The Report: Colombia 2016

The deadline for a significant peace deal approaches Increased security encourages economic growth Thoughts turn to closing the rural-urban wealth gap Agriculture and construction are set to benefit post-war The nation looks to establish diplomatic and trade ties

Country Profile

As peace talks between the government of Juan Manuel Santos Calderón and the leaders of the FARC continue in an effort to end 51 years of armed conflict, Colombia’s political climate could now be on the verge of significant change. Both sides agreed in September 2015 to set a deadline by which a final peace accord must be signed – March 23, 2016. If achieved, a peace accord could bolster economic growth by up to 1.9 percentage points, according to the National Planning Department. As the government edges ever closer to signing a peace deal, it is becoming clear that a post-conflict Colombia will include both challenges and opportunities. Job creation and the establishment of infrastructure and state services, such as schools and hospitals, in former guerrilla strongholds will be key to reducing the wide gap between rural and urban areas.

This chapter includes interviews with President Juan Manuel Santos Calderón; María Ángela Holguín, Minister of Foreign Affairs; and José Ángel Gurría, Secretary-General, OECD.

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As one of the larger economies in Latin America, Colombia has a track record of above-average GDP growth, a reputation for sound macroeconomic management and market-friendly policies. In 2015 it has demonstrated resilience, absorbing a significant oil price shock – petroleum accounts for roughly half of total exports –while maintaining positive, albeit slower, growth. The economy expanded by an estimated 3.2% in 2015, according to the Ministry of Finance, driven primarily by the retail, agriculture and financial services. Despite continuing global headwinds and internal challenges, including poor logistics performance, a gradual recovery is expected in 2016 and beyond, driven in part by a programme of transport infrastructure investment. Moreover, a peace settlement ending a long-running internal armed conflict is expected to yield a peace dividend in the form of lower security costs, the opening up of previously closed areas of the country to development, and higher economic growth.

This chapter includes interviews with Mauricio Cárdenas, Minister of Finance and Public Credit; Cecilia Álvarez-Correa, Minister of Trade, Industry and Tourism; Ana Maria Carrasquilla Barrera, Chairman of the Board and Executive President, Latin American Reserves Fund (FLAR); and Luis Fernando Castro, President, Bancóldex. 

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Despite the current economic deceleration, Colombia’s banking sector remains strong, with bank profitability, capital adequacy and return on equity (ROE) indicators holding up well during 2015. Loan portfolio growth reached 15.5% that year, according to Colombia’s central bank, while non-performing loans rose to 3.08% at the end of August 2015. Meanwhile, the capital adequacy ratio fell to 15.2% in the same period, comfortably above the minimum legal requirement of 9%, and ROE rose to 15.4%, up from 12.3% at the start of the year. If the expected macroeconomic recovery takes place during the following years, total loan portfolio is expected to continue growing at double-digit rates in nominal terms, although in 2016 the growth rate will be in single digits in real terms, and marginally lower than in 2015. Longer term, lending to corporate, trade financing, higher-end consumer loans and the emerging mortgage loan sector hold out the promise of sustainable expansion.  

This chapter includes an interview with Luis Carlos Sarmiento Gutiérrez, CEO, Grupo Aval. 

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Capital Markets

With a total market capitalization of $93.49bn in September 2015, the Bolsa de Valores de Colombia (BVC) is the fourth-largest stock exchange in Latin America, behind those of Brazil, Mexico and Chile but ahead of Peru’s. During the course of 2015 investor nervousness over emerging markets following the end of the commodities boom, coupled with rising US interest rates in December, prompted a flight to quality, especially US high-quality bonds and dollars, resulting in severe declines in share prices and reductions in liquidity and overall trading volumes across the region. The BVC was not immune to this. The Colcap, a Colombian capitalization index, fell 29% during 2015, closing at 1154, driven in large part by the sharp fall in oil prices since mid-2014. Even so, the prospect of a peace settlement in 2016, coupled with Colombia’s strong fundamentals point to a positive outlook for the sector.  

This chapter includes an interview with Juan Pablo Córdoba Garcés, President, and Colombian Stock Exchange (BVC).

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Colombia’s insurance sector has been enjoying strong growth, supported by the country’s underlying rate of economic expansion, a growing middle class, product development and the entry of new players into the industry, with growth being strongest in the life insurance segment of the market. However, penetration and density rates remain low. According to the Colombian Insurers Association, penetration, or total premiums as a percentage of GDP, is 2.6%, while density, or premiums per capita, currently stands around COP400,000 ($147).  Although the country’s general economic growth rate has eased back in 2015, several factors underpin optimism for the insurance sector’s outlook. Low insurance penetration and density rates suggest sufficient room to continue achieving double-digit percentage growth in premiums, while the fourth generation road concession programme is expected to give a boost to general demand.

