Colombia Defence and Security Report Q4 2010

Colombia faces a new era with the election of President Juan Manuel Santos (the former defence minister) on June 20. Many of former president Uribe's policies are expected to remain in place, especially his effective crackdown on the country's two major guerrilla groups, the Fuerzas Armadas Revolucionarias de Colombia (FARC) and the Ejército de Liberación Nacional (ELN). Relations with Venezuela continue to deteriorate – especially with Colombia's accusation on July 15 that Venezuela is harbouring five leftist group leaders. Venezuela strongly denies the claim, and has recalled its ambassador. Relations between the two countries went sour last year after Colombia signed a military cooperation agreement with the US, which Venezuelan President Hugo Chavez regards as a regional security threat.

Colombia's defence spending continues to increase, as it has every year since 2000. In 2009, defence spending was US$10bn, a y-o-y increase of 11%, and a huge increase over US$2.6bn in 2001. Last year, Colombia spent the second most on defence in Latin America, second to Brazil. However, compared to the size of its economy – as measured by GDP – Colombia spent (relatively) the most on defence in Latin America. Former president Uribe instituted a wealth tax from 2007-2011, which is expected to provide US$3.7bn for the military. This will be used to purchase such equipment as aircraft, armoured vehicles and small arms to upgrade and modernise the armed forces. These will be sourced from US, French, German, Israeli and Russian suppliers.

Economically, the country's investment outlook is becoming much brighter, with the energy and infrastructure sectors best placed to benefit. Strong fixed capital investment will help drive economic growth, encouraging us to revise up our 2010 real GDP growth forecast to an above-consensus 3.9% (from 2.1% previously), and a higher average growth rate for the remainder of our forecast period. Reasons for optimism about the economy include: President Santos's commitment to running a balanced budget by 2014; Colombia's major plans for onshore oil production expansion, leading to expected strong oil-generated revenue flows; and recent support from US Secretary of State Hillary Clinton for a free trade agreement (FTA) between the two economies. However, we remain relatively downbeat on the potential for consumers to start spending heavily without access to easy credit, and we see little chance for credit growth to return to pre-crisis levels in the near term. There are also major pressures on the fiscal accounts, especially from healthcare and the need to spend on infrastructure.

The expected continuation of the military crackdown on the leftist rebel groups under the new president will allow greater government and private-sector investment in regions of the country that, less than a decade earlier, had been largely controlled by guerrilla forces.