Political Risk and Market Stability in Colombia: How Petro and Hernández Shaped Investment Outcomes

Colombia's 2022 presidential election marked a seismic shift in the country's political trajectory, with Gustavo Petro's historic victory as the first leftist president. His platform-centered on land reform, wealth redistribution, and a green transition-clashed with the neoliberal policies of previous administrations, creating both opportunities and risks for foreign investors. Conversely, Rodolfo Hernández's anti-corruption and populist agenda offered a contrasting vision, emphasizing governance reforms and social welfare. The interplay between these political forces has since shaped Colombia's investment climate, revealing how electoral outcomes can directly influence market stability and capital flows.

Petro's Policies: Ambition and Uncertainty

Gustavo Petro's election introduced a stark departure from Colombia's traditional economic model. His administration prioritized state-led reforms, including the nationalization of private health insurance, pension system overhauls, and a 2023 tax reform targeting high-net-worth individuals and corporations, according to a ColombiaOne analysis. These measures aimed to address Colombia's fiscal deficit-reaching 6.1% of GDP in 2023-and public debt of $201.76 billion by late 2024, as noted in a RioTimes report. However, critics argue that the reforms risk stifling private-sector participation, particularly with tax rates on dividends rising to 39% for individuals and 20% for foreign entities, according to a Holland & Knight analysis.

The 2023 tax reform, while generating an estimated $5.4 billion annually, has been criticized for its abrupt implementation and lack of stakeholder consultation, a point underscored by the U.S. State Department. This has exacerbated regulatory uncertainty, deterring foreign investors who now perceive Colombia as a higher-risk destination. For instance, the mining and energy sector-historically accounting for 71.8% of total FDI in 2024-saw a sharp decline due to ambiguous policies and declining natural gas production, according to a LatAm FDI analysis.

Petro's "Total Peace" initiative, aimed at negotiating with armed groups, has further complicated the security landscape. While the policy sought to reduce violence, it has been criticized for enabling criminal organizations to expand their influence, compounding investor concerns, as described in a CSIS analysis. The administration's push for a greener economy, meanwhile, remains aspirational, with no clear roadmap to reduce reliance on oil and coal production, a point visible in the 2022 election overview.

Hernández's Anti-Corruption Agenda: A Double-Edged Sword

Rodolfo Hernández, though defeated in the 2022 election, left a lasting imprint on Colombia's political discourse. His focus on anti-corruption and law-and-order policies resonated with voters disillusioned by decades of graft scandals. Hernández's advocacy for a basic income for 5 million poor households underscored his populist appeal, but his anti-corruption efforts-such as enforcing the OECD Anti-Bribery Convention-have had measurable impacts on governance frameworks, according to a Chambers guide.

Research indicates that anti-corruption measures can boost investor confidence by improving transparency and reducing economic inefficiencies, as shown in an Ellis Ridge analysis. For example, Colombia's adoption of Law 2195 of 2022, mandating ethics programs in public entities, aligns with global best practices and may enhance long-term market stability, a conclusion supported by an academic paper. However, these gains are offset by broader political polarization and bureaucratic inertia, which have hindered policy implementation, as noted in an FTI Consulting note.

FDI Trends: A Tale of Two Eras

Foreign direct investment in Colombia reflects the tension between Petro's transformative agenda and lingering uncertainties. In 2022, FDI inflows surged to $17.18 billion, a 79.71% increase from 2021, driven by optimism around Petro's election and post-pandemic recovery, per Macrotrends data. However, this momentum reversed in 2024, with FDI contracting by 15.2% to $14.23 billion, attributed to regulatory ambiguity and global economic headwinds; ColombiaOne later reported the 2024 decline without the earlier link.

The mining and energy sector, once a cornerstone of Colombia's FDI appeal, accounted for 71.8% of total investment in 2024 but faced declining inflows due to Petro's nationalization efforts and production declines, as highlighted by LatAm FDI (cited earlier). Conversely, sectors like technology and renewable energy showed promise, with the government offering tax incentives for innovative industries, according to Lloyds Bank Trade. This divergence highlights the importance of sector-specific strategies for investors navigating Colombia's evolving landscape.

Navigating the Risks and Opportunities

For investors, Colombia presents a paradox: a politically polarized environment with ambitious reforms and untapped potential. Petro's policies, while socially progressive, have introduced regulatory risks that deter capital. Hernández's anti-corruption focus, though laudable, has yet to translate into systemic change. The key to unlocking Colombia's investment potential lies in balancing these forces.

The government's "Commitment to Colombia" program, aimed at streamlining regulations and improving infrastructure, offers a glimmer of hope, according to the U.S. State Department (previously cited). Additionally, Colombia's strategic location and access to both the Atlantic and Pacific Oceans position it as a nearshoring hub, particularly for technology and renewable energy sectors, a trend identified by LatAm FDI (previously cited). However, persistent challenges-such as corruption, bureaucratic delays, and uneven regulatory enforcement-remain significant hurdles, as reported by Latin America Reports.

Conclusion

Colombia's political landscape, shaped by Petro's leftist reforms and Hernández's anti-corruption agenda, underscores the delicate interplay between ideology and market stability. While Petro's policies have introduced regulatory uncertainty, they also reflect a commitment to addressing inequality and environmental sustainability. Hernández's governance reforms, meanwhile, highlight the potential for institutional improvements to enhance investor confidence.

For investors, the path forward requires a nuanced approach. Sectors like technology and renewable energy offer growth opportunities, but success hinges on navigating political risks and engaging with policymakers to advocate for stable, transparent frameworks. As Colombia's 2025 elections approach, the interplay between political ambition and market realities will remain a critical determinant of investment outcomes.