Colombia’s Economy: From the Margin to the Spotlight

Posted on 17. Jul, 2012 by in colombia

Alternate Title: Why I’m Bullish on Colombia, Part 2

In October of last year Scotiabank bought Colombian bank, Colpatria. Why should you care?

Quick background – since the beginnings of the subprime mortgage meltdown in 2007, I’ve been increasingly bitter toward banks, bankers, and the entire financial industry. They’re crooks getting rich off paper value, while greater society pays the price. I want them regulated to the teeth because they’re a despicable gang of gamblers.

Scotiabank, however, is an exception to the rule. I have a friend in the company who’s told me a lot about the company philosophy. The Canadian bank never touched subprime, and largely stayed away from real estate. They took a hit in the recession, but didn’t need a bailout. In a society practicing good capitalism with proper moral hazard and no banks deemed too big to fail who receive tens of billions of bailout money from government, incompetent and reckless banks fail. And in such a society practicing good capitalism, competent firms like Scotiabank would emerge the victors and take leading roles in the economy (unfortunately that didn’t happen).

Nonetheless, Scotiabank is competent and cautious. So cautious, in fact, that they’re largely moving away from developed markets (US, Western Europe, etc.) because the risk-reward ratios aren’t sufficient. Mature markets are saturated and hyper-competitive. They’re moving into emerging markets, which was exactly my career philosophy thinking in moving to South America.

The point to take away is that you don’t have to be an economics expert (as I’m not) to recognize who are experts. And Scotiabank has the most competent out there. So their buying into the Colombian economy via Colpatria speaks volumes and sends a message: COLOMBIA IS COMING UP.

I already wrote my opinion in Why I’m Bullish on Colombia. One of my best friends, who has a Master’s in Economics, didn’t like that piece at all. I argued that it was a qualitative piece, discussing industry, culture, and history, and that I’m not qualified to write a quantitative economics article. Then I asked him to write one, which he did. Anybody in need of a brilliant financial mind, email me (webmaster at expat-chronicles dot com) to be put in touch. Here’s a sample of his work:

Scotiabank’s most recent move with Banco Colpatria is more than just one bank’s strategy toward diversification. Underlying the deal is a shift toward a more internationalized, stronger Latin American economy with Colombia emerging as a focal point in this transition.

Receding are the financial powers of old. European banks have been hit hard by troubles in the Eurozone. To raise capital, Spain’s Banco Santander sold its Colombian assets to CorpBanca of Chile in December 2011 for over USD 1.23 billion. In another December deal, the Dutch financial group ING sold its Latin American holdings — encompassing Colombia, Mexico, Chile, Peru and Uruguay—in the largest ever Latin American acquisition valued at USD 3.9 billion. The bidder: Colombia’s Grupo Sura. In fact, Scotiabank’s investment in Colpatria was made possible after General Electric, an American company, divested the 49 percent stake in its Colombian counterpart.

There is no shortage of buyers for Colombia’s economic potential. The nation has proven to be one of the bright spots in a world of economic uncertainty. A new acronym “CIVETS” has been coined to represent the next generation of fast-growing economies, placing Colombia alongside Indonesia, Vietnam, Egypt, Turkey and South Africa. Whereas the International Monetary Fund recently revised its expectations of global output downward, Colombia’s is moving up, particularly after a 7.7 percent surge in gross domestic product in the third quarter of last year. Its economy is expected to outshine many of its Latin American peers including Brazil, the region’s most-watched market, whose economy has shown signs of weakness of late. Colombia’s stock market has already responded to this potential, witnessing USD 4.9 billion in initial public offerings in the second half of 2011 — a sum greater than any other in Latin America.

The present breakthroughs in Colombia’s economy have their roots in reforms that took place in the Uribe administration of the previous decade, most notably in terms of security. This has allowed the current administration, led by President Santos, to shift focus to development through five main pillars: infrastructure, housing, agriculture, extractive industries and innovation.

Colombia now ranks 42nd internationally for ease of doing business according to the World Bank, and is noted as one of the index’s most drastic improvers since its inception in 2004. The stage for increased business activity in Colombia has also been set by prudent fiscal and monetary policies. Inflation has been kept in check and will likely recede to the middle of Colombia’s 2 to 4 percent target range. Fiscal discipline is expected to reduce the government’s deficit from 3.5 percent in 2011 to 2.3 percent in 2014. Whereas the sovereign debt in the West continues its downward spiral, often garnering a “negative” outlook from ratings agencies, Colombia saw its government debt lifted to investment grade in 2011.

As if this isn’t enough to foster development, there are a slew of free trade agreements coming online. In 2011, Colombia expanded upon its existing regional trade initiatives — with Mexico, Chile, the Northern Triangle of Central America (El Salvador, Guatemala and Honduras), the Caribbean Community, Andean Community, and Mercosur — and struck free trade agreements with Switzerland, Canada and the United States. Last year also saw negotiations begin with Japan. This year the European Union is expected be added to the free trade list alongside Panama and South Korea. As a result, Colombia hopes to triple its nontraditional exports in the next decade.

