Colombia Makes the Grade: Now What?

Given the substantial security, economic policy and increase in Foreign Direct Investment advancements made over the last decades, Colombia has become one of the most consistent and fastest growing economies in Latin America.

The most telling factor of Colombia’s recent ascent is the country achieved investment grade status from two of the three major ratings agencies – Standard & Poors on March 16 and Moody’s Investors Service on May 31.  Moody’s said in the accompanying statement, “Security concerns, historically a major issue for Colombia, have not disappeared, but have been waning after several major government wins against domestic guerrilla groups.” 

Many large financial institutions require investment grade ratings from two ratings agencies before investing in assets as part of an investment grade portfolio.  It also lowers the cost of borrowing for the government, and is expected to spur foreign investment. Current President Juan Manuel Santos is optimistic the upgrade signifies healthy long-term economic growth.   “The rating confirms that our economic policy is serious, responsible and long-term, that we are not just taking measures for short term affects.”

In an interview with BBC News in November of 2004, former President Alvaro Uribe was quoted as saying, “Of course we need to eliminate social injustice in Colombia but what is first?  Peace.”  His aggressive strikes against left-wing guerillas and right-wing paramilitary groups have been partly credited with putting the country back on solid ground.

Violence decreased in Colombia during Uribe’s presidency (2002-2010).  Colombia’s homicide rate has been nearly cut in half from the highest rate in the world of 66 murders per 100,000 people in 2002 to 35 per 100,000 in 2010.  Kidnappings have also rapidly declined from 2,882 in 2002 to an estimated 282 kidnappings in 2010.

Winning Strategy

The decrease in violence has allowed the Colombian economy to flourish.  Over the last five years real GDP in Colombia has averaged 4% growth per year.  In 2010 real GDP growth was 4.5% and economists are currently estimating 2011 full year growth between 5-6%.   Inflation has also been kept in check at 3.1% in 2010.  According to a Colombian central bank survey on May 11, 2011, this year’s prices are estimated to rise by just over 3%.

Facilitating Colombia’s economic growth is their abundance of natural resources.  Cracking down on guerilla fighters has allowed the country to increase production of petroleum, thermal and metallurgical coal and minerals.  Currently, Colombia is the fourth largest coal exporter in the world and is also the third largest exporter of oil to the United States.  More traditional exports such as coffee, cut flowers, and bananas still play a big role in the economy.

President Juan Manuel Santos, who served as Minister of National Defense under President Uribe, is working on legislation to continue Colombia’s economic growth.  On June 9 the Colombian Congress passed a key royalty reform to spread billions of dollars of oil and mining royalties more evenly across Colombia.  Previously, mining regions received 75% of royalties, whereas under the new bill they will only receive 25%.  The reform will not only improve the distribution of wealth among the regions of Colombia, but also stipulates the government can save 30% of royalties.  This allows the government to offset major price fluctuations protecting the country from a sharp decline in the price of commodities.

Economics Come First

The royalty reform was the second major piece of legislation passed in Colombian Congress recently.  On June 8 lawmakers passed a law of fiscal responsibility that avoids major rises in government spending financed by debt.  The government is expected to pass another piece of economic regulation which would place a limit on the fiscal deficit.

Colombia is also in the process of passing numerous free trade accords.  The Santos administration is drafting agreements with numerous countries in Asia and South America.  A trade agreement with the EU is pending approval in the European Parliament, while a trade accord with Canada will be implemented on July 1 of this year.  On June 13 U.S. President Obama announced that Colombia has met all of the U.S. requirements to move ahead with the implementation of the Free Trade Agreement, which has been waiting approval by the U.S. Congress for four and a half years.

The Colombian Congress passed the Victims and Land Restitution Law on May 24.  The law recognized the existence of armed conflict in Colombia and offered compensation and reparation to citizens who lost their land and / or family members since 1985.  The reform returns or grants land titles to millions of displaced Colombians and provides monetary compensation for those who lost family members.

