see also: Investing in emerging stock markets
Colombia
Although Colombia has a reputation (in the US, at least) as a dangerous place to conduct business, it is interesting that cities such as Cali, which used to be known as the “murder capital of the world”, now have less murders per capita than Washington DC, or Baltimore. This is a direct result of the increased security that we have witnessed as a result of Pres. Uribe’s push to deal with the long-simmering rebel issue (FARC and AUC still a major problem). Due to the success of the government (with strong US backing), the level of terrorist and drug-war activity has fallen precipitously, and as a result, FDI and business has boomed. With the increase in security, there has been a massive influx of FDI capital and investment in the region. Business is booming, and real estate markets are being developed. This is all directly related to the increased sense of security in the country, and makes Colombia an interesting opportunity for investment.
In the past, the previous president Pastrana was less successful in dealing with the FARC, as he attempted to negotiate rather than isolate and attack. The current president has become a national hero for his ability to deal with the security issue
Economic:
- liberal reforms have been excellent, and the country has a large appetite for market oriented reforms. This is indicated by the willingness of the Colombian congress to ratify an agreement to sign an FTA with the US (even though the US has not reciprocated the intentions yet).
- future need: pass law to change relations with national and states. Funding and budget concerns of current system that requires federal to pass budget to local. It is similar to the problem that Argentina faces (and one that Brazil fixed). By keeping this currency system, Colombia limits the funding available nationally to fights its war against the terrorists (rebels). Also, it presents an issue in the future for budget balancing, and should be an area for Colombia to address in the future.
Political issues:
- security issue: terrorism, FARC, AUC (see discussion above, and below)
- border issue (neighbors unfriendly. Ecuador and Venezuela’s reaction in the past few months illustrate this concern)
- too much consolidation of power in Uribe? Strength of institution issue: after Uribe, will the fragmented political system remain united in their support of a common cause, or will the political system fragment for real after he is gone?
In order to make the aforementioned policies happen, what are the chances of success in passing through future market reforms (such as FTA with Europe, or reforming the budgetary issues)?
Summary of Packenham chances for further market reforms
- Political credibility: Pres. Uribe – medium. His “Nixon-goes-to-China” score would be low if it were based on th typical credibility factors of a poor social , or leftist background. He is right-of-center in his philosophies, and business, rich background. But, he has credibility as a sufferer of terrorism, and can relate to the struggles of the anti-terrorism. So, his score is “medium”
- Political system: fragmented, but unified. Although there are many parties, there is overwhelming support behind Uribe, so the fragmentation issue will likely not be a problem if he persues further reforms
- Leadership skills: excellent (as per Jonathan dinzes J. ). He has proven to be very effective.
- Consensus for market reforms: high. THE Colombian congress agreed to , and most people support further market oriented reforms, such as free trade agreements.
Based on this analysis, I believe that Uribe could be very successful in passing further reforms, and he should do so.
Needler Analysis: at this time, I do not believe that the Needler model points to any fear of military coups in either of these countries. Neither the Marxist, national interest, nor the institutional approach would indicate a desire for military intervention. Especially not in Colombia as they are spending lots of money, and increasing the prestige of the military (honor for fighting and winning vs the terrorists). If in the future, the budget gets tight, the economy goes down, and the violence returns…then maybe…but, for now? No.
Background
Once a tightly controlled economy, Colombia has since evolved into a free market bastion in Latin America. A slew of deregulation policies in the early 1990s kick-started an era of economic liberalization in the country, which saw dramatic tariff reductions accompanied by increased privatization. This relaxation of stringent trade restrictions has invited considerable foreign investment into Colombia, with the United States as one of its major contributors. Perhaps aided by industrial diversity and prudent fiscal policies, the country has never experienced any severe economic crises. Conversely, it enjoys constant growth at a rate of 5.1% (2005 est.), and a steady decline in unemployment, from 15.1% in 2002, to 11.4% in 2006. This, coupled with drastic improvements in security, makes Colombia an attractive global business destination.
Colombia and its neighbors
02/2008 - Colombia attacks rebels inside of Ecuador. The trouble for Colombia is that the FARC rebels hide in camps in Ecuador. In Feb, 2008, Colombia crossed the border, and attacked, igniting diplomatic problems with both Ecuador and with Venezuela. Hugo Chavez sent his military to the Colombian border, getting ready. So to did, Ecuador. While a diplomatic effort solves the day...
