Colombia’s 2 October vote against a historic peace agreement between the government and the leftist guerrilla group the Revolutionary Armed Forces of Colombia (FARC) has shocked proponents of the deal and external observers around the world. Here, Control Risks takes a headline look at some of the immediate key implications of the vote. The bottom line is that we still expect a negotiated agreement to emerge in time, but that the business environment is in for a bumpy ride over the next couple of years.
- The vote was to a large degree determined by low turnout. The final vote count was 50.22% for 'No' and 49.77% for 'Yes'. The polls previously expressed support in the order of 67-72% supporting ‘Yes’, but only 37.43% of eligible voters cast their ballot. Turnout could have been low in part due to the effects of Hurricane Matthew along Colombia’s Caribbean coastline, but historically usually around 55% of Colombians abstain from participating in elections. In addition to that, political complacency by those who had expected a strong ‘Yes’ win may have eroded their eagerness to attend the polls in the rain. In contrast, former President Álvaro Uribe (2002-2010), the peace deal’s most vociferous long-term critic, flexed all his political muscle to push the ‘No’ vote.
- The political right are the major winners of the day. Uribe and his Democratic Centre (CD) party campaigned heavily for a ‘No’ vote, expressing major reservations with regards to the agreements reached on land redistribution, political participation for former FARC fighters, and what they considered to be judicial impunity for FARC leaders and human rights offenders. The ‘No’ vote clearly highlighted the extent to which Uribe’s long and vocal campaign against the terms of the peace process had succeeded in influencing voters to question, and ultimately the reject, the contents of the deal. But the onus will now be on Uribe and the CD to present realistic alternatives, given both Santos’s and the FARC’s public commitments to continuing the peace process despite the ‘No’ vote, and that will likely prove a greater challenge in the months ahead.
- President Juan Manuel Santos’s administration loses legitimacy in a significant way. The ‘No’ vote is a devastating personal below to the President, given that he has effectively staked his political legacy on achieving peace. Politically, it also complicates his hand, not just on future peace negotiations, but also on key elements of his legislative agenda as the CD now has the ‘moral’ weight of the ‘No’ vote behind it. Despite overwhelming majorities in both houses of Congress, Santos will be well aware that he cannot make any controversial policy decisions if he seeks to retain and garner public support for any future peace negotiations. In the first instance, this will translate into a weakening of tax reform measures which will be proposed by the government in November. Vice-president Germán Vargas Lleras, who had given the agreements only lukewarm support, is now likely to take a more prominent role in government moving forward.
- The FARC will not demobilise as planned but security conditions will not deteriorate immediately. The FARC will no longer adopt the demobilization timeline under the verification of the United Nations; they will not regroup into the earmarked concentration zones and camps; and they will not begin a formal disarmament process. But the bilateral ceasefire between the military and the FARC will hold at least until 31 October as announced by Luis Carlos Villegas, Minister of Defence. Beyond the next month, the outlook is more uncertain, but we do not expect a return to outright conflict. Similarly, a full resumption of the illegal activities through which the FARC finances itself – drug trafficking, illegal mining, and extortion, for example – will be difficult if serious negotiations over the peace process continue, as such behaviour will only antagonise the ‘No’ camp and harden their position in the negotiations.
- We expect the peace deal to be renegotiated but it will be an extremely drawn-out affair. The two major sticking points of any renegotiation are political participation for the FARC and the transitional justice system laid out under the peace agreement. In fact, the FARC have expressly manifested they would rather return to the jungle than accepting jail sentences for senior leaders, while Uribe has emphasised that there can be no deal that gives the FARC guaranteed political participation and allows FARC leaders to avoid prison time. The fact that Uribe and Santos are meeting in person on 5 October, for the first time in six years, gives some encouragement that dialogue will proceed but, given that the peace negotiations took four years to finalise in the first place, a quick breakthrough in these key issues will not happen overnight. Moreover, the FARC, despite its public commitment to peace, has little incentive to negotiate with a government whose legitimacy and legacy has been defeated by the public, or an opposition that is intent on their destruction.
- The National Liberation Army (ELN) will use this opportunity to grow and establish its military-political opposition. They will brand themselves as the true revolutionary movement, and will seek to reel in disgruntled FARC fighters to their movement. Their position to "wait and see" seems to have paid off as they will not begin their own peace negotiations with the Santos government anytime soon. Their strategy will be to fill vacuums of power left by the FARC and grow their political and military apparatus giving them an advantage in future negotiations with the government. They will not abandon any time soon their practices of extortion, kidnapping, or attacks against infrastructure, which had been a government demand to initiating peace talks.
- Economic deterioration in Colombia. Investor confidence will take a hit now that there is much more uncertainty about the direction the country is headed. The IMF has already adjusted Colombia’s overall GDP growth projections to 2.2% for 2016 (down from 2.5% in January) and 2.7% for 2017 (down from 3.0% in January). The peso will also fall vis-a-vis the dollar and other major currencies. Colombia's investment grade, currently at BBB for Standard and Poor’s could also come into question. But the main issues are political, and to what extent the government retains the ability to deliver needed reforms and prevent political inertia for the last two years of Santos’s presidency. Tax reform, which must be introduced before the end of the year, so that Colombia does not break its fiscal rules regarding national debt limits, will likely be significant watered down and lose its impact as a result. Other pending elements of the legislative agenda to boost the economy may well fall by the wayside, such as the general budget for 2017 and land reform.
What happens next?
In sum, we still believe that a peace agreement can be salvaged. However, it will take to the remainder of Santos’s term in office, in 2018, for this process to be completed. There are likely to be very public setbacks along the way given the differences between the FARC and Uribe and the CD on the key elements of the agreement that need to be renegotiated. Both sides will threaten, on occasion, to pull out of talks, and there will be occasional flare-ups between the military and the FARC that will leave the overall peace process on edge, but these will not ultimately derail the process and we don ot foresee a return to outright conflict between the government and the FARC. Any final agreement will almost certainly again be put to a public vote to achieve legitimacy.
In the meantime, uncertainty is the watchword for Colombia. Key reforms will be put on hold or significantly watered down as the Santos administration loses its political weight. That should not upset the country’s political and economic fundamentals: it will remain open for foreign investment and remains a politically stable market for foreign investors. But it does mean that progress in tackling some of the major challenges facing investors – deficient infrastructure, low-level corruption, regulatory uncertainty in certain sectors, for example – is likely to remain slow, and the hoped-for peace dividend remains on hold.