Outside of government reform, watchdog institutions and investors are taking notice of Colombia’s growth.  In the World Bank’s 2011, “Doing Business Report” Colombia was listed as the number one country in Latin America to protect investors, and fifth worldwide.

In 2008, Foreign Direct Investment reached a record $10 billion, but dipped to $7.2 billion in 2009 and $6.8 billion in 2010 due to the global recession.  Through Q1 of this year FDI had increased close to 50% compared to the prior year and is estimated at $8 billion for 2011.  The government expects FDI to reach $13 billion by 2014.

“We put to Congress an anti-corruption bill which I think no other country in the world has put in place, it’s very aggressive.  Some people tell me it’s too aggressive, because it might discourage people from going into government” – President Santos

Still Some Rough Edges

Despite the many positive signs, Colombia faces significant challenges.  First and foremost, violence, although diminished, still plagues the country.  Current estimates indicate that 8,000 FARC guerilla fighters patrol the countryside, mostly concentrated in the rural southern region of the country.  Last week FARC rebels were blamed for the explosion of a rural police station killing or injuring more than 20 officers.

Also, many fear the Victims and Land Restitution Law will spark a new wave of violence among FARC rebels unwilling to relinquish stolen land.  Ana Fabricia Córdoba, 51, a leader for displaced populations, and a vocal proponent of the Land Restitution Law, was shot several times and died on June 7 while riding a bus in Medellin.

Another major issue, corruption, still poses a significant problem in Colombia and does not appear to have improved over recent years.  In the 2010 Transparency International “Corruption Perceptions Index” Colombia was ranked 78^th out of 178 countries.  Colombia scored a 3.5 on a scale of 0 to 10 with 10 ranking as “highly clean.” Although this was Colombia’s lowest ranking since 2000, it places the country in the middle of Panama at 3.6 and Brazil at 3.7.  It is important to clarify that these assessments are based on the perceptions of various groups and agencies, and due to the nature of corruption, it is impossible to substantiate these findings in fact.

President Santos has proposed an anti-corruption bill to Congress that he feels will be an important step in eliminating corruption.  “We put to Congress an anti-corruption bill which I think no other country in the world has put in place, it’s very aggressive.  Some people tell me it’s too aggressive, because it might discourage people from going into government,” the President stated.  Corruption is most prevalent between politicians and business officials with private contracts.  There are also concerns over the influence of drug traffickers on local policemen, military officials, and judges.  In some cases, the official is forced to accept a bribe for refusing to do so could put his or her entire family at risk.

Currency Impacts

Another threat to the Colombian economy is the price of the Colombian peso compared to the U.S. dollar.  The United States is Colombia’s largest trade partner, but as the dollar declines in value Colombian exports to the United States become more expensive.  In the last 12 months the Colombian peso has gained 9% compared to the U.S. dollar, cutting into profit margins.  Recently the Colombian central bank extended an aggressive dollar purchasing program through at least September 30, while the government is purchasing dollars to build a $1.2 billion fund to protect against the peso’s appreciation.  Even with these measures, if the U.S. Federal Reserve injects more money into the economy by purchasing treasury bonds in a QE3, it will be very difficult for the Colombian central bank to offset the decline in value of the dollar.

Despite the many difficulties the country currently faces, there is no doubt the Colombian economy is on the rise.  Achieving investment grade status not only lowers borrowing costs and increases foreign investment; it symbolizes an economy that has risen out of conflict into a global competitor.  As the economy continues to grow, policy makers need to focus on continuing to improve the safety of citizens, eradicate corruption, and improve upon poverty and inequality.  But, can’t this be said about many other countries as well?

Brendan Wolters currently lives in Panama City, Panama. He works at The Solace Group, which helps foreign investors identify opportunities and invest in Central America. Contact him at bwolters@thesolacegroup.com.