With elections on the horizon and recent civil unrest threatening to undo all of the country’s hard work, can Colombia hold onto its new image as a bustling investor destination? Eleanor Wragg reports.
Less than 15 years ago, Colombia, plagued by paramilitary groups and drug traffickers, teetered on the edge of failure, with negative indicators for personal security, inward investment, trade and social development. Fast-forward to 2013 and, thanks to significant progress in the fight against guerrillas, sound economic policies and trade liberalisation, the country has undergone an astonishing transformation. Tipped in some quarters as the next Brazil, investors now are flocking to take advantage of its improved security situation, its vast oil and mineral wealth, its ever-wealthier domestic market and its fast-growing economy.
With a location in the heart of the Americas, almost 2,000 miles of coastline on both the Atlantic and Pacific oceans and a raft of international trade and commercial agreements, Colombia is a natural hub for production, distribution and export to markets worldwide. Add to that its 45 million inhabitants – Latin America’s third-largest domestic market – whose per-capita GDP has almost tripled over the last decade, and you quickly begin to see why foreign direct investment (FDI) into the country surged to US$15.8bn in 2012, up from an average of US$8.1bn per year between 2006 and 2010.
PricewaterhouseCoopers, in a 2009 report, ranked Colombia’s workforce as South America’s most productive, and the world’s businesses have taken note. Some of the big names setting up shop in the country include General Motors, which recently invested US$200mn in a new stamping plant in Bogota; Unilever, which is investing around €75mn in a new, state-of-the-art laundry detergents factory at Palmira, Valle del Cauca; and Kimberly-Clark, which has established one of its three global innovation centres there.
As one of the CIVETS countries (together with Indonesia, Vietnam, Egypt, Turkey, and South Africa), Colombia is predicted to be one of the next leading emerging markets over the coming decades, and because of a huge reduction in the threat posed by groups such as the FARC, ranging from drug trafficking to terrorism to attacks on the national infrastructure, the country is now jostling with Mexico and Peru to be recognised as the economy in the region with the brightest prospects.
“Overall, Colombia is a predictable country,” says Carlos Caicedo, senior principal analyst for Latin America at IHS. “It’s a country which has never experimented with populist economic policies and has always been very responsible fiscally and monetarily.”
Paul Spindler, partner at Kingston Smith, points out that “over the last 10 years, Colombia has moved into a much more free market position. It was already quite open, but nobody really wanted to invest in Colombia because it was quite a risky place to do business.”
Colombia is seen as a promising place for foreign direct investors, says Corina Monaghan, head of North America, crisis management at consulting firm Towers Watson. “Having said that, there are some issues at the moment. We’ve seen a lot of protests that need to remain in check, and there have been incidents involving the FARC, ELN and several other rebel groups that threaten business in general in Colombia. Right now their house is not completely in order.”
While the country’s government says it sees economic growth of 4.5% this year and 4.7% in 2014, inequality remains a significant challenge. As a result, there have been riots and strikes by a cross-section of society, including labour federations, agricultural producers, coffee growers, health workers, landless farmers, lorry drivers, miners and students; all of whom have specific grievances. A key factor in many of the protests has been the country’s many free trade agreements (FTAs), particularly the pact with the US, which took effect in May 2012, as farmers and coffee growers increasingly struggle to compete with cheaper imports.
“Some people perceive the FTA to be unfair for them and their livelihood and they think that the US has benefited more,” says Monaghan, adding that the US has increased its exports to Colombia more than Colombia has increased its exports to the US. There could also be knock-on effects regionally, with governments, concerned about Colombia’s problems replicating themselves in their own country, shying away from any similar deals in the future.
“People are asking to what extent the situation in Colombia could happen in other Latin American countries,” says Caicedo. “It could happen in Peru or in Ecuador, for example. Any country signing an FTA will look at Colombia. This FTA looks great on paper for Colombia because it opens access to the US market for many goods that Colombia exports, but what wasn’t properly assessed was how much damage this trade liberalisation was going to cause to its agricultural sector, particularly the coffee growers, who have also been hit by a drop in global coffee prices.”
To alleviate the outrage, President Juan Manuel Santos has been offering subsidies to many of the sectors that have been affected, although with a rapidly appreciating peso dampening the country’s manufacturing and agriculture sectors’ export competitiveness, it remains to be seen how successful these measures will be.
A new fiscal framework – in particular the structural balance rule, the stabilisation fund and the royalty law – will, according to the OECD’s economic assessment of the country, help shield the economy from swings in commodity revenues. It’s also very attractive to foreign investors: Colombia imposes no foreign exchange controls on trade, and there’s a special policy on projects performed by companies with foreign capital in sectors such as the exploration and production of oil, natural gas, coal, nickel, and uranium, which means investors are not bound to repatriate export-generated foreign currency.
Earning its keep
Because of Colombia’s burgeoning middle class, industries from retail to tourism, transportation and telecommunications are being propelled forward; and with 40% of the country’s population aged under 20, there can only be further growth in these sectors.
With measures including the government’s recent US$2.6bn stimulus package aimed at reactivating the industrial sector, and its pledge to pour US$100bn into infrastructure over the next decade – sorely needed, given that it can cost almost as much to truck goods to the Pacific coast as it does to ship them on to Asia – opportunities abound for investors. The government’s Highways for Prosperity scheme, estimated to cost over US$3bn, has already seen interest from multinationals including Odebrecht, Acciona, Mota Engil and OHL and is expected to create 23,000 jobs during the construction process alone as well as creating new transportation corridors.
Meanwhile, the banking sector also looks attractive. “It’s quite active in terms of mergers, acquisitions and disposals,” says Spindler at Kingston Smith. “It’s a lot like the UK about 25 years ago, where you have quite a diversified banking sector with a number of banks. Foreign banks are coming in and acquiring or selling depending on their strategies, and Colombian banks are expanding internationally, although it tends to be into their neighbouring countries in the region.”
As an example, earlier this year, Medellin-based Bancolombia made one of the largest acquisitions in Colombian banking history when it bought HSBC Panama for US$2.1bn, and confirmed in October that it would purchase US$217mn in assets from Guatemalan financial institution Agromercantil BAM.
Another plus point for the country is its membership of the nascent regional economic integration bloc, the Pacific Alliance. Made up of Chile, Colombia, Costa Rica, Mexico and Peru and with an objective to advance trade with a clear orientation toward Asia, it offers diversification away from the US market and therefore a cushion against any potential future shocks coming from that economy, as well as a gateway into Asian economies, hungry for Colombia’s vast natural resources.
“Colombia is a mini-Brazil in terms of the amount of commodities that it could supply and China would be a natural market for Colombia. Unlike Brazil, Colombia is facing the Pacific, so it’s a very good prospect. The main problem, however, is poor infrastructure. Colombia’s Pacific coast is mostly jungle with poor roads and no railways. This needs to be addressed if Colombia wants to take advantage of trade with China,” says Caicedo at IHS.
Speaking at a recent press conference, Sergio Escobar, head of the Mexican branch of Colombia’s export promotion agency, said that the country could expect to increase its exports five-fold to members of the Pacific Alliance trade bloc over the next two years.
Colombia is also putting in the legwork to ensure that it can take advantage of these new opportunities. The country has risen four places in World Bank rankings relating to starting a business, and is placed sixth in the world when it comes to protecting investors – beaten only by New Zealand, Singapore, Hong Kong, Canada and Malaysia.
It’s also looking at more value-added industries: through the government’s productive transformation programme, Colombia is working on promoting sectors such as software and IT services, business process outsourcing, energy, and related goods and services.
A chance of showers
Colombia, with its open economy, liberal trade and conducive investment environment, should therefore be a haven for investors. But, as one of 10 Latin American countries holding presidential elections in the next 12 months, investors are losing sleep over the potential outcome of voting in May 2014.
“From my point of view, it’s too early to make any prediction but next year will be very important for many Latin American countries,” says the IFC’s regional head of short-term finance, Americas, Antonio Alves. “They all have presidential elections which could be game-changers, and we need to keep an eye on how the campaigns will evolve as we may see a change in the landscape.”
President Santos is hanging his political reputation on the outcome of peace talks he started with the FARC. Although he hasn’t officially announced he will stand in the elections – he has until November to do so – commentators say that his success could mean he’d be a shoo-in for a second term. However, the talks’ glacial progress has worn Colombians’ patience thin: a September Gallup poll showed his approval rating plunging to a paltry 21%, down from 48% in June.
The Economist Intelligence Unit points out that while President Santos’s popularity is at a record low, the opposition also faces key challenges and lacks a strong contender ahead of the May presidential vote.
“We’re sitting wondering who the next president of Colombia will be and what this person’s attitude will be towards foreign direct investment,” says Monaghan at Towers Watson, echoing the sentiments of many investors in the country. “What characterises most of Latin America is that you have political parties that are so divergent in their views so that in the space of an election the climate for foreign investment can change rapidly and dramatically.”
However, as Monaghan points out, Colombians in general have benefitted from the status quo, so it could be assumed that Colombia is unlikely to see a spectacular volte face. “I do think, though, that there is a threat,” she adds, “and my opinion is that there is a stronger threat than in neighbouring countries because the political violence in Colombia is significant.”
“Policy continuity is the main feature,” explains Caicedo. “Even if President Santos doesn’t win, the next president is expected to keep the same policies in place.”
What is critical for business in Colombia is security, and there hasn’t been a better opportunity in the last 50 years of a peace agreement. “If the peace negotiations collapse, we’re going to have another four or five years of intensive military confrontation, terrorism and kidnapping,” says Caicedo. “There is an opportunity for this president to sign an agreement between now and 2014 and he needs to win the election to be able to deliver on that. It’ll have implications for oil, for mining and for security in 2015 to 2016.”
By and large the sentiment toward the country is still overwhelmingly bullish. The country began OECD accession talks earlier this year, and looks set to join the club of 34 of the most economically developed liberal democracies in the world very soon – yet another plus point for the Andean nation.
“Colombia has one of the most open systems in terms of foreign direct investment, they are trading with the US and the EU and I think that Colombia should remain as a good place to invest,” says Monaghan. “People need to be cognisant of the political violence, but the overall picture is very positive.”
Today, Colombia’s prospects remain strong – especially in comparison to its neighbours, and while some investors may opt to wait and see, the overall feeling is one of a country with everything to thrive for, and a bright future.