Colombia Defence and Security Report Q3 2008

During Q208 Colombia's security situation continued to be dominated by the changing fortunes of the Fuerzas Armadas Revolucionarias de Colombia (FARC). FARC has suffered major setbacks during the period with the death of veteran leader Manuel "Tirofijo" Marulanda Velez and the surrender of Nelly Avila "Karina" Moreno to police. Earlier in the year FARC also lost deputy commander Ral Reyes, and Ivn Rios of the FARC's secretariat. Alfonso Cano was named as successor to leader "Tirofijo".

Our view is that FARC is being significantly weakened by political pressures from neighbouring governments, a drop in previously enjoyed public favour, and financial difficulties. With the recent leadership losses it has suffered we believe that FARC's future could seriously be in doubt. The organisation is already splintered into various geographical groups and BMI is of the view that further divisions could occur, producing additional factions who may surrender, or who may continue as insurgents.

During this past quarter external political pressures have mounted for FARC as Venezuelan president Hugo Chvez, the unique supporter of its political aims, has changed his stance to one of pressuring the organisation for non-violence and the release of hostages. This is in line with the Columbian government's stance and thus frees the way for its anti-crime solutions (which are highly militarised).

Meanwhile, in response to Colombian accusations that Ecuador has supported FARC, Ecuadorean Foreign Minister Maria Isabel Salvador has called on the Organisation of American States (OAS) to investigate such claims. Following the seizure of FARC computers after Colombia's cross-border raid in March, Interpol has only verified that Colombian authorities did not alter documents, while authenticating their contents is beyond its remit. However, while Ecuador's call for an investigation can be understood as an assertion of innocence in the matter, it could also suggest knowledge of the computers' contents and that any connection with the FARC will not be found therein.

An additional factor undermining the FARC's future is that its financial earnings have been in decline, due to the disruption to drug smuggling by a combination of US, Mexican and Colombian policing. There is no sign of a let up on this stronger policing approach and therefore the FARC's income will continue to be under pressure.

BMI is not saying that FARC is finished just yet. Indeed any demobilisation of its various units would be piecemeal. However, if the new FARC leadership shows a preparedness to negotiate with the government this would imply serious weakness. Our political risk rating for Colombia remains unchanged for now - a score of 70.4 out of 100 in terms of short-term risk, and six out of 10 in the subcategory of 'security threats'.

The BMI view on Colombia's economy is that it has strong growth potential despite the forecast decline in real GDP growth from 7.5% in 2007 to 5.1% in 2008. Domestic demand will be a strong driver this year as disposable incomes continue to rise, however the supporting external factors of the previous economic cycle will probably soften. Colombia is likely to feel the negative effects of increased commodity prices, tight monetary policy conditions, and the financial volatility of the US economy.

In addition Colombia is now seen as one of Latin America's more reliable targets for foreign investment.

The country has been in the process of opening up its economy since the early 1990s. A period of stability and steady economic growth since the election of conservative President lvaro Uribe in 2002 has given investors a solid platform on which to work. The president was re-elected in May 2006 elections and has maintained a broadly positive stance to FDI. Colombia is currently one of the few staunch Latin American allies of the US, with which it concluded a free trade agreement in February 2006, although this is still awaiting ratification by the US congress.