Colombia, Latin America's oldest democracy became independent in year 1819 when Gran Colombia disintegrated and evolved into Venezuela, Peru and the country of Colombia. During the 19th centruy, Colombia was a very peaceful nation where Conservatives and Liberals governed. Unfortunately, the 20th century was a very violent period of time for Colombia including the La Violencia phase that began in 1946 and lasted to the mid 1960's where upwards of 300,000 people were killed. By the late 1970's, the drug lords began to corrupt politicians and many other intermediaries. The violence has heated up over the last few years with approximately 3,500 Colombians killed annually of which mostly are civilians. During the last 10 years, over 40,000 Colombians have been killed and 1 million have been displaced by the civil war
Colombia's civil war during periods of the 20th century in Colombia have created a challenging environment to sustain positive economic development. The continual threat of armed guerilla terrorist attacks, persistant kidnappings, difficult social conditions makes Colombia a very difficult country to attract foreign direct investment (FDI). At present, leftist guerilla rebels control 40 percent of Colombia, mostly in unpopulated rural areas. Population is 40 million, the Colombian people are now fed up with the violence and want action and they are going to get it with their new President.
POLITICS: President Alvaro Uribe was sworn into office August 7, 2002 on a war platform to end the hostilities and civil war that has disrupted the nation for the last 38 years. His campaign slogan was "Firm hand, big heart". His political mandate is to end the war and bring lasting peace, to reform the political institutions, cleanse the corruption and eliminate the dirty politics. Mr. Uribe, an independent Liberal with a centre-right vision also plans to boost defense spending by $1 billion USD/year, cut government waste, lift trade sanctions to boost job creation and to increase taxes by $800 million USD/year to pay for the war.
The Marxist Leftist Guerilla forces came to existence in the 1960's known as FARC (The Revolutionary Armed Forces of Colombia) with approximately 22,000 fighters originally Stalinist based. The other leftist guerilla group is much smaller with 5,000 fighters, known as ELN (National Liberation Army) and was influenced by the Cuban revolution. On the other side, the right-wing outlawed paramilitary group is known as AUC (United Self-Defense Forces of Colombia) with an estimated total army of 5,000 to 8,000 fighters. AUC is fighting both FARC & ELN and the Colombian military. The government forces, the Colombian military are now in battle with both the leftist rebels and the right-wing paramilitaries. Mr. Uribe has broad support from the United States and will receive further financial aid and military support from the United States. During former U.S. President Clinton's term in office, America gave Colombia $1.7 billion USD in drug fighting aid. President Uribe's war with the domestic terrorist groups is absolutely necessary in order to save Colombia as a republic. BI.C forecasts President Uribe will win the war with a long drawn out peace accord settlement with government representation from both the left and right wing factions of the terrorist groups. However, should the rebels and paramilitaries win the war, Colombia could very well disolve the way of Gran Colombia two hundred years ago. Colombia may find itself in the same league as Somalia, Afghanistan or several African countries like Sierra Leone where hoods and war lords rule large sections of the nation.
The leftist guerillas are tied into the multi-billion USD cocaine drug trade for distribution. The profits from their transhipment services are used to finance their insurgency. The collapse of the communist world in the late 1980's left the marxist rebels to look for new financial avenues to fund their ideology, kidnappings and the peace tax became more prevalent. Former President Pastrana tried to make peace with FARC by granting them the land mass area the size of Switzerland as a 'safe-haven' but later rescinded the area after peace talks collapsed. Final players in this complicated war puzzle include private armies for several of the large drug lords. Arms traffic with the Middle East and Russian mafia are big business for the Colombian guerillas to secure their weapon systems. Civilians in Colombia are unfortunately are the victims as many targets for the rebels and paramilitaries include assasinations, random killings, peace tax and kidnappings. FARC does not grow cocoa, but it is estimated that it receives $500 million USD/year from transport taxes in areas it controls. Peace tax on companies with revenues of over $1 million USD/year to hand over 10 percent of their profits in exchange not to kidnap any of their executives.
ECONOMY: the economy is stagnant with high country risk resulting in low foreign direct investment levels. Depressionary conditions currently still exist as Colombia enetered its 1st recession since the 1930's, it lost its investment grade rating in mid 1999. It is in the worst banking system and economic crisis on memory with unemployment at 17.5 percent peaking at 20 percent in 1999. The disturbing statistic is the slums, widespread poor with 65 percent of the population living below the poverty line attributed to the civil war. GDP growth fell 4.3 percent in 1999 although it reversed in 2000 growing by 3 percent, GDP slowed at 1.8 percent in 2001. Illegal cocaine and heroin production is valued in the billions annually, Colombia is also a major global coffee supplier and oil producer. Total foreign debt is at over $20 billion USD. Deposit interest rates and inflation are at historic lows. Inflation for year 1999 was at 11 percent, year 2000 at 9 percent and is currently in the same range. The fiscal deficit is unsustainable, in 1999 public sector deficit increased to 5.5 percent of GDP falling off to 3.3 percent by year 2001. The current account was in balance in year 2000 although deteriorated for year 2001 at 1.8 percent of GDP and estimated at 3 percent for 2001. GDP (2000) was at $250 billion USD or equivalent to $6,200/capita. Tax revenues are at only 19 percent of GDP. March 2002, Colombia was successful with a 225 billion pesos bond placement equivalent to $99 million USD.
