Country in Focus: Colombia

31 March 2012

Colombia has gone from being an economic and security basket case to a leading investment destination in Latin America. In this second Country in Focus report, Firstline explores Colombia’s outlook and risks, which have not completely disappeared, and also looks at candidates for bond investments.

Colombia has become one of Latin America’s major success stories and is now a leading destination for investments in the Americas. The country is rated BBB- / Baa3 with stable outlooks from both S&P and Moody’s. Despite this laudable rating, many people continue to identify Colombia with the drug trade, and the long-running civil conflict that has claimed the lives of thousands in that country.

However, the security situation in Colombia has improved markedly (the crime rate declined 50% between 2002 and 2006), and the economy has taken off in an unprecedented fashion, on the back of stronger domestic demand and confidence, as well as commodity-driven growth.

Like many other emerging market countries, Colombia is resource-rich. Coffee, petroleum, coal, gold and a wide variety of agricultural products are major exports, more than 70% of cut flowers imported by the U.S. are from Colombia, and it is also the world’s leading source of emeralds.

Most of Colombia’s major commodity exports are up by over 50% in the last 10 years, even after accounting for the 2008-2009 global financial crisis. Natural gas will soon be added to the export mix, as medium scale LNG export plants will be constructed in the next 2 years, and the government recently approved an increase in the amount of gas that is exportable. Much of this natural gas will go to Jamaica, Panama, the Dominican Republic, and other destinations in the Caribbean basin.

Tourism is also increasingly contributing to the economy due to the improved security situation, and direct flights from major American cities by low cost airlines. This is reflected in the increase in tourist arrivals, from 1.7 million in 2001, to 2.8 million in 2010, according to Colombia’s Ministry of Commerce, Industry and Tourism.

Colombia’s exports are more geographically diversified than many other Latin American countries. While trade with China has increased substantially, the U.S., the European Union, and Venezuela are its largest trade partners. Coupled with a large domestic population of over 46 million people, this diversification adds a little bit of stability to Colombia’s economy compared to other countries that rely heavily on exports.

Increased exports and domestic consumption have led to higher government reserves, from US$ 10.8 billion in 2007, to US$ 28.1 billion in 2010. This, along with improved credit ratings from major agencies, allowed Colombia to increase its borrowings internationally. Debt to GDP decreased from 55% in 2004 to 49% in 2007, to increase again to 58.8% in 2009.

High debt levels may be explained by the high military expenditure residuals from the more intense periods of the conflict, and subsequently to build or rebuild infrastructure, as well as provide employment and stimulate economic growth. Unemployment continues to be very high in Colombia, at 12% of the working population. As a result, the poverty rate is also persistently high, with more than 36% of the population living under the poverty line in 2010, according to the World Bank.

Returning to the issue of debt, Colombia’s ability to sustain a higher level of debt is established. Debt service as a percentage of exports was 21% in 2010. This number is likely to decrease, as Colombia increases regional oil and gas exports to energy-constrained economies in Central America, the Caribbean, and to a lesser extent the Southern Cone of South America (Argentina, Uruguay, and Chile). Coffee consumption continues to increase, especially in China, which bodes well for that commodity, and the cash flows that coffee sales will accrue to farmers and the government in Colombia.

Additionally, foreign direct investment is persistently high, with more than US$ 6 billion dollar invested annually every single year since 2004. These trends will continue to generate employment opportunities, which in turn will strengthen the domestic economy and lead to further gains in security and stability.

While the turnaround in Colombia makes for a great story, and the country risk has decreased substantially over the last decade, Colombia remains quite vulnerable, both in terms of macroeconomics as well as in terms of the security. Narco-trafficking and paramilitary organizations may adapt their tactics, and could end up re-launching the large scale military campaigns that were common until the late 1990s. This could severely impair Colombia’s economic growth and foreign investment, which in turn would increase default or delinquency risk on Colombian bonds.

It is important to note however that Colombia does not have a recent history of defaults as a sovereign, nor do major Colombian corporates.

Colombia 10 year yield

Colombia Bond Table

In addition to the sovereign bond maturing in 2020, there are compelling investment options in Colombian corporate bonds.

Ecopetrol (Baa2 / BBB-) is Colombia’s national oil company, majority owned by the government but with substantial private shareholders through stock market listings in New York, Toronto and Colombia. Ecopetrol is a Fortune 500 corporation (ranked #445), and is among the 25 largest oil companies in the world. Additionally, it is one of the four largest oil companies in Latin America, along with PDVSA, Pemex, and Petrobras. Ecopetrol is engaged in exploration and production of petroleum and natural gas, along with refining, fuel retail, and petrochemicals manufacturing. Ecopetrol has a solid balance sheet, with other US$ 4.5 billion in cash, and operating cash flow of US$ 13 billion. Cash flow and revenue will continue to increase as the company invests in increasing oil and gas production going forward.

Bancolombia (Baa3 / BBB-) is Colombia’s largest commercial bank, and one of the largest commercial banks in Latin America. It lends money to corporations, SMEs and regional governments in Colombia, provides mortgages and consumer loans, debit and credit cards, and facilitates remittances. Bancolombia is also active in Panama, El Salvador, Puerto Rico, Peru, Brazil, Spain and the U.S. Currently, Bancolombia has a very large cash position, with more than US$ 6 billion in cash. It is managed very conservatively, and is well positioned to benefit from Colombia’s growth going forward.

Both of these companies have great exposure to local developments as well as substantial international footprints which allow for inherent diversification. For more info on Ecopetrol, Bancolombia or any of the other corporates, please contact a member of the Firstline team so we can discuss available investment options at length.

Michael J Cooper
Trading & Investment Strategist

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