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Colombia’s President is responding to criticisms that his economic reforms, particularly his commitment to divest from fossil fuels, are responsible for the sluggishness of the country’s economy. Gustavo Petro, Colombia’s first leftist leader, argues that the strengthening peso and lower bond yields reflect investors’ optimism that he lacks the necessary congressional support to implement radical reforms. He believes that Colombia has potential beyond oil, including the development of agriculture, tourism, and clean energy exports.
This statement comes at a critical time for Colombia, as it embarks on a rapid and risky transition away from fossil fuel extraction, aiming to attract foreign investment. In contrast, Brazil, Mexico, and Argentina, the three largest economies in Latin America, are all looking to increase their oil and gas production. Petro, who took office in August after a narrow victory in the presidential election, is also facing challenges in pushing through social reforms that have divided his broad coalition.
Although a bill to reduce working hours failed to pass in Congress last month, Petro remains confident that legislation expanding the state’s role in healthcare and pensions will be approved. However, the Autonomous Fiscal Rule Committee warns that Colombia risks violating its own fiscal rules if it implements the spending increases necessary to finance these reforms. Petro argues that the changes will be funded through a substitution of costs, emphasizing the economic benefit of investing in preventive healthcare.
Analysts predict that Petro, known for impulsive decision-making, will struggle to reassemble a coalition in Congress to support his reforms. His approval rating has dropped to 33% from around 50% at the beginning of the year, according to polling conducted by Invamer. During his tenure as mayor of Bogotá from 2012-2015, Petro pursued divisive policies following disagreements with coalition partners.
Sergio Guzmán, director of Colombia Risk Analysis, believes that the markets have renewed faith in Colombian institutions as a check on Petro’s radical agenda, boosting confidence in Colombian bonds. Investors have been wary of the cost of Petro’s reforms and his commitment to ending new spending on fossil fuel exploration, despite oil and coal production accounting for roughly half of the country’s export value.
While Colombia experienced the highest economic growth among major Latin American economies in 2022 with a 7.5% GDP expansion, growth is forecast to slow to just 1% in 2023, according to the IMF. Last year, the economy benefited from increased prices for coal and oil exports due to global energy market disruption caused by Russia’s invasion of Ukraine. However, inflation is currently running at around 13%, and Petro’s administration has yet to outline a clear plan to replace fossil fuel revenues.
Finance Minister Ricardo Bonilla has stated that Colombia will boost its agricultural and manufacturing sectors to compensate for the loss in fossil fuel revenues. However, analysts express skepticism about the international competitiveness of these industries.
Petro’s reform agenda aims to address the severe impacts of climate change. Colombia is highly vulnerable to extreme weather, particularly heavy rainfall, and is home to around 8% of the Amazon rainforest. Bogotá has committed to achieving net-zero emissions by 2050, and Petro claims that deforestation has decreased in Colombia during the first three months of 2023 compared to the same period last year.
Petro is currently in Brussels for a summit between EU and Latin American and Caribbean leaders, the first high-level meeting between the regions in eight years. Expectations for the summit are low due to disagreements over the Ukraine conflict and environmental provisions delaying an EU-Mercosur trade deal. Petro believes that Europe should view trade with Latin America as an opportunity to build a future centered around decarbonization and diversification of production, highlighting Europe’s higher carbon footprint compared to Latin America and the region’s potential for competitiveness in low-carbon goods.
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