The bloody civil conflict in Colombia is boiling over, and the City is watching with a grim eye. As the presidential election looms, the brutality of the FARC remnants and other armed groups is not just a humanitarian disaster but a clear and present danger to fiscal stability. I have seen this playbook before.
When a government cannot secure its territory, capital flight soon follows. The peso is already feeling the pressure, and I expect gilt yields to reflect the risk premium that investors are now demanding. The current administration’s spending to placate warring factions is a recipe for inflation.
It is a classic case of social spending without corresponding revenue, a fiscal illusion that the markets will eventually punish. The central bank may be forced into hawkish action, choking growth further. This election is a binary choice between continued conflict and genuine reform.
If the voters choose the former, expect a sharp devaluation and a spike in sovereign risk. The bottom line is clear: Colombia’s future hangs in the balance, and the markets are taking notes.