May 31 (Reuters) – The likely election victory of former defense minister Juan Manuel Santos as president, rebel and drug violence, the push for investment grade rating, and tensions with Venezuela are all points to watch in Colombia this year.

JUNE ELECTION RUN-OFF

Juan Manuel Santos looks set to win a June 20 run-off election and succeed his former boss Alvaro Uribe as president. He won the most votes in a May 30 first round, easily beating former mayor Antanas Mockus after polls had shown them in a tie. While he fell just short of an outright win, Santos is clearly favored to win the June run-off [ID:nN31230268]. Investors see that as a signal Uribe’s security and pro-business policies will continue, and Santos also has a strong position in Congress to push through reforms. Colombia’s peso COP=RR and TES bonds TFIT15240720 rose marginally after the result. Santos won in all but one of Colombia’s states and garnered more than double the votes of Mockus. He will likely count on the support of former Uribe allies in the Cambio Radical and Conservative parties to further bolster his backing. Mockus may flirt with the leftist Democratic Pole party, but risks alienating moderate voters. But Santos must also try to distance himself from the scandals over rights abuses and corruption that blemished Uribe’s government. A probe into whether state agents illegally wiretapped Uribe’s opponents, reporters and judges has crept closer to the presidency without involving Uribe. Support for Mockus surged before the vote, thanks to his call for clean government and ethics. For full election coverage, click on [ID:nCOLOMBIA].

What to watch:

– Alliance-building before June run-off.

– Scandals in the Uribe administration hurting Santos.

ARMED GROUPS, DRUG TRAFFICKERS

Uribe gained the upper hand in Colombia’s long conflict with successes against the left-wing Revolutionary Armed Forces of Colombia or FARC rebels. But peace talks are unlikely. Under intense pressure from Uribe’s security policies, the FARC has settled into hit-and-run tactics. Both Santos and Mockus are promising a tough line but Santos, as former defense minister, appears better equipped to ensure continuity, adapt policy where needed and also manage relations 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 while 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 [ID:nN2272297] and an attack that killed nine marines before the election [ID:nN24194130]. Colombia remains the world’s No. 1 cocaine producer and illegal armed groups are all engaged in drug trafficking, making the government’s task more complex as rebels form alliances with drug-trafficking gangs. Despite a demobilization of paramilitaries who once fought the FARC, new groups have emerged and rights groups say they are an increasing threat. U.S. Democrats who have final say over approving U.S. aid and a free trade deal for Colombia will watch the new government for signs of improved control of rights abuses and drug corruption among troops and lawmakers, as well as more protection for union leaders and rights workers and probes into their murders.

What to watch:

– Major blows to the FARC’s leadership.

– Urban rebel attacks to show resurgence.

VENEZUELA TENSIONS

Tensions between Uribe and Venezuela’s socialist President Hugo Chavez have been at their worst as the two clash 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. Trade ties always served as a buffer zone between Chavez and Uribe, but Venezuela has curbed commerce and that is hurting Colombia’s economic recovery, knocking around 1 percentage point off its GDP growth. Some analysts say they cannot rule out a limited border incident — even by accident. Santos says he could work with Chavez, but a Santos presidency would likely keep tensions high as Chavez calls the candidate a threat and Santos says he would stop Chavez spreading his socialist revolution to Colombia. Chavez has said he hoped for dialogue with the new Colombian leader. But he will likely still lash out at the base plan and use it to attack U.S. influence. [ID:nN28225132]

What to watch:

– Increased nationalist saber-rattling.

– A Colombian deal to sell electricity to energy-strapped Venezuela that is improving ties.

NEW, OIL MINING INVESTMENTS

Thanks to its political stability, 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 (PRE.TO) and other foreign operators are making headway in exploring Colombia’s once-abandoned oil fields. Risks from guerrilla attacks on oil operations remain and the country needs more infrastructure [ID:nN23202379]. But it hopes production will reach more than 1 million barrels per day next year and an oil block auction in June will measure interest. Mining is also growing, with particular interest in gold. Some companies have faced resistance in receiving environmental permits, including AngloGold Ashanti (ANGJ.J). But Canada’s Greystar Resources (GSL.TO) recently won an appeal over an environmental permit.

What to watch:

– Results of June auction of 200 oil and gas blocks.

– Environmental authorities rulings on mining.

INVESTMENT GRADE

Santos, a former finance minister who once helped bring Colombia out of a fiscal crisis, says creating jobs and generating economic growth are key parts of his platform. He will increase 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. Mockus too is known for his fiscal discipline when he was mayor, and is asking for higher taxes. Last year, Canada-based credit rating agency DBRS raised Colombia to investment grade, citing debt management, macroeconomic policy and public security gains. That pushed up the peso and local stocks. But larger rating agencies have so far balked at giving Colombia the prized rating. Colombia says the country needs a fiscal overhaul, based on Norway’s model, before it can reach the grade. The government now says it will leave the sale of the state’s share in energy supplier Isagen to the next president, leaving a question mark over budget financing and opening the way for more foreign debt issuance. The announcement of the delay in the sale hit TES debt and the peso. [ID:nN18146934]

What to watch:

– More debt sales, local or international.

– How the next government handles Isagen. (Editing by Eric Walsh)