Trade soars in investor-friendly Colombia

Trade in Colombia is booming, buoyed by good relations and flow with the US. Luis Waldmann looks at Colombia‘s prospects and any hurdles to growth.

Colombia, just like Brazil, Peru and other countries flush with natural resources, is benefiting from high global liquidity and commodity prices. South America’s fifth-largest economy is a leading exporter of oil, coal and coffee, and has seen its bond and stock markets boom in the last few years. The Colombian peso at a seven-year high versus the US currency is also a clear sign of resilience, though much to the despair of dollar earning exporters.

Commodities, chemicals and garments are the bulk of Colombia’s exports, which doubled in four years to US$24.4bn in 2006, according to the country’s trade ministry website. Imports, which are 91% made up by industrial goods, hit US$26.2bn also in 2006.

Despite the good news, political stability remains fragile. Negotiations over a free trade agreement with the US have stalled following a scandal in which government members were accused of cooperating with right-wing militias. Still, Colombia does enjoy a good relationship with the US, which is highlighted by Washington’s roughly US$5bn in aid since 2000 for Colombia to beef up its military and eradicate drug production. The fact that Colombia is nestled between volatile Venezuela and Ecuador, which together with Bolivia could be seen as unwelcoming for international investors, adds to international concerns.

The US buys 40% of Colombia’s exports, and is followed by Venezuela (11%), Ecuador (5%) and Peru (3%).

Trade finance openings

Opportunities in short-term trade exist in industries such as chemicals, coal, oil, minerals, agriculture, machinery, equipment and sugar-based ethanol, says Steven Puig, regional trade head, Latin America, at Citigroup.

Supply chain financing, in that Citigroup caters to the suppliers and clients of existing customers, is also high on the bank’s Colombia agenda. Trade finance spreads are roughly half of those seen in 2004 and 70% as much as 2005 levels, Puig notes, and top-name companies can borrow one-year loans at less than 100 basis points over Libor, he adds.

To Greg Toulemonde, representative in Colombia for BNP Paribas, confidence in investing in the country is at levels not seen in 15 years. BNP finances Colombian exporters and importers through its franchise Global Trade Services (GTS), utilising pre-export financing in the oil, coal and agriculture industries.

BBVA Colombia’s trade finance has doubled in the last five years, says Brianda Cediel, trade finance product manager at BBVA Colombia, thanks to the good performance of the Colombian economy and synergies across BBVA’s operations worldwide. Presently, the most dynamic industries for BBVA Colombia are coal, oil, energy and nickel, while autos, textiles and flowers are also active, she notes.

BBVA Colombia offers letters of credit, documentary collection, factoring, forfaiting, pre-export and import financing, guarantees and working capital financing. Most pre-export loans have tenors of up to 180 days, while Colombian companies can obtain over 10 years’s financing for infrastructure. Moreover, the bank works with structured financings guaranteed by export credit agencies (ECAs), multilateral agencies or private insurance companies. Pre-export financing backed by sales to customers in OECD countries has provided Colombian exporters with longer dated and cheaper financing, says Cediel.

Colombia’s level four OECD rating, the same as Brazil and two notches ahead of Venezuelan risk, renders minimum insurance premiums charged by export credit agencies (ECAs) attractive even for the top tier names, compared to what the bank market is presently offering, says Valentino Gallo, Americas head of export and agency finance at Citigroup.

And despite Colombian borrowers having access to a range of bank and equity capital market resources, many prefer to stick to well-tested ECA structures “only to nurture them as a sort of alternative market for when things may get difficult,” says Gallo.

ECA solutions are also very attractive for second-tier clients eager to become known internationally, says Gallo. Another strategy to cope with rising liquidity is to offer local currency-denominated loans and to target smaller companies “where the margins are more attractive,” says Gallo.

Gallo notes that Japan’s Nexi is “extremely interested” in Colombia, as well as European ECAs and the US Ex-Im Bank coupled with Opic. While Colombian coal, oil and resources-related projects are a magnet for Nexi, European agencies such as Coface and Cesce are more focused on supporting exports of European Union-developed technology.

