• Colombia is holding parliamentary elections on Sunday, in a dry run to a hotly contested presidential election in May.
  • The country’s outlook was revised down by Moody’s, and a fragile peace accord may not be enough to keep investors pumping money into the economy.

On Sunday, Colombia will hold a parliamentary election that analysts view as the latest test of an increasingly fragile peace agreement — as well as the country’s ability to appeal to global investors.

Decades of civil strife haven’t deterred investors from viewing Colombia — which the World Bank ranks even higher than more developed markets like China and South Africa as a country where it’s easy to do business — as a draw for capital. Spanish bank Santander estimates the Latin American nation has pulled in over $16 billion in foreign money over the last decade, mainly from the U.S. and Europe.

However, confidence among investors could be shaken in the shadow of a contentious election season. Sunday’s vote takes place in a polarized environment. As part of the peace agreement, former members of the Revolutionary Armed Forces of Colombia (FARC) — the guerilla army that laid down its arms as part of a peace agreement, but is still responsible for more than 200,000 politically-inspired deaths — will send at least 10 representatives to Colombia’s bicameral legislature.

The parliamentary election is seen by analysts as a dry run for a hotly contested presidential election in May, and may unsettle investors with a prolonged bout of political instability.

Colombia's President Juan Manuel Santos

Jaime Saldarriaga | Reuters
Colombia’s President Juan Manuel Santos

Current Colombian president Juan Manuel Santos, barred from running for reelection, can point to a successful yet controversial deal with FARC rebels, which ended more than five decades of heavy conflict. He also elevated Colombia’s presence on to the international stage, while opening certain sectors up for more investment.

Still, “the primary risk for investors from the presidential and congressional elections is that they are likely to further complicate the implementation of the delicate peace accords reached with the former leftist FARC rebel group,” Michael Arone, chief investment strategist with State Street Global Advisors told CNBC in an interview.

Politics isn’t Colombia’s only looming problem: In February, its outlook as an investment grade credit was downgraded to “negative” by ratings agency Moody’s Investor’s Service, which cited a deterioration in its public finances.

Also looming in the background of the discussion about Colombia’s economy is its reliance on commodities. The country produces less than 1 million barrels of oil per day, and the recent bear market in oil took a severe toll on the economy.

“We are prepared to look beyond sporadic violence.”-Douglas Johnson, managing director, Cranganore 

“Government revenues are likely to benefit from fiscal reforms passed in 2017 and a broader tax base,” said Arone, who also rates Colombia’s agriculture and manufacturing sectors highly.

“In addition, income from oil exports is also expected to increase as oil prices have rebounded and oil production surpasses disappointing levels from last year,” he said. “However, the price of the implementation of the peace accords will likely weigh on fiscal results.”

Colombia’s economy is expected to grow by nearly 3 percent this year, yet analysts estimate Colombia will need to invest billions in order to integrate demilitarized FARC members, and offset the insurgency’s influence on key sectors of the economy. The spending required may put new pressure on a fiscal deficit that has narrowed in recent years, after it ballooned to 4 percent of gross domestic product.

“Recovering commodity prices are a huge boost, so… are outsized infrastructure outlays,” said Douglas Johnson, managing director of Miami-based Cranganore, told CNBC.

In a February note to clients, Johnson said his firm was “still drawn” to Colombia’s underlying growth potential and a robust banking sector. Johnson pointed to two emerging trends: Bank asset growth and financial technology. Bank account volumes are expected to grow, and with it the role of credit in the economy should also expand. In addition, the major Colombian banks are highly profitable.

“We are prepared to look beyond sporadic violence,” he wrote in February.

Source: CNBC