The oil industry is held back from development to its full capacity due to the looming civil war. ELN left- wing terrorist group are responsible for attacks on oil pipelines in northwest Colombia disrupting national oil production. In year 2000 alone, ELN caused over 20 million barrels of lost production on the Cano Limon-Covenas oil pipeline. Oil production in 1999 for Colombia was at 845,000 b/p/d and by June 2001, this figure fell to 556,000 b/p/d due to terror attacks on oil pipelines. Labour is relatively cheap, thus profits in the oil industry can be substantial. Colombia is well known to host oil resource deposits in the 100 million plus barrel range, it is indeed rich in oil. Oil is the largest legal export product. If Colombia does not secure new oil reserves, it may actually become a net oil importer by year 2005. Colombia's proven oil reserves are at 2.3 billion barrels, potential oil reserves are at 37 billion barrels.
POSITIVES: established legal and regulatory framework, public institutions, democracy, well educated nation and good work ethic. CONCERN: brain drain and mass exodus as many of the intellectuals have emigrated due to the violence with approximately 1 million Colombians having left since the mid 1990's.
BANKING SYSTEM: high level of bad loans, weak financial system.
KNOWLEDGE: Oil, Mining, Drug Trade - Legalize Drugs, Civil War:
President Uribe must go on the offensive and win the war with the leftist rebels and the right-wing paramilitaries in Colombia, if he doesn't, Colombia may implode. Colombia needs 'Law and Order' to be viable economically and as a democracy. Mr. Uribe must build a modern Colombia replacing cocaine production with wealth creating industries particularly in the oil and mining sectors. Colombia is very rich in oil & mineral reserves, vast wealth below the jungles with tremendous opportunities in gold mining and in oil production. In addition, Colombia has great oil wealth offshore, it is here where oil extraction can be forwarded to markets in the United States with great accessibility.
Colombia produces 80 percent of cocaine consumption requirements for the United States market. Colombia's heartland is not suitable terrain for crop replacement as suggested in a U.S. sponsored $1.3 billion USD Plan Colombia. If markets like the United States and Western Europe were to legalize drugs, this would end the violence and the war in Colombia overnight. Further, they would be able to tax and produce these drugs and monitor domestic consumption while providing programs to help those patients in need. In addition, legalizing drugs like cocaine would end the dark world of inner city gangs and violence throughout cities within the United States. The Cali and Medellin cocaine drug cartel would be out of business immediately and they might have to actually re-direct their large financial resources to productive wealth creating industries to the better of society. How about the mining industry in Colombia, there are billions in profits to be made? The world will no longer have characters to the same degree like the late drug lord Pablo Escobar, the Russian mafia, middle East and Asian middleman smuggling illegal military hardware arms. Their would be a large cessation of violence throughout Colombia and the drug turfs of the inner cities within the United States. Planet earth would be a safer and more prosperous world if drugs were legalized. No more bought politicians, pilots, military officers and other intermediaries with illegal drug trafficking. No more illegal drug money profit laundering worth in the billions annually to offshore tax havens where funds for the most part are not used to productive avenues.
Mining and oil wealth in Colombia are key industries for its future prosperity as it will replace the cocaine and heroin production trafficking industries. Massive untapped natural resource wealth exists in Colombia where tens of thousands of well paid jobs will be created. It is time for President Uribe to strike offensively against the 3 main terrorist groups in Colombia and it is also time for countries like the United States to legalize drugs. Colombia's peace dividend will result in less cash outlays for the military and funds re-routed towards wealth creation industries, infrastructure and social development within Colombia. More importantly, FDI will return to Colombia particularly in the area of mine development where large capital costs are required. A higher standard of living and a stronger Colombian peso will result if long term sustained peace arrives.
REGIONAL ANALYSIS: Latin America
The fear is that if President Uribe is sucessful in his war, the guerillas will move more into Bolivia, Peru and Ecuador for cocoa crop production in the manufacturer of cocaine and heroin. Latin America as a region is currently quite volatile with Uruguay and Argentina experiecing large currency devalutions over the last year. The Brazilian real is under pressure with a political turn towards the left a strong possibility and with the economy being recently aided with a $30 billion IMF package. Further, Ecuador has recently replaced its national currency with US-dollarization. Next door in Venezuela, President Chavez is on thin ice with great instability as the nation is badly divided poltically between the classes. And the Venezuelan bolivar for that matter has collapsed over the last year. The risk for Colombia being caught in a downward regional economic contagion and currency crash risk is high. On the bright side over the long term, warm ties with United States is positive for Colombia if peace prevails as Colombia will become a pivotal key oil exporter to America.
CURRENCY: ISO symbol 'COP' Colombian peso. At time of review on August 9, 2002, the COP had a value of 2540 COP to 1 USD. In year 1999, the peso was devalued with its flotation in the market place, the year the recession started in Colombia. Surprisingly for the most part, the peso has been relatively stable over the last 2 years although it has depreciated by 10 percent versus the USD since the start of 2002 although it has fallen more versus the euro. Although since 1998, it is down close to 45 percent in value versus the USD.
CURRENCY HISTORY: on September 27, 1999, the decision by Colombia's central bank to let the peso float thus allowing for central bank intervention in the exchange market to be limited to achieving their balance of payments goals (international reserves position) and inflation targets, thus providing a more stable exchange rate environment. Structural reforms were also implemented at this time. July 2002 at 2521 COP to 1 USD, January 2002 at 2289, January 2001 at 2242, January 2000 at 1931, January 1999 at 1573, August 1998 at 1389. Previous to the float, the peso was set at 1140 in 1997 and 1036 in year 1996.
CURRENCY FORECAST: short term is vulnerable for the peso with civil war and regional contagion may result in a sharp drop in value, the medium term will see further modest depreciation. If President Uribe wins a sustained domestic peace, the long term is bullish for the peso due to its tremendous natural resource wealth, functioning legal system and democracy. Float. UPDATED: August 9, 2002
