In the near future, the thumbs down that Colombians have given the government’s peace agreement with the Marxist FARC rebels is not likely to impact the economy severely. While the voters surprised most observers, including the best of the poll-takers, when they rejected the deal in the referendum on October 2, the FARC’s top commander, Rodrigo Londono (aka Timochenko) has indicated that (as yet) his guerrillas have no plans to end the cease-fire and they do want to participate in fresh peace talks. Hope that the pact can be renegotiated is reflected in the exchange market performance of the peso, which initially took a hit but was lately quoted at around 2,918:USD 1.00, which is still well above the nadir of 3,436 pesos per dollar it touched earlier this year.
At that, although the margin was narrow, a replacement for the accord that took four years to negotiate will be difficult to forge. Those who voted “no” are adamant that they will not accept a bargain in which FARC war criminals avoid jail and have a guaranteed place in the political arena. President Juan Manuel Santos has staked his legacy on the peace agreement and is now in a markedly weaker position, undermined by former President Alvaro Uribe, who with his Democratic Center Party spearheaded the campaign for the “no” vote.
The infrastructure development and agriculture investment that could carry the country forward will now have to wait. Post-conflict financial assistance, promised from abroad, will hang fire. An important tax reform proposal that was to be introduced late this month also will get delayed, raising questions about the government’s fiscal position, which has been strained because of low oil prices and the softness of the economy. Data for the third quarter suggest that growth will stay weak. Of course, the longer the stand-off lasts the greater will be the risk that the country slips back into its drug-fueled conflict.
The recently agreed OPEC move to cut oil production will not push up prices substantially and in sustained fashion. This is bad news for the state oil company Petroleos de Venezuela (PdVSA), which is now openly threatening to default on its debt unless enough bondholders agree to the proposed swap of paper maturing next year. The deadline for this swap has been extended three times and still only about half the bondholders have shown serious interest. I continue to believe PdVSA will be able to muddle through until next year, but eventually a restructuring of its (and Venezuela’s) debt will become unavoidable.
In a last-ditch effort to keep a lid on domestic unrest the regime has extended to a number of border states the experiment, begun in Zulia earlier this year, under which state governments and private traders with access to dollars can import food and other essentials from neighboring Brazil, Colombia and Trinidad & Tobago. The move has visibly improved supplies in the affected areas. There are, however, two problems with it. For one, Pres. Maduro and his people are using the new system (which they do not discuss publicly) to benefit the military brass and other cronies whose support they hope to retain. For another, the imported products are being resold in Venezuela at many times the state-controlled prices and this means that the IMF’s prediction of 500% inflation this year is already looking significantly understated.
Payments out of Egypt will remain sluggish and delays are more likely to increase than abate in the near term. While the government of President Abdel Fatta al-Sisi is more willing than its predecessor to accept the tough economic reforms the IMF demands as condition for its extension of a USD 12-billion loan, money from this source will still take quite a while to start flowing. Meanwhile, the current-account BoP deficit continues to run at around 7% of GDP, official hard-currency reserves have been run down to dangerously low levels, and none of the traditional sources of foreign exchange inflows are doing well.
Receipts from tourism dropped by 46% between 2014/15 and 2015/16, according to the Central Bank. Investment from abroad is deterred by socio-political uncertainties and an uninviting business climate. Earnings from Suez Canal traffic are way down, as are those from oil exports. Household remittances have declined, too, and a spat with Saudi Arabia and other Gulf Monarchies this month over a UN resolution concerning Syria threatens to disrupt even their financial assistance.
Egypt is too important to be allowed to fail and will eventually get the IMF money. But as a quid pro quo it will have to devalue the pound, which on the black market has fallen to around 15 per dollar (meaning the street charges a 70% premium for dollars over the official rate of 8.8:1) and this will add to an inflation rate that is already over 14%.