As fast as exports are moving out of Colombia, foreign businesses seem to be coming in. Their entrance is aided by Colombia’s top five World Bank ranking for investor protection. Colombia provides the second best prospect for investment in Latin America according to a survey by JP Morgan of 40 international companies, behind only Brazil. Energy has been an attractive sector, with Itochu Corporation of Japan paying USD 1.5 billion for Colombian coal last year, as well as plenty of interest in oil. In the telecommunications industry, Telefonica of Spain announced that it would invest USD 500 million. Seeing Colombia’s potential as a consumer, the Chilean department store operator Ripley and Portuguese retailer Jeronimo Martins, have allocated USD 272 and 550 million, respectively, toward expansion in the Colombian market.

Scotiabank isn’t the only international company to realize Colombia’s potential. The nation is increasingly shifting from the margin to the spotlight of Latin America’s economy.

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Source: IMF estimates, April 2012

Colpatria Tower is a Bogota landmark.

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10 Responses to “Colombia’s Economy: From the Margin to the Spotlight”

  1. Carlito

    17. Jul, 2012

    We had our house market bubble and economic crisis back in 1998, some banks bailed out others not; that’s where our current 4×1000 tax comes from. From those dark times (Samper/Pastrana era) banks became more regulated here than US or even Europe. i won’t say that a crisis is impossible (those are ciclical anyway) but one like the american it’s quite improbable, although there are signs of housing bubble emerging in Bogotá (high price to rent ratios for instance and unpaid debt).

  2. Colin

    17. Jul, 2012

    Another area I’ve heard mentioned as prime for a bubble in Colombia: CAR LOANS.

    I assume there will be another in the US given the reckless banks are all still in business. That area: SCHOOL LOANS.

  3. Jimmy

    18. Jul, 2012

    Good for Colombia.

    Colombian courts honor contracts which does alot to attract foreign investment. The drug industry seems to have outsourced narco violence to Mexico.

    Colombia has also benefited from the commodity boom — oil, gas, minerals. lumber.

    But will the commodity prices remain high? As the EU and North America stagnate — the Chinse Export Machine is slowing. Could this crash commodity prices? Or are the emerging economies of South Ameica for real?

  4. J.R.

    19. Jul, 2012

    Very happy to see Colombia progressing. Although they need to be careful as they seem to be relying very heavily on Natural resources for their income. Very much along the lines of Canada, which is just fine as long as commodities don’t go south, which they will eventually. In fact i read somewhere that their export income is +40% from Nat resources. Mainly oil and minerals. Can be dangerous. Anyway, they need to find a way to pump some of those profits back into the local economies, which seems to be happening very slowly. if they can make the local communities prosperous, the FARC will not be an issue. It might very well happen under Santos. I wish them luck.

  5. Samuel

    20. Jul, 2012

    Just makes me want to move there all the more.

  6. jesse

    21. Jul, 2012

    There’s another way to read this deal: Conservative, risk-adverse bank with capital to deploy gets offered a Colombian bank and its assets at fire-sale prices. I don’t know what was paid and for what assets, but I do know GE. GE is a financial. No longer does it simply make refrigerators and stoves and other appliances. Its heavily involved in speculative finance and shit much more speculative than Colombian banks. During the 2008 “crisis” there was even speculation that GE would need a bailout, difficult under current policy given that GE has never registered itself as a bank. Since that time GE, no doubt under the explicit advice of the Fed and Treasury, has been divesting itself of financial assets and deleveraging. (ING, also mentioned in your post, was also broken apart, with its US branch sold to Capital One, under similar Fed/Treasury guidance.) So instead of reading this deal as bullish on Colombia, you might read it as a basically low-risk play by a bank with capital to deploy getting offered a very sweet deal. Any asset anywhere can be low risk…at the right price. At a time of global deleveraging in the banking sector this is the ideal time for banks with money to spend, such as Scotiabank, to grab up assets at can’t lose prices. Depending upon the price paid it may say very little about the future of the Colombian economy.

  7. Colin

    21. Jul, 2012

    Jesse – excellent point!

    However, I highly doubt Scotiabank would buy banks in Venezuela, Spain, or Argentina – no matter how great the offer.

  8. John

    10. Aug, 2012

    Nice article, any idea where I can find a Colpatria branch or ATM in Chapinero? I just returned to Bogota 2 days ago and am having troubles finding an ATM that will accept my bank card.

    I’ve been banking with Scotia for quite a while, decent bank and they have a long history of banking in the Americas, especially the former British colonies of the Caribbean. I just wish my damn card would work at more ATMs!

  9. Werner A

    31. Dec, 2012

    All that you say is correct. but beware of cycles.
    Latam markets have always developed in cycles: you are well off if you invest at the beginning of one, and you are up for a lot of pain if you invest at the end of one. This is why Brazil has been called “eternal country of the future”.
    The Santos government could be the beginning of the end of one such cycle, in particular if they cannot conclude a lasting peace with all guerrillas and paramilitaries, be it by negotiation or otherwise.

  10. Harry Dogg

    08. Sep, 2013

    If Scotiabank’s philosophy pays off, you would expect for some larger, more powerful institution to eventually gobble up Scotiabank. That’s the way the system works. Fewer and fewer big players as time goes by. Also, you referred to something known as “CIVET”. From what I understand, a civet is a form of animal which is fed coffee berries, the later of which must pass through the animals digestive system and be excreted with it’s feces in order to acquire an added value, a pungent taste and aroma.

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