While the resolution allows both Colombia and Ecuador to save face and begin to repair relations strained this week, it fails to address some of the broader implications of Colombia’s raid. Foremost among these is the emphatic support for Colombia’s guerrillas expressed by President Hugo Chávez of Venezuela. Mr. Chávez mobilized his armed forces in response to the raid, pledging war with Colombia if it tried a similar foray into Venezuelan territory, where both the FARC (the Revolutionary Armed Forces of Colombia) and a smaller Colombian group, the National Liberation Army, or ELN, operate along the border. “It is not against the people of Colombia, but rather the expansionist designs of the empire,” General Rangel said, referring to the United States, at a news conference here.
“We do think it’s curious that a country such as Venezuela would be raising the specter of military action against a country who was defending itself against terrorism,” said Dana Perino, the White House spokeswoman. “I think that says a lot about Venezuela.” Mr. Chávez chafes at such portrayals of Venezuelan policy from Washington, positioning the dispute as a struggle between Ecuador and Venezuela, two like-minded governments, and Colombia, the largest recipient of American military aid in Latin America and one of the largest outside the Middle East.
Colombia and Free trade :
Colombia: free trade agreement with Mercosur as an associate member. As mentioned before, the impact for business is that you can locate your operations in any one of the Mercosur countries and export to the others duty free. If you manufacture in Colombia, you can export to all of the Mercosur nations, which gives you a large market reach.
"We aren't interested in Colombian investments here," Chavez said, standing beside Correa. "Of the Colombian businesses that are here in Venezuela, we could nationalize some." He said Venezuela will search for products from other countries to replace those from Colombia. Noting that Colombia traditionally supplies food to Venezuela, he said now "we can't depend on them, not even for a grain of rice." Though Venezuelan officials express confidence they will quickly find replacements for Colombian goods, government critics say the move is bound to worsen shortages of basic foods from milk to chicken that were an annoyance in Venezuela well before this dispute
Chavez influence in Colombia
He likes to get involved to try and negotiate freedom of prisoners held by the rebels, who are ready and willing to talk to Chavez. This has brought in France, who has been relying on Mr. Chávez’s mediation to try to free Ingrid Betancourt, a captive of the FARC with dual French and Colombian citizenship who was once a candidate for Colombia’s presidency.
Currency Issues
But more importantly, we should mention that the Colombian peso has appreciated by 10.5% against the dollar since January, and by 16% in the last 12 months. The main cause of the revaluation of the peso is the big inflow of Foreign Direct Investment, which reached more than US$9 billion in 2007. Last year, foreign portfolio investment was close to US$1.5 billion and less than USD100 million in the last quarter, while during the same period FDI reached US$2.5 billion.
Capital Controls
Colombia has (4/2008) imposed capital controls to limit excessive short-term inflows that will cause high currency appreciation. These controls, which require foreigners to make a deposit of 40% of their portfolio investment for six months at the Central Bank without earning interests, have been ineffective in stopping the strengthening of the peso, and have had a negative impact in the equity market.
Capital controls in Colombia have been ineffective in stopping the appreciation of the currency, and have created distortions in the equity market, increasing its volatility. At the end of last year, the government announced some relaxations for the controls, including the elimination of the restriction for IPOs´. While this is a first step in the right direction, it is far from sufficient. An elimination of all restrictions, at least as far as equities are concerned, is necessary to promote the liquidity, transparency and proper operation of the stock market in Colombia.
IN Colombia:Due to the massive amount of FDI that has flowed recently in to Colombia, the government put “capital controls” into effect to limit foreigners ability to invest in the stock market or bond market. These capital controls are worrying due the increased spread on government bonds, and the resulting increase in borrowing costs for the government. It also indicates that the government is concerned about currency APPRECIATION and not DEPRECIATION. They are afraid that the massive influx of capital will result in currency appreciation, cutting off export competitiveness. This is an area to watch in the future to see if they release capital controls…and if they do, how will that effect the currency, but if they don’t, then it should harm their stock market (as we see, in 2007, the Colombia market was one of the worst in the emerging markets…after the controls were put into effect).
Stock Market:
in 2007, the Colombian stock market had a very poor performance, and in 2008, the IGBC index is down by 12%, the worst one in Latin America.
This can be partially explained by the fact that the market is highly concentrated in local participants, accounting for 97% of daily transactions, 50% of which are retail investors. On the other hand, no more than 20 stocks are considered to be liquid and traded on a daily basis with volumes higher than US$1 million.
