Colombia is stuck in political limbo, and vital US aid might hang in the balance

In a national plebiscite on October 2, Colombian voters narrowly rejected a landmark peace deal to end a 52-year war between the state and leftist rebels, with “no” votes winning out by just 54,000 of the 13 million ballots cast.

In the immediate aftermath, the Colombia peso slumped, falling 2.7% on Monday morning to 2,959.03 to the dollar.

Later on October 3, Moody’s said the “no” victory was a negative for the country’s credit profile.

In the days after the deal’s defeat, there seemed to be little progress toward a resolution over whether or how to renegotiate the deal.

Meetings between President Juan Manuel Santos, whose administration brokered the deal, and former President Alvaro Uribe, who led the campaign against the deal, yielded no concrete progress.

A prolonged political limbo could put at risk international assistance that would be needed to implement many components of the deal, like rural development and financial aid for combatants.

Congressional aides told Reuters that US support for Colombia would remain strong, but lawmakers may reduce funding — thought to be $450 million for development and counternarcotics projects — to the South American country if new peace talks go poorly.

“There’s a well of support for Colombia. Congress will find a way to make something work that’s helpful and constructive,” an aide said. “But a lot is going to change between now and December.”

“US assistance to Colombia in 2016 was about $320-$325 million. The proposal was to increase that to $450 million — that was the request from the White House, and both the House and Senate approved that,” Adam Isacson, senior associate for regional-security policy at the Washington Office on Latin America, said during a press conference on October 3.

“It has not gone to conference and they have haven’t passed it. Without a peace accord, when it goes to conference, if things are really in limbo and not moving, it’s very likely that the House and Senate appropriators will look at that extra $130 million and reappropriate somewhere else,” Isacson said.

US Senators have expressed support for the deal and for Colombia.

Sen. Patrick Leahy, top Democrat on the Senate subcommittee that oversees foreign aid, said, “I have confidence that President (Juan Manuel) Santos … will find a way to bring the process to a satisfactory conclusion.”

Marco Rubio, the Florida Republican who heads the Senate’s Western Hemisphere subcommittee, said the close military and economic alliance between the US and Colombia would continue.

But he noted that any peace agreement must be fair to victims of “the many atrocities committed by the FARC,” suggesting that alliance could be influenced by the nature of whatever deal emerges from this period of uncertainty.

‘It’s like a light in the middle of the storm’

Colombian officials and other analysts, however, acknowledged the significance of the “no” vote but put it in a broader context, suggesting that other developments may mitigate the shock of the plebiscite’s failure.

Finance Minister Mauricio Cardenas said the government’s economic plan was on stable footing.

“The government has been able to secure a working coalition in Congress to pass the economic agenda,” Cardenas told Bloomberg on October 5.

The peace agreement’s rejection “should not interfere with the economic agenda. On economic issues there shouldn’t be any major changes,” he added.

“We are not making initial concessions. We are going to go for the tax reform the country needs,” Cardenas said on Wednesday, following up the next by downplaying initial market turmoil.

“Colombia’s immediate economic prospects will be largely determined, as has been the case in the last two years, by the price of oil and other chief commodity exports, and the impact of this on the fiscal and external accounts,” Anna Szterenfeld, regional manager for Latin America at the Economist Intelligence Unit, told Business Insider on October 6.

“The passage of a tax reform in the months ahead to compensate for lost fiscal revenue related to oil will be critical to the stability of the public finances, and hence, investor and creditor confidence,” Szterenfeld added.

The Santos government is expected to unveil that tax reform in the coming weeks, aiming to boost revenue between 1% and 2% of GDP, though recent events will add political complexity to its approval.

“Colombia’s Congress will still approve the tax legislation before the end of the year,” Reuters reported on October 3, citing a note from Citi, but added “not having a signed peace deal makes justifying tax increases harder for many congressmen.”

The CEO of oil firm Ecopetrol, Colombia’s largest company, echoed Cardenas’ assurance, telling Bloomberg on Wednesday, “As the national oil company, we expect these talks to resume. We don’t expect a bleak scenario at the end of the year.”

The Nobel Peace Prize awarded to President Juan Manuel Santos at the end of the week was taken by some as a further sign that peace talks and the Colombian economy would remain on an even keel.

“It is not the same to sit down to talk with a defeated president as it is to do it with a Nobel peace” prize winner, Camilo Silva, a founding partner at Colombia firm Valora Inversiones, told El Espectador.

“Amid a storm of uncertainty, the Nobel is a message that gives a signal of temporary calm,” Diego Guevara, a professor at the University of the Sabana and economic expert, told El Espectador. “It’s like a light in the middle of the storm. It is a good symbol.”

NOW WATCH: Colombian authorities seized 3 tons of cocaine bound for the US hidden in a ‘narco-submarine’

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.