LatAm Watch COLOMBIA! – Oct 2012

29 October 2012


LatAmWatch: Colombia—on the verge of change?


“Colombia may be on the threshold of a new era in its history—and massive opportunities for investors.”

“With the first official peace talks in almost a decade, there is renewed hope that one of Colombia’s major guerilla movements could disarm en masse and abandon their five decade war against the central government. A truce would provide even more momentum to Colombia’s economic outperformance which has made it the second largest economy in South America after Brazil (of course, Argentina disagrees). Yet regardless of the outcome, the market is signaling that the country could get a credit rating upgrade in the next year if it continues on its path. Firstline can help position you to benefit in either scenario.”

After several months of going back and forth, the Colombian government, headed by President      Juan Manuel Santos, is now engaged in formal peace talks with the Revolutionary Armed Forces  of Colombia, best known by their Spanish acronym, FARC. This has wide ranging, positive implications for the Colombian economy and will make an already attractive country even more palatable for investors.

The FARC, a Marxist guerilla group, has waged war on the central government for almost five decades in what has become the longest running armed conflict in the Western Hemisphere. The FARC has claimed responsibility for several acts of terrorism, in addition to guerilla attacks on police, army and other government armed forces. They also employed kidnapping of civilians as a means of raising funds, through ransoms. Lastly, they were heavily involved in the production and distribution of illegal drugs, which repeatedly brought them into conflict with other groups engaged in those activities.

The human, psychological and economic tolls of the conflict were enormous. Economically, the violence in Colombia was a major deterrent for local consumers, as well as local and international investors. Additionally, the government was forced to spend billions of dollars on defense over several decades. Those funds could have gone towards improving health care, infrastructure, education and other goods that would have contributed to the economic growth of the country.

However, the last decade has seen substantial improvements in the security situation, first under President Alvaro Uribe, and continuing under the current President, Juan Manuel Santos. Economic growth has helped draw many lower income Colombians away from the drug trade and guerilla movements, while amnesty, counterterrorism and intelligence initiatives have been fruitful in debilitating various armed factions in the country. The combination of these and other factors have led the FARC, which is the largest organization of its kind in Colombia, to peace talks which began October 18th in Oslo, Norway, and will transition to Havana, Cuba, with time.

If the FARC agrees to peace terms, it will signal the end of this conflict. Expenditures previously earmarked for defense will go towards internal investment. The security situation will improve dramatically, especially in the Southeastern regions where the FARC is strongest—and where there are substantial unexploited oil, heavy oil, and gas reserves, in addition to gold and fertile farmland that could see the emergence of large scale agribusiness.

Mauricio Cardenas, Colombia’s Minister of Finance, anticipates that if the peace talks are successful, Colombia’s GDP could grow at ‘Asian-like’ rates of 6% per annum or more. That statement might seem hyperbolic. However, when we consider that Colombia has spent between 3% and 4% of GDP on military expenditure over the last decade, and that it has also grown at 5% since the security situation started improving in the early 2000’s, it seems very achievable—a 20% reduction in average annual military spending of US$ 10 billion would yield an additional US$2 billion that the government could redeploy into other uses that would accrue more direct economic benefits.

Colombian issuers, in particular banks have been very active in issuing new bonds this year, and bond markets have embraced all of their issues. Bancolombia, Grupo Aval, Banco Davivienda, among others, had issues that were six to eight times oversubscribed. As of late September, Colombian corporate bonds had a spread of 301 basis points over the US treasury, and have tightened 101 basis points since the beginning of the year. Contrast this with Brazil’s corporate spread, which is around 386 basis points above the treasury despite being one notch higher in credit ratings. The lower spread can be attributed to Colombia’s higher growth rate, and slightly better fiscal position—which positions the country well for an upgrade, even without a positive outcome from the talks, which are likely to be just the beginning of a longer, drawn out process.

However, savvy investors position themselves at the vanguard of trends, as that is where the lion’s share of profits is made. Firstline has considerable access to market intelligence on Colombia bonds, and solid experience investing and trading in them across several time frames. We can leverage that experience for your portfolio, helping you achieve higher returns in this low return environment while minimizing the risk to your principal. For more information, please contact us at info@nullfirstlinesecurities.com.

Michael J Cooper
Trading / Investment Strategist
Firstline Securities Limited

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