Last year was a historic one for the Country’s stock market in terms of IPO’s. More than US$5 billion were raised by Colombian companies through equities and the biggest IPO ever took place, when Ecopetrol, the state-owned oil company issued 10% of its shares, for US$2.5 billion. This amount was absorbed entirely by local investors, and close to 500.000 Colombians are now new shareholders of Ecopetrol. Retail investors bought 62% of the stocks and Pension funds acquired 37% of this issuance. Immediately after the stock began trading in November 2007, market capitalization increased by 50%. But contrary to what was expected, liquidity did not increased proportionally, and the rest of the stocks prices decreased by the end of the year, as a lot of retail investors reduced their positions in those equities to buy Ecopetrol.
Retain investors are selling, but, on the other hand, institutional investors (including pension funds and insurance companies) have been net buyers, acquiring more than US$200 million in stocks between January and March
What this situation shows is that the Colombian market needs to diversify its participants in order to reduce volatility, since relying only in local buyers and sellers is very risky. In fact, countries like Brazil, where 35% of daily transactions are made by foreign investors, and who bought on average 70% of the IPO´s in that country last year, have recovered more rapidly from the recent crisis. The Bovespa Index is up by 1% in 2008, after falling by 11% at the beginning of this year.
More news about Colombia
Colombia to Invest $342 Million in Ethanol Plants
Reliable Plant Magazine (January 7, 2008)
http://www.reliableplant.com/article.asp?pagetitle=Colombia%20to%20invest%20$342%20million%20in%20ethanol%20plants&articleid=9878
A new plan released by President Uribe calls for investment into facilities capable of producing 300,000 liters of ethanol per day. Social benefits of the plan include the employment of 1,500 former refugees.
Chávez, China Cooperate on Oil, But for Different Reasons
The Christian Science Monitor, by Sara Miller Llana and Peter Ford (January 3, 2008)
http://www.csmonitor.com/2008/0103/p06s01-woam.html
China and Venezuela complete a $4 billion oil deal, allowing the Chinese to explore in Venezuela's Orinoco region. Venezuela will also increase shipments of oil to China and construct three refineries in China. Chavez views this as a blow to US hegemony, while China sees the investment more pragmatically.
US Business Chiefs Urge Congress on Colombia Trade
Reuters, by Doug Palmer (December 11, 2007)
http://www.reuters.com/article/companyNewsAndPR/idUSN1156152320071212?pageNumber=1&virtualBrandChannel=0
CEOs of the largest US based corporations lobby Congress to pass a US-Colombia FTA arguing it would improve ties, benefit both countries economically, and provide more stability in Colombia. The opposition urges Congress to wait another year to place pressure on President Alvaro Uribe to end violence against trade unionists.
View more News on globalEDGE.
Extreme Investing: Inside Colombia
BusinessWeek, by Roben Farzad (May 28, 2007)
http://www.businessweek.com/magazine/content/07_22/b4036001.htm?chan=search
In recent years Colombia has seen strong GDP growth while lowering both inflation and unemployment. Despite this positive economic news, the country has not been able to shake off its image as a haven for drug lords and criminals. A closer look into the cities and businesses of Colombia reveals safer streets and more efficient businesses. These improvements have increased confidence among both investors and consumers, though the economy as a whole remains fairly volatile. The mixed signals Colombia is sending paint an unclear picture of the nation's future as an economic hub for Latin America.
External Links
Colombia: Bogota Chamber of Commerce
http://camara.ccb.org.co/ccbingles/portal/default.aspx
The Bogota Chamber of Commerce supports the entrepreneurial sectors and collaborates with the Colombian national government in the regulation of the business community. Civic and social programs aim to improve the quality of life in Bogota and Cundinamarca. Site includes sections on strengthening business, dispute resolution, and social/cultural programs. English version is somewhat limited but full site is available in Spanish.
Category: Research: Organizations
Country: Colombia
Colombia: Proexport Colombia
http://www.proexport.com.co/VBeContent/home.asp?idcompany=17
Proexport Colombia contains valuable trade information for foreign importers and domestic exporters, mainly about Free Trade Zones in the area. The section for foreign importers is in English, while the section for domestic exporters is in Spanish.
Country: Colombia
WTO: World Trade Report
http://www.wto.org/english/res_e/reser_e/wtr_arc_e.htm
This annual publication by the World Trade Organization summarizes the current state of world trade and global trade policy. Each year, WTO focuses on new developments in world trade or a current issue affecting the world. Report is available for download in complete form as well as by chapter or section.
Category: Publications
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At stake is the annual $5 billion in trade between Colombia and Venezuela, dwarfing the $2 billion in trade between Colombia and Ecuador, as commerce on the border dwindled Wednesday to bare necessities like food.
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