Colombia: Latin America’s rising star

Colombia’s domestic economy is growing, as are its foreign assets. There is little to suggest it cannot continue to grow over the coming decade, even if its political situation remains tinged with uncertainty

Author: Alejandro Pieschacón, Senior Equity Strategist, Casa de Bolsa
July 1, 2013

From its position as a declared ‘failed state’ in the 90s, Colombia has turned into one of the most stable growing markets in Latin America. The economy grew six percent in 2011 and four percent in 2012, with similarly strong growth forecasts over the coming years. It has been highlighted by the World Bank as a top reformer in five of the last eight years.

Colombia is the fourth-largest economy in the region – below Brazil, Mexico and Argentina – and has strong figures in nominal and real terms. Those figures are not quite so positive when we look at the numbers per capita, due to Colombia’s higher population than its Andean peers, but this is considered to be a long-term strength. The 47 million people in Colombia contribute to a GDP per capita of $6,300 dollars, way below Chile’s $11,800 or Mexico’s $9,600, but nevertheless Colombia’s regional GDP per capita growth in the last 15 years has grown by a stunning 35 percent. Further ratifying the positive economic conditions, in 2012 the country was awarded investment grade status by the three major credit rating agencies.

Colombia’s capital markets
The performance of capital markets has also been remarkable. After strong growth between 2002 and 2011, when the economy grew at an average annual real rate of 4.36 percent, fixed income issuances increased by 249 percent and the trading volume of sale transactions doubled, with a volume of two times GDP. That is relevant considering that the capital market’s current mix is 90 percent fixed income and 10 percent equity and derivatives. The fixed income market is the third largest in the region, below Brazil and Mexico, with a volume 60 percent higher than Chile, and has the highest growth rate in the region over the last 12 years.

That growth is explained by some major macroeconomic changes that made inflation fall sharply from double-digit levels in 2000 to levels of four percent in 2006, and to slowly diminish to the current level of two percent. This circumstance allowed the central bank to adopt a dovish policy and expand the money supply. That positive economic environment also improved the rising equity market, with a compound annual growth rate of 11 percent for volumes and 44 percent for floating assets since 2006.

Since the late 90s, the development of the equity market has been among the country’s priorities, as one of the best ways to finance a growing business sector. With $122m in average daily trading value in the last three years and $220bn market cap, the Colombia Stock Exchange is the fourth-largest market in the region below Brazil, Mexico and Chile. Currently, Colombia, Chile and Peru are in the process to merge their flows and have a joint equity market called MILA. Unfortunately legal and technological issues have slowed down the process, but hopefully it will gain some traction during the year. Mexico has also shown official interest to enter this MILA market; if successful it will double this market’s potential, giving the region even more visibility overseas.

But the improving flows are not coming from the capital markets; in fact, foreign direct investment has reached a new historical high in the last two years, with more than $16bn in 2012, 80 percent of that invested in oil and mining. Oil production has increased from 520,000 barrels per day in 2006 to the current figure of 1,000,000, proving that a good resources base, plus an unambiguous legal framework for foreign investment, will ultimately do the trick.

What financial crisis?
The financial crisis of the last five years has been a huge opportunity for Colombian companies. Those that were well managed and under leveraged seized the illiquidity and debt ratios of the global players as a chance to expand in the region. Since 2010, we have witnessed mergers and acquisitions activity in Colombian financial companies totalling more than $10bn all over the region. Standouts include Grupo Aval, Bancolombia and Suramericana acquiring assets out of the border for $7.7bn. Most of that money was raised through capital markets.

The Colombian banking expansion is also remarkable, turning 35 subsidiaries in 2007 to 195 in 2013. Colombian subsidiaries currently represent 23 percent of Panama’s banking sector, 15 percent of Costa Rica’s, and 52 percent of El Salvador’s, while also managing, on average, 20 percent of the pension fund business in Chile, Mexico, Peru, Uruguay and El Salvador. Currently, Colombia’s foreign assets exceed $103bn.

Political stability
All this would not be possible without well-built institutions and political stability. Key economic institutions like the Colombian Central Bank are independent and have established a successful monetary policy that has paid off. So there is no major worry there: the issue is political stability. The last three governments (Uribe I and II, and Santos – Uribe’s former minister) have focused on improving security, which has been the country’s game changer. All three governments enjoyed the highest approval rates in the region during their periods in office. So, is there a chance that the only Latin American country with active guerrilla forces switches sides and joins its neighbours by electing a left-oriented government? Currently, slim to none. In fact, the volatility in the equity market in the election year, measured three months after and three before the election, is the lowest in region, even below Chile’s, demonstrating a degree of financial stability around elections.

10 years were enough to change not only the lead indicators, but also the people’s sentiments toward their country. Today, the new generations entering the labour market are learning about drug lords and terrorist attacks in soup operas, rather than on the news. The country is economically viable, but we are still only half way there. We still have rebel groups that, according to official figures, number close to 5,000 people, unfortunately a lot of them women and children, forced to enter those militias as their only way to make a living.

Some of the government’s social inclusion programmes are ineffective; the land restoration programme to return to the territory taken by the guerrillas is slow; and unemployment in rural zones could be the highest in the country, making it hard to eliminate the guerrillas from the equation, at least for now. At this moment, the government and the FARC leaders are attempting to find a political way out of more than 60 years of conflict. We all hope something good will came out of that negotiation, and that the guerrillas will defend their left wing ideas with votes rather than bombs.

Competitiveness through diversity
It is clear that Colombia has been an overachiever in the region thanks to several political and social adjustments that have improved the economic environment and generated a new, commodities-oriented economy. The new challenge is to consolidate those changes using the high levels of foreign direct investment to diversify the economy into services and agribusiness, diminishing the dependency on high oil and coal prices, and to improve competitiveness with a $49bn infrastructure programme leading up to 2020, while also continuing to strengthen financial systems and capital markets. The road forward looks promising, but it is crucial that Colombia maintains its course in order to continue being Latin America’s rising star.