Colombia’s new president has inherited a fragile economy – and he has already promised sweeping changes to promote economic stability. The success of his approach will hinge on how well the proposed shock therapy can be balanced against a tough social backdrop and cautious international markets.
Colombia has a new president. Abelardo de la Espriella’s narrow election victory points the country to the political right – a similar direction to many other countries in Latin America in recent years.
Amid the country’s fragile fiscal position, the peso rally that followed the election reflects relief from a more market-friendly agenda. But the real test will begin when Colombia’s Congress signs off the new president’s policies. How this phase pans out will affect whether the country can achieve a true economic recovery.
Colombia’s election fits a pattern that has become familiar across Latin America in recent years: a leftist government unable to reconcile social ambition with fiscal credibility, and an electorate weighing that failure against the discomfort of a right-wing outsider.
Abelardo de la Espriella won by a margin of about one percentage point of the vote in a historically competitive second round. The tightness of the race was very similar to that seen in Peru just a couple of months earlier and it is indicative of the polarisation that now serves as the default political condition in the region.
This is an additional challenge for the incoming government: not only does it have to sort out the economic imbalances left behind, but also ensure that the transition accommodates the half of the population that was not convinced by its election promises.
What challenges will the new government face?
On the surface, Colombia enters this transition in reasonable economic shape. Growth avoided the hard landing that many feared after Gustavo Petro took office in 2022. Financial markets expected a slowdown in economic growth due to the halt in new oil and gas exploration, state-driven reforms in the labour, pension and healthcare sectors, and debates over adjustments to fiscal rules.
But overall economic activity stayed afloat. The current account has improved, and the peso has had its best run in years. The current account deficit fell to 1.7% of GDP in 2024, its lowest level in two decades, helped by a 17% jump in remittances and a stronger tourism sector.
The peso itself appreciated by around 15% against the dollar in 2025 (see Figure 1), and it kept climbing during the election: after the first round on 31 May, the currency gained a further 7.1%, while yields on 10-year sovereign bonds fell by around 150 basis points.
Moreover, social indicators improved. The rates of unemployment and poverty declined over the four-year term, with the former at its lowest this century and multidimensional poverty in single digits for the first time. This was supported by public spending and an increase in domestic consumption, boosted by subsidies and minimum wage increases. The achievements will be harder to maintain amid a tighter fiscal position.
Figure 1. Representative market exchange rate
Source: Banco de la República. TRM daily average.
Stripping out the currency effect, the picture changes. Colombia’s debt-to-GDP ratio fell this year largely because a stronger peso inflated the economy’s size in dollar terms, not because the government borrowed less. In fact, the deficit itself has been widening steadily.
The finance ministry activated the fiscal rule’s escape clause in June 2025, running through 2027. According to projections from the fiscal watchdog CARF (in English, the Colombian Autonomous Committee for the Fiscal Rule), this would trigger a deficit of up to 7.4% of GDP for 2026. This contrasts with the projections from the International Monetary Fund’s (IMF) April World Economic Outlook, WEO and the finance ministry’s plan, which targets around 5.2% of GDP (see Figure 2).
Nevertheless, the deficit is expected to remain at higher levels, and the net debt could reach 61% of GDP this year, the highest in Colombian history. This presents one of the biggest challenges for the incoming administration, not only because of the financial stress the country is facing, but also because of the signalling and credibility issues between the government targets and the independent watchdog.
Figure 2. Fiscal deficit
Source: IMF WEO (April 2026) – general government net lending/borrowing
Indeed, borrowing is a problem. Two of the three major rating agencies stripped Colombia of its investment grade status in 2025, and in October, the government cancelled the IMF’s $8.4 billion flexible credit line on which Bogotá had relied as a fiscal buffer, following a suspension from the IMF in April, citing the same deterioration in the fiscal accounts that the finance ministry was still downplaying in its own projections.
Foreign direct investment fell 33% between 2022 and 2025, a sharp reversal for a country that had used its investment grade rating and 2020 OECD accession to build a reputation as one of the region’s more reliable destinations for capital.
This is the credibility that de la Espriella now has to rebuild, and it is also why his transition has leaned so heavily on the presence of José Manuel Restrepo, a former finance minister whose reputation with international investors rests on pragmatism rather than ideology.
What is the plan of the new administration?