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Energy & Utilities

Over the past decade the oil industry has been at the centre of Colombia’s economic growth. The sector accounted for nearly one-fifth of all foreign direct investment over the past 10 years, approximately half of all export revenues and, through taxes and royalties, provided up to 30% of government income. Consequently, the fall in the oil price from more than $100 per barrel in mid-2014 to less than $30 in early 2016 has had a large impact on the national economy. Major companies have been forced to drastically re-adjust their growth plans and streamline operations. While production has plateaued, exploration work has dropped off sharply. However, promising offshore discoveries, a nascent shale gas segment, and a new, cleaner and more efficient refinery underpin optimism for the long- term future of the industry.

This chapter includes an interview with Francisco José Lloreda, President, Colombian Petroleum Association. 

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Colombia’s mining industry continues to feel the effects of the recent drop in commodity prices, particularly of gold. Gold production remains high, having risen by 7.7% to 519,472 oz in the third quarter of 2015, according to the National Mining Agency. Moreover, two new major gold projects received environmental permits in 2015 and are expected to add 60,000 oz and 450,000 oz, respectively, to current production levels. Meanwhile, with gold prices dropping to $1100 per oz at the end of 2015, from over $1900 per oz in the second half of 2011, export revenues have continued to decline. It is not all bad news for Colombia, however. The country could be one of the first to benefit from an expected rebound in the price of coal. The strong devaluation of the peso has given Colombia a cost advantage over many of its competitors, and the idle capacity at some of its mines means that production could be ramped up relatively quickly given the right conditions. 

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Transport & Logistics

In the current context of lower commodity prices, the need to improve national transport networks has become even more important, as Colombia works to boost its competitiveness at the international level. Although the transport sector grew by 4.1% in 2014, in June 2015 the National Association of Financial Institutions forecasted that the sector would grow by 2.9% that year, a reflection of the transport infrastructure gaps the country still contends with. Colombia’s rugged geography and the hinterland location of some of its main cities, in particular the capital Bogotá as well as Medellín and Cali, put it at a logistical disadvantage compared to other countries. The World Bank’s “Doing Business 2016” report ranked Colombia 110th of 189 economies for ease of trading across borders, one place better than in 2015 but still well below most of its neighbors.

This chapter includes an interview with Alejandro Costa, General Director, Impala Terminals Colombia. 

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Construction & Real Estate

Colombia’s construction sector remains an engine of economic development, both as a driver for employment and a significant contributor to GDP. In 2014 the sector grew by 9.9%, and accounted for over 1.4m direct jobs, according to Colombia’s National Statistics Bureau. Much is now resting on a new stimulus package launched in May 2015, the Plan for Production and Employment. The $6.2bn plan, to be implemented in the period 2015-19, is expected to have a positive impact on the construction sector, due to its focus on housing, the acceleration of expenditure on large-scale infrastructure and a programme to rebuild public schools across the country. Meanwhile, housing demand continues to fuel Colombia’s real estate sector, with government-sponsored initiatives encouraging the construction of new homes for lower-income Colombians, and the growth of the middle class galvanizing demand for medium-income housing.

This chapter includes an interview with Carlos Jacks, President, CEMEX. 

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Industry & Retail

Largely cut off from foreign investment during the 1980s and 1990s due to security concerns, Colombia developed a wide variety of local manufacturing businesses and brands. However, the opening of the economy over the past decade has forced local firms to compete with international imports. Moreover, the rapid growth of the oil and mining industries has shrunk manufacturing’s importance in the wider economy. In the first nine months of 2015 the sector’s proportion of GDP fell below 11%, down from 14% in 2009. Nonetheless, several sub-sectors continue to show promise, and the devaluation of the peso, improvements to infrastructure and the commissioning of a new refinery offer hope of an industrial rebound. Meanwhile, despite the economic slowdown and the weakening of the peso, the retail sector posted solid growth of 3.4% in the first 10 months of 2015, with hardware and home improvement sales (18.3%), and alcoholic beverages and cigarettes (13.5%), among the best-performing segments.

This chapter includes an interview with Christian Daes, Chief Operating Officer, Tecnoglass.  

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The tides of Colombia’s agricultural sector, which for years lagged behind neighboring countries due to landownership restrictions and underdeveloped transport infrastructure, have fast been changing. As of early 2016, several key reforms and progressive measures were beginning to allow investment to flow to the Colombian countryside. The sector expanded by 3% year-on-year in the first three quarters of 2015, and accounted for 6% of GDP. In 2016 a proposed peace deal with the FARC offers hope of a safer countryside and increased government emphasis on rural development. In late 2015 the Ministry of Agriculture and Rural Development announced funding to boost domestic production of key crops and a land reform law that would open the door to large-scale agribusiness. With new roads and ports to link Colombia’s interior to domestic and export markets, 2016 looks set to be a turning point for the agriculture sector, and a year in which an integrated agricultural policy begins to take shape.

This chapter includes an interview with Rafael Mejía López, