August 7, 2019 / 1:38 PM / 3 months ago

Colombia's Duque must get reforms through Congress to safeguard economic recovery

BOGOTA (Reuters) - President Ivan Duque must push pension and energy reforms through a hostile and polarized congress over the next year if Colombia’s slow and uncertain economic recovery is to take root, analysts and lawmakers said.

FILE PHOTO: Colombia's President Ivan Duque is seen after a news conference at the Presidential Palace in Bogota, Colombia August 5, 2019. REUTERS/Luisa Gonzalez

Latin America’s fourth-largest economy grew 2.8% in the first quarter, led by the finance and mining sectors. That beat 2% expansion a year earlier but was well below central bank expectations of 3.2%.

Concern is growing that Colombia’s nearly $300-billion (£247.2 billion) economy would suffer should the key reforms stall, diminishing interest in extractive projects seen as important to sustaining growth.

As Duque enters the second year of his presidency, he faces low approval ratings and has seen his pet legislative projects so far either rejected by lawmakers or modified beyond recognition.

Among the bills considered most urgent is an effort to better regulate required consultations with communities potentially affected by oil and mining projects, after investors were spooked by local referendums that banned licensed extraction.

Oil and coal are the country’s top two exports and sources of foreign exchange, making the industries’ success vital to government ledgers.

“In his second year, it’s fundamental that Duque pushes the laws that are lacking,” said Senator Carlos Abraham Jimenez of the Radical Change party, which is neither part of the ruling coalition nor the opposition.

“It needs to speed up the ‘prior consultations’ reform. They are delaying a reform that’s so necessary to the economy.”

Energy Minister Maria Fernanda Suarez said on Monday the government would introduce a bill this year meant to improve companies’ coordination with local authorities and next year would propose improvements to the consultation process, all in a bid to head off future community objections.

But getting laws through Congress will be difficult, especially as many lawmakers will likely be off campaigning for October’s local and regional elections, making a quorum in the chamber difficult to reach.

Duque, 43, has only a slim majority in the Senate and none in the lower house.

He has struggled to keep his own right-wing Democratic Center party in line after failing to honour a campaign promise to toughen the terms of a 2016 peace deal that ended five decades of conflict with the Marxist FARC rebels.

The rifts within the ruling party and a bitter war of words with the opposition were even cited as a cause for economic concern by the head of the central bank, sparking criticism from the government and calls for him to stay out of politics.

“It’s as if the Democratic Center hasn’t realized that it’s the governing party. It keeps acting as if it’s the opposition,” said Beatriz Helena Gil of political transparency group Congreso Visible.

Changes in the cabinet and Duque’s communications team could help improve his image and his relationship with congress, where current ministers are unpopular, said Carlos Arias, who consults for political campaigns. Such changes are not currently expected.

CREDIT RATING AT RISK

Luckily for Duque, ample global liquidity and low international interest rates have so far helped Colombian assets rise in value during his term, despite uncertainty about whether fiscal targets will be met.

Ratings agency Fitch has said a deterioration in the credibility of the government’s 3.6% growth target is putting the Andean country’s BBB credit rating at risk. The International Monetary Fund recently cut its 2019 growth projection for Colombia to 3.4%.

Fitch has urged measures to stabilize government debt and tackle the current account deficit, which it estimates will be above 4% of GDP.

International investors, meanwhile, have long expressed frustration with regulatory headaches.

Both the government and investors interested in possible fracking projects are waiting for an administrative tribunal to rule on whether the technique will be allowed.

“The legal framework for the industry, in particular fracking and offshore drilling, has not yet materialized and investors are wary that changing political conditions could upend the efforts made to date,” said Colombia Risk Analysis founder Sergio Guzman, who advises potential foreign investors.

Funding is also needed to finish ambitious and much-needed road projects considered key to competitiveness, Guzman said.

“We’re in a very particular situation where taking any project to Congress is becoming a nightmare,” said Munir Jalil, head economist for investment bank BTG Pactual in Colombia.

For now, Duque’s congressional headaches are not drawing the ire of investors - so long as fiscal targets like the deficit, which the government predicts will be 2.4% this year, are met.

“Foreign investors ask about the political situation, but it’s the last thing they ask. There are way more important things for them - like the current account and fiscal deficits,” Jalil said.

Reporting by Carlos Vargas and Nelson Bocanegra, additional reporting by Julia Symmes CobbWriting by Julia Symmes CobbEditing by Dan Flynn and Cynthia Osterman

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