The spectre of Colombia’s long civil war is casting a dark shadow over the presidential election, with violence spiralling out of control in rural areas. As voters prepare to go to the polls, the conflict that has claimed over 260,000 lives and displaced millions is once again dictating the agenda. The cynical observer might note that peace is a fragile commodity, and Colombia’s is currently trading at a discount. The question for investors is whether the next administration can restore order or whether the country will continue to haemorrhage capital.
For decades, the war between the government, leftist guerrillas, right-wing paramilitaries, and drug cartels has been a drag on Colombia’s economic potential. The 2016 peace deal with the Revolutionary Armed Forces of Colombia (FARC) was hailed as a historic breakthrough, a bond that would yield dividends of stability and foreign investment. Yet the numbers tell a different story. Over the past two years, violence has surged: FARC dissidents, the National Liberation Army (ELN), and drug gangs have filled the vacuum, attacking security forces and terrorising communities. The government’s security spending has ballooned, crowding out investment in infrastructure and education. This is a classic case of fiscal intoxication, where the state throws money at a problem without addressing the root causes.
The presidential race has become a referendum on how to handle the insurgency. Right-wing candidate Iván Duque promises a tough line, vowing to renegotiate the peace deal and crack down on rebels. Leftist Gustavo Petro, a former M-19 guerrilla, advocates for a more conciliatory approach, focusing on rural development and social spending. From a market perspective, both options carry risks. Duque’s hardline stance could trigger further violence, scaring off investors. Petro’s policies, meanwhile, risk inflating the deficit and stoking inflation. The market hates uncertainty, and Colombia is currently offering a generous helping.
Let us consider the economic fallout. The Colombian peso has already weakened against the dollar, reflecting capital flight fears. The central bank may be forced to hike interest rates to defend the currency, choking off growth. Foreign direct investment, which had been recovering post-peace deal, is likely to stall. The real question is whether Colombia can avoid a sovereign debt crisis. With a debt-to-GDP ratio creeping towards 50 percent, any shock could push it into dangerous territory.
The bottom line is this: Colombia’s untamed violence is the country’s greatest liability. Until the government can offer a credible plan for security, the risk premium will remain elevated. Investors should watch the election closely, but keep their powder dry. As for the politicians, they would do well to remember that in financial markets, as in war, the first casualty is trust.