trending Market Intelligence /marketintelligence/en/news-insights/trending/TysYiqw2_k7EBbMCmYXoDw2 content esgSubNav
In This List

Colombia's economy, banks to benefit from FARC peace deal — eventually


The World's Largest P&C Insurers, 2023


The Worlds Largest Life Insurers, 2023


Essential IR Insights Newsletter Fall - 2023


Insurers get to grips with evolving net zero standards

Colombia's economy, banks to benefit from FARC peace deal — eventually

Colombia'shistoric peace deal with the Revolutionary Armed Forces of Colombia, known as FARC,should benefit the country's economy, which could eventually help local banks, analyststold S&P Global Market Intelligence.

The agreement,formally signed Sept. 26 by Colombian President Juan Manuel Santos and FARC rebelleader Rodrigo Londoño, ends more than half a century of bloodshed and is the resultof four years of negotiations. The deal still must beapproved in an Oct. 2 referendum.

The dealis not unanimously popular — many Colombians, including former President AlvaroUribe, called for an agreement that punished the FARC's top leaders — but if itpasses the Oct. 2 referendum, as is expected, the rebels are set to hand over theirweapons to United Nations observers in the next six months, according to an AssociatedPress report.

The FARCwill also form a political party and be guaranteed a minimum of 10 seats in Colombia'scongress, while thousands of FARC guerillas — mostly young men — must be reintegratedinto society.

Colombia'sgovernment will likely need to implement fiscal reforms, including raising taxes,to finance the cost of implementing the peace accord, but help is available frominternational institutions. The IMF announced in June that it will increase itsflexible line of credit for Colombia to $11 billion. IMF chief Christine Lagarde,who attended the signing ceremony in the Colombian city of Cartagena, said the accordwould be "extremely positive" for Colombia's economy and that, even thoughfiscal reforms may be necessary, "peace is affordable."

Indeed,according to a Fitch Ratings research note, the accord is expected to be positivefor the economy in the medium- and long-term. Felipe Carvallo, a senior analystin Moody's financial institutions group, echoed that sentiment. "As we havesaid in the past, the agreement is very positive for the country's economic growth,"he told S&P Global Market Intelligence.

Colombia'seconomy, though still growing, has suffered from recent global economic instabilityand the low price for oil — a key export. As a result, it is only expected to growaround 2.8% in 2016 after growing over 4% annually in the past, Carvallo noted.

However,the government estimates the deal could add between 1.1 and 1.9 percentage pointsto the country's GDP growth in the coming years, according to a study by the government'sNational Planning Department.

"Thebenefit in the long-term is for the whole economy, not just the banking sector,"Carvallo said.

In particular,there are important opportunities for investment, especially in agriculture, tourismand infrastructure, in the areas currently controlled by the FARC. The deal couldalso facilitate greater foreign investment, especially in oil exploration and infrastructuresuch as new highways.

U.S.government officials are optimistic. "Implementing the agreement, showing thatColombia has a stable future, I think will make Colombia a more attractive placefor foreign investment," Reuters quoted U.S. Treasury Secretary Jack Lew assaying at a press conference.

As forlocal banks, the deal does not imply an expansion of their credit portfolio in theshort-term but, depending on their area of focus, many of them could benefit inthe longer term, Andrés Márquez, director of financial institutions at Fitch RatingsColombia, said.

"Thereis no downside [for banks], but the upside will likely be felt in the medium orlong term," he said.

Colombia'sthree largest banks, Bancolombia SA,Banco de Bogotá SA andBanco Davivienda SA, whichare mainly focused on corporate lending, could benefit through higher consumer creditand the financing of infrastructure projects, as well as potentially expanding intonew geographic areas made safer by the accord, Márquez noted.

In addition,small- and medium-sized banks with a greater presence in areas controlled by theFARC should benefit from higher demand for consumer loans. In the agriculture sector,state-owned Banco Agrario de ColombiaSA in particular should have more opportunities for microfinance lending.

Otherdevelopment banks, such as Banco deComercio Exterior de Colombia - BANCOLDEX SA, Financiera de Desarrollo Nacional SA and ,which are mainly focused on trade and infrastructure finance, could also see morefinancing opportunities, Márquez noted.

"Dependingon the financing needs, large-, medium- and small-sized banks could all eventuallybenefit from the deal," he said.

It willtake some time for the peace accord to benefit the financial sector, but analystsagree it should give Colombia's ailing economy a much-needed shot in the arm, whichis good news for local banks.

Moody'srevised its outlook forthe Colombian banking sector to negative from stable in July, citing lower oil prices,but this could well change if banks' loan quality and capital improves in line witheconomic growth, Carvallo said.