The return to the fiscal rule limits, after their suspension in late 2025, would require major consolidation, either by reducing spending or by increasing revenues, to around 3.7% of GDP. Prior to suspension, the 2027 deficit target was 4.5% of GDP, while debt was required to remain below the statutory anchor of 60% of GDP.
These are the targets to which the new government will need to return in 2028. ANIF, an economic research centre (in English, the National Association of Financial Institutions), has already put a figure before the elected president’s team to restore the fiscal position: a tax reform that would raise 30.2 trillion pesos (about $8.8 billion).
To achieve this, de la Espriella has proposed cutting the state apparatus by 40%, resuming fracking and eliminating several taxes, including the tax on financial transactions and gasoline levies, intended to free up liquidity for the productive sector.
He has also announced plans to cut 700,000 public-sector jobs – around 3% of the labour force. In the most recent plan, which will be formally presented in September 2026, de la Espriella’s tax reform will seek to simplify tax administration, broaden the tax base and introduce targeted tax incentives for strategic sectors, including technology.
But this plan of ‘shock therapy’ also raises questions, as cutting state spending while preserving popular social spending and reviving growth are three choices that pull in different directions.
The social backdrop makes the balancing act harder. The presidency arrives in a high-friction environment of institutional confrontation and deep social polarisation, with investment shifting away from productive sectors because of legal uncertainty and insecurity.
The tensions between the outgoing and elected administrations have intensified to the point of halting handover meetings between officials from both sides. Security concerns remain high, as armed militias maintain a strong presence in rural areas, adding to the imposition of economic emergency decrees and regulatory changes affecting traditional sectors such as mining, thereby dampening investors’ appetite.
What is the view of the markets?
Wall Street’s initial verdict on the election result has been favourable, but it is worth reading the caveats as closely as the headline.
JPMorgan has framed the outcome as raising the odds of a genuine political and economic shift, with Colombian bonds and equities responding positively. The bank sees the new administration as more internationally credible on energy, infrastructure, technology and mining. Yet the analysts are careful to hedge their bets, maintaining a cautious view on the peso, and warning that polarisation and disputes over the electoral process could still generate volatility.
BBVA, another bank, goes further: its head of Latin America foreign exchange strategy argues that the peso has already risen enough to reflect more than half of the gains it is expected to achieve. The analysis adds that markets may be overestimating how much fiscal adjustment de la Espriella can deliver, given that he is likely to have limited support in Congress.
This last point will be decisive in the first year. A president without an automatic majority cannot legislate a 40% reduction in the state by decree alone, however many orders he signs on day one. The peso’s strength and the bond market’s applause reflect relief that Petro’s successor arrives with a market-friendly script, not evidence that the script can be executed against a fractured Congress and a fiscal hole that nobody has priced fully.
What next for Colombian policy-makers?
Colombia’s new administration enters office with a brief relief from financial markets but little room for error.
In the short term, the priority will be to restore fiscal credibility by presenting a realistic consolidation plan that narrows the gap between official targets and independent projections, while avoiding measures that undermine the social gains of recent years. Reassuring investors, stabilising public finances and rebuilding confidence with international institutions will be essential to prevent further pressure on borrowing costs.
Over the medium term, the government’s success will depend on its ability to translate campaign promises into legislation. That will require building durable coalitions in a deeply polarised Congress, balancing spending restraint with social and political realities, and demonstrating that structural reforms can be implemented without creating further institutional uncertainty.
In the longer term, Colombia’s challenge extends beyond fiscal adjustment. Sustaining economic recovery will require restoring investor confidence, attracting productive private investment, improving legal certainty and strengthening the conditions for growth beyond the commodity sector.
Markets have welcomed the prospect of a more orthodox economic agenda. But the durability of that optimism will ultimately depend less on the election result itself than on whether the new administration can deliver credible reforms while maintaining political and social stability.
Where can I find out more?
- Technical paper on fiscal outlook for 2025 and 2026: An assessment of Colombia’s fiscal position from the independent fiscal watchdog CARF.
- The inflationary risks of expansionary fiscal policy, Colombia: An IMF paper that examines the extent to which expansionary fiscal policy poses a challenge to containing inflation.
- Government bond outlook report: A monthly report from Bancolombia looking at what’s next for Colombia’s public debt after the election rally.
- Multidimensional poverty in Colombia, 2025: A technical bulletin from DANE (in English, the National Administrative Department of Statistics), which presents the reduction in multidimensional poverty.
