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World News

Factbox: Key political risks to watch in Colombia

BOGOTA (Reuters) - President Juan Manuel Santos’ policies in areas such as the fight against Marxist guerrillas, a push for investment grade, managing dollar inflows and tense ties with leftist neighbors are points to watch in 2010.

SANTOS’ GOVERNMENT

Santos, a former defense chief and finance minister, succeeded President Alvaro Uribe on August 7. Investors see his presidency as a continuation of Uribe’s tough security line against rebels and pro-business policies. Santos has a strong position in Congress to push through reforms after securing support from the Conservative and Cambio Radical parties.

The experienced technocrat has named a Wall Street favorite, Juan Carlos Echeverry, as his finance minister and an experienced diplomat, Maria Angela Holguin, as his foreign minister. He has appointed a U.S.-educated oil engineer as energy minister and an ex-member of Congress with a history of supporting tough security measures as defense minister.

Santos has a solid mandate after securing 69 percent of the vote in June’s election and a recent opinion poll showed 76 percent of Colombians view him favorably. He must manage his alliances carefully to ensure a strong hand in Congress.

The new president must try to distance himself from the scandals over rights abuses and corruption that blemished Uribe’s second term. A probe into whether state agents illegally wiretapped Uribe’s opponents, reporters and judges crept closer to the presidency without directly involving Uribe. Troops were also accused of killing civilians and counting them as rebels to boost their perceived successes against guerrillas.

What to watch:

-- How Santos manages his “unity government” alliances.

-- Can he keep his popularity through the honeymoon phase.

-- Fallout from scandals hitting his administration.

ANDEAN TENSIONS

Tensions between Colombia and its left-wing Andean neighbors, Venezuelan President Hugo Chavez and Ecuador’s President Rafael Correa, are at their worst in years and will test the Santos government. Venezuela and Colombia have clashed over Uribe’s accusations that Venezuela was harboring Colombian rebels on its territory. [ID:nN30220546] [ID:nANDEAN] Chavez broke off ties but his foreign minister flew to Bogota to attend Santos’ inauguration. The two neighbors also have sparred over a plan to allow U.S. troops more access to Colombia’s military bases to help combat drug trafficking. Chavez says the plan is a U.S. threat to his OPEC nation. Venezuela has curbed trade. While a military conflict is unlikely, with tensions high there is a risk of a border incident, even an unintentional one.

Santos says he and Chavez are like “oil and water” but that he can work with the Venezuelan. He aims to improve relations enough to recover billions of dollars of trade lost in the dispute. In the medium-term, the potential for friction is high as Chavez will not drop his objections to the U.S. base deal and Santos has accused Chavez of trying to spread his socialist revolution to Colombia. Chavez will use the base plan to attack U.S. influence in the region, especially if his popularity at home sinks before a September election.

Relations with Ecuador have improved since a 2008 Colombian army raid across its border to attack a Revolutionary Armed Forces of Colombia (FARC) rebel camp. Correa attended Santos’ swearing-in ceremony. Ties were partly restored in late 2009. But a probe into charges that Colombian agents spied on Correa and top officials has stirred tensions.

What to watch:

-- Increased nationalist saber-rattling by Chavez.

-- Fallout from Colombia’s charges against Caracas.

-- Moves by Correa to cut ties over spy charge probe.

ARMED GROUPS, DRUG TRAFFICKERS

Uribe gained the upper hand in Colombia’s long conflict, with wins against the left-wing FARC rebels. Santos has promised to continue the tough line, saying “time is up for the FARC.” Peace talks are unlikely despite recent overtures by the FARC.

Under intense military pressure, the FARC has settled into hit-and-run attacks. As former defense minister, Santos is well equipped to ensure continuity, make changes where needed and manage ties with Washington as the White House steadily reduces military aid. Authorities can still score with major rebel desertions or by capturing or killing top leaders. The FARC could seek to gain more credibility by releasing some hostages or show its force by pulling off operations such as its kidnapping of a governor in December.

The government is trying to expand a program to consolidate its military successes by bringing in social and economic development programs quicker to areas once blighted by conflict and drug trafficking. But Colombia remains the world’s No. 1 cocaine producer and multiple illegal armed groups are all engaged in the drug trade, making the government’s task more complex. Armed groups have fragmented and rebels have formed alliances with drug-trafficking gangs and former paramilitaries. Despite a demobilization of paramilitaries who once fought the FARC, new crime groups have emerged and rights groups say they are an increasing threat.

What to watch:

-- Major blows to the FARC’s leadership.

-- Urban rebel attacks.

-- A new Santos task force against emerging militias.

NEW OIL, MINING INVESTMENTS

Thanks to its better security and pro-business environment, Colombia is now Latin America’s No. 4 oil producer, a major coal exporter and a growing player in gold investment. Canadian companies like Pacific Rubiales and other foreign operators are making headway in exploring Colombia’s once-abandoned oil fields. Risks from rebel attacks remain and the country needs more infrastructure. But it hopes oil output will reach 1 million barrels per day next year and an oil block auction in June drew more than $1 billion in new investment offers. The nation also plans auctions of coal and other minerals.

Santos has said he wants to expand and improve Colombia’s ports, railways and roads. That will be a key challenge as oil pipelines reach capacity and port expansion will be necessary to tap resource-hungry Asian markets -- especially for coal.

Santos says he wants to better manage royalties and also to create an offshore savings account for boom revenues and to ensure exporters in other industries are protected.

What to watch:

-- Santos policies to handle royalties in energy, mining.

-- New investments in oil, gold and coal.

-- How Santos plans to expand key infrastructure.

CAMPAIGN FOR INVESTMENT GRADE

Santos, who as finance minister once helped bring Colombia out of a fiscal crisis, says creating jobs and generating economic growth are key for his government. With strong expansion, he says he will not increase taxes but instead boost the taxpayer base to bolster state revenue to help fight the budget deficit -- one of the key reasons Colombia does not have investment grade rating. Last year, Canadian-based credit rating agency DBRS raised Colombia to investment grade, citing debt management, macroeconomic policy and public security gains. Standard & Poor’s has signaled that Colombia may finally receive the much-awaited investment grade if Santos pursues policies that strengthen the economy. Moody’s Investor Service says it is encouraged but the potential for an investment-grade rating is highly unlikely this year. The former government has proposed a law to use surplus oil and mining revenues to cut debt and also wants to reform how the sectors’ royalties are used.

What to watch:

-- Santos’ fiscal reform push.

-- More debt sales, local or international.

-- Ratings agencies’ reaction to Santos’ policies.

Editing by Eric Beech

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