First-tier companies can obtain 10-year bank financing at 150bp to 200bp, and five-year loans at 75-100bp, Gallo says. Locally-raised peso-denominated financing can be as long as 15 years and cost single-digit interest rates for the top names, says Gallo. He stresses that Colombia’s continued need for long-term power and infrastructure projects is drawing mounting interest.

In all, increased liquidity has led Citigroup “to lend more not only in Colombia but everywhere in Latin America,” Puig comments.

“The level of confidence that exists regarding Colombia’s economy is at a very high point,” says Puig, who predicts 2007 GDP growth to be 5.7%.

The general rule of global liquidity being channelled to riskier economies certainly applies to Colombia, a country that, like Chile and Brazil, is led by a market-friendly administration. Trade financiers are now forced to make up for a shortfall in margins by delving into lower tiers and smaller transactions. Longer-term infrastructure finance, however, looks all the more attractive.

Exporters’s ordeal

The main problem hurting Colombian exporters is the peso rally, says Cediel. The Colombian currency is being traded at its highest point against the dollar since 2000.

The weakening dollar is the main inconvenience for Colombian exporters in that a falling greenback renders Colombian exports more expensive to international customers, explains Augusto Solano, president of Asocolflores, the local association representing flower producers. Colombia exported US$960mn-worth of roses and other flowers in 2006, slightly up from US$930mn in 2005. Flower exports are paid within 30-60 days and are not backed by guarantees as 85% of the sales are headed to the US, Solano says.

The Colombian peso has appreciated due to two reasons, explains Juan Carlos Echeverry, an economics professor at Universidad de los Andes in Bogota. First, emerging economies such as Colombia’s are indeed luring international investors. Second, Colombian exports of oil, coal, sugar and coffee are fetching record revenues.

BBVA Colombia’s Cediel notes that the Colombian government, which is working hard to contain a surging currency and rising inflation, has created an obligatory deposit of 40% on import financing, working capital and certain investments and 11% for pre-export financing.

Echeverry adds that the main government measures to devalue the currency have been to intervene in the foreign exchange market, with the central bank buying dollars in the spot market thus generating demand for the US currency. Another policy, which ended in July 2006, bid to restrict foreign capital by forcing it to remain in the country for at least one year.

German Verdugo, a director at Bogota-based brokerage Correval, forecasts that the government’s attempts will not be enough to stem the currency rally. The appreciation of the Colombian peso reflects the dollar weakness internationally and Colombia’s attractiveness, he summarises.

Another central problem exporters face is precarious transport infrastructure. To Juan Pablo Luque Luque, president of Colombian credit insurer Segurexpo, lack of infrastructure in roads and ports is making Colombian products lose price advantages.

Credit insurance

As new players arrive in Colombia’s export credit insurance industry, a considerable increase in premium volume is forecast. Premium levels have already increased 20% yearly in the last few years, says Luque Luque of Segurexpo. And Segurexpo’s total approved limits topped US$350mn in 2006, from approximately US$100mn in 2000.

Segurexpo sells credit insurance policies to exporters and companies selling locally. Exporters are offered political and extraordinary risks cover, which insure against currency inconvertibility or politically-driven impossibility to repatriate sales. Average tenor is 90 days, and the longest period is 180 days. Most of Segurexpo’s export credit insurance exposure is in the US, Venezuela and Peru. Countries like Mexico, Brazil and El Salvador have represented above-average losses to Segurexpo, Luque Luque says.

Bart Pattyn, regional managing director at Coface Latin America, predicts fast growth in the Colombian credit insurance market. In 2006, the Colombian market expanded from US$8.1mn to US$11.4mn, with just two players, notes Pattyn.

Coface, combined with Colombian company Mundial Seguros, offers credit insurance, information, ratings, credit opinions and collection in Colombia. Mundial distributes Globalliance Credit Insurance policies, which focus on whole turnover short-term commercial transactions, covering insolvency, protracted default and political risk. The average term of the individual transactions is up to 180 days. As for losses in the region, Coface is mostly focused on the Brazilian agriculture sector, Pattyn reveals.

Venezuela concerns

Venezuela could potentially utilise trade as a weapon against Colombia, warns Echeverry from Universidad de los Andes. Venezuela and Ecuador combined buy 15% of Colombia’s exports.

Luckily for Colombia, Venezuela has an inflation problem that impedes Caracas from restricting Colombian-made products, he ponders. Moreover, Colombian exports to Venezuela are mostly made up of staples like food and automobiles. Venezuela’s gross domestic product surging over 10% annually since 2004 makes it a sure prey for Colombian exporters. However, Venezuela’s tight currency control system (Cadivi) remains an unresolved matter (GTR, Jan/Feb 2007, p69-71).

The best way for Colombians to evade Cadivi is to export to Venezuela via the Aladi mechanism, a central bank-to-central bank trade-settling system that comprises 11 Latin American countries plus the Dominican Republic, says Citigroup’s Puig. The system is also known as Convenio de Pagos y Créditos Recí­procos.

“Some of our customers have been concerned in terms of the risk associated with selling into Venezuela given the fact that the foreign exchange mechanism that exists there is managed by Cadivi,” says Puig. “So the Aladi mechanism has been a very good alternative for them to make sure they will be paid for their exports”.

Cadivi demands a barrage of requirements from Venezuelan importers before approving dollar sales. Citigroup’s Caracas staff is trained to help its Venezuelan corporate customers comply with such demands, Puig says. Citigroup-supported Colombia-Venezuela trade comprises products as diverse as automobiles and chemicals.

To Kenneth Levine, an attorney at Wall Street law firm Carter Ledyard & Milburn, there is no reason to think Colombia is immune to the long-term instability that other Latin American countries have experienced. Ecuador, Colombia’s neighbour, appears ready to default on its sovereign debt within the next six to nine months, he anticipates.

“Colombia could very well experience similar economic or political problems in future years,” warns Levine.

Although the Colombian legal system is a ‘relatively’ good one and has in the past enforced US money judgments, he recommends that Colombian issuers consent to a jurisdiction such as the US to litigate disputes.

“Investors need to find assets in the country to attach and many foreign companies and countries leave little in the US or other foreign countries to be seized. The better option is for the issuers to grant investors a security interest in collateral,” Levine says.

In all, bond and stock market investors now have trust in the fundamentals of Colombia due to strong economic growth, a stable government and positive relations with the US and the European Union, Levine says.

Leasing takes off

CSI Latina, the Miami-headquartered financial services company, arrived in Colombia in July 2005 and entered into a joint venture with company Leasing Bancolombia. CSI Latina has seen business roughly double to US$30mn in the second year of operation in Colombia, says Arnaldo Rodriguez, president and CEO of CSI Latina. Both companies formed Sutecnologia, a new firm aiming to provide operating and fair market value leases of technology equipment to the local corporate sector.

A relationship with Leasing Bancolombia Internacional also exists to finance the acquisition of various types of equipment throughout Latin America in such industries as manufacturing, bottling, food processing, industrial, transportation, production and agricultural. Outside of Colombia, CSI Latina has financed over US$70mn of equipment leases with terms ranging from three to five years in Mexico, Brazil, Costa Rica, Panama and Guatemala.

CSI Latina is primarily focused on technology leasing in Colombia and to help global technology vendors such as Cisco Systems to increase sales by simultaneously providing financing and the technology solution, allowing the end users to mitigate obsolescence, lower their total cost of ownership and a host of other improvements.

CSI Latina is seeing very large opportunities in the telecom sector in Colombia, Rodriguez says. CSI Latina relies on partner Leasing Bancolombia to mitigate the credit and enforcement risks.

Structured finance operations are also coordinated with Leasing Bancolombia Internacional, by facilitating structured lease financing for import and export transactions. The company offers a product called mart track to local companies who need to import equipment over a phased installation or build out period where we can provide supplier advances until the equipment or solution is fully built or installed.

After the installation is complete, financing is provided with terms ranging anywhere from 18 to 60 months depending on the useful life of the asset and the credit quality of the underlying obligor.  Most of the transactions are in local currency.