernizing agricultural production, adopted broader tariffs to protect certain local products, and signed the largest contract in the Navy’s history to build warships. As part of this reindustrialization policy, the government is placing greater emphasis on transfer of technology and local R&D in key sectors from defense to healthcare.
Although the private sector should be a key ally in this new industrialization push, the administration’s view of its role remains unclear. In contrast to prior administrations, there is less emphasis on attracting investment and the overall tone is less business friendly.
What Next for U.S.-Colombia Relations?
Petro’s election raised concerns that the U.S.-Colombia relationship would suffer. Although he has pursued a more regional foreign policy and sought to position Colombia within the Global South framework, both the Biden and Petro administrations have made efforts to cultivate the bilateral relationship. In June, Petro announced the historic appointment of moderate Luis Gilberto Murillo as Ambassador in Washington, the first Afro-Colombian to hold the post. There have been at least ten public, high-level meetings between the two governments, including visits to Colombia from Secretary of State Antony Blinken, Secretary of Homeland Security Alejandro Mayorkas, and a bipartisan Senate Foreign Relations Committee delegation.
The Biden administration has sought to find common ground with Petro on climate change and implementation of the 2016 peace accords, and even cautiously supported Petro’s new approach to drug trafficking. It also reacted with moderation when Petro quickly moved to reestablish diplomatic relations with the dictatorship of Venezuela’s Nicolás Maduro. The Petro administration has proactively sought to explain policy changes in Washington and assuage fears. In a positive sign, the U.S. Congress approved the largest aid package to Colombia in 11 years in December.
The Biden administration has so far decided not to publicly engage Petro on some of his most controversial statements, like his denunciation of the “North’s” policies at the U.N. General Assembly; blaming the United States for bankrupting Latin American economies; and blaming NATO for provoking Putin to invade Ukraine. But the change of leadership in the House of Representatives, an emboldened Florida GOP and the proximity of the 2024 election may mean there will be less tolerance for radical statements against the United States and less room for flexibility on policy changes.
After Petro won the election, Florida Governor and presidential hopeful Ron DeSantis said that “to elect a former narco-terrorist and a Marxist to lead Colombia is going to be disastrous” and Senator Marco Rubio stated in a September letter that “President Petro’s drug policy and posture towards the United States is alarming.” In August, Senator Ted Cruz introduced legislation to re-impose terrorism sanctions on the Fuerzas Armadas Revolucionarias de Colombia (FARC) and called on establishing conditions to U.S. aid to Colombia.
On trade, the Petro administration has backtracked on campaign calls for a renegotiation of the U.S.-Colombia Trade Promotion Agreement (CTPA) and instead is working with USTR to review it through the agreement’s Free Trade Commission. The Commission is likely to meet in May to discuss adjustments to the 10-year-old agreement. In preparation for the meeting, several technical committees will be meeting in March to assess implementation of the CTPA and propose adjustments.
Total Peace and The Security Challenge
Security remains a key concern for companies doing business in Colombia. After a reduction in violence following the 2016 peace accords with the FARC, security conditions have deteriorated in the past few years with drug gangs, paramilitary groups, FARC dissidents, and Ejército de Liberación Nacional (ELN) battling for control of territory. Petro has made peace efforts a priority for his administration. Petro’s “Total Peace” seeks to complement the peace agreement with FARC. He restarted negotiations with ELN, which the prior administration suspended in 2019 after an attack in Bogotá. The United States has designated ELN a terrorist organization. Petro is also pursuing talks with FARC dissidents and drug gangs. The opposition has accused Petro of weakening the armed forces and ordering them to cease their offensive against illegal armed groups.
Petro’s Total Peace plan is ambitious and carries significant risk. Like in the earlier negotiations with FARC, Petro has sought to place communities impacted by the war at the center of the peace negotiations and adopted an approach that includes rural development and crop substitution. In December, he said the government would allow farmers to continue cultivating coca until crop substitution programs were proven effective. This drew a call for caution from the United States. If successful, the Total Peace plan could reduce violence and improve conditions for Colombians in poor rural areas. However, some analysts worry that it will result in a further spike in coca cultivation – which reached an all-time high under President Iván Duque – leading to an impasse in U.S.-Colombia relations. Others have warned that illegal armed groups may use peace negotiations to buy time, reorganize, and seek strategic advantages against other groups.