beyondbrics

Juan Manuel Santos has wasted no time getting down to business as president of Colombia: repairing diplomatic and trade ties with Venezuela and Ecuador, targeting corruption and launching land reforms. Such verve has won him public approval ratings of 90 per cent.

But nature is refusing to get with the programme, and, like Chilean president Sebastián Piñera before him, Santos now has a disaster to deal with. Months of drenching rain, landslides and floods have killed more than 250 people, affected or displaced 2m and caused more than $5.3bn in damage, about 2 per cent of GDP. Colombians are calling the flooding “Our Katrina”, after the collapse of a dike compounded the misery in the coastal region of Atlántico.

Santos clearly relishes a challenge. He is known as an excellent administrator, smart at picking talent and driving his agenda forward. Winning back the trust of neighbouring leaders Hugo Chávez and Rafael Correa was no simple feat, given Colombia’s 2008 military raid on a guerrilla camp in Ecuador (which Santos, then defence minister, presided over) and its accusations that Venezuela was knowingly harbouring terrorists.

The flooding, however, poses economic risks, chiefly the danger of the central government deficit exceeding the projected 4.1 per cent of GDP. “The damage of the Chilean earthquake was estimated at up to $30bn, while the government’s large reconstruction package was less than a third of that, at USD8.4bn,” a Barclays Capital research report notes, adding:

The Colombian government is likely to shoulder even a smaller fraction of the overall damage, considering it is in a less comfortable fiscal situation. However, we think the news poses overall risks for spending growth to be somewhat higher and the deficit to be somewhat wider.

Santos has declared a state of emergency, and earmarked $533m in the 2011 budget for reconstruction and humanitarian work. The government may also tap funds from the nation’s royalties fund, sell 1 per cent to 2 per cent of shares in oil company Ecopetrol, or look for a temporary tax fix.

International aid agencies, multilaterals and newfound friend Ecuador have also offering assistance. Santos faces the same challenges in distributing these funds that he has sought to address in his anti-corruption reforms – the tendency of regional governments to inflate cost estimates or redirect funds for their own ends.

Nonetheless, most of the losses are private. “Despite the extra challenges imposed by the floods, we still think the credit offers a fairly attractive risk-reward profile and that spreads are in a good shape to weather the US Treasury drift,” Barcap.

Related reading:
Frustrated Colombia edges toward Asia, beyondbrics (Nov. 23)
Interview with Juan Manuel Santos, FT (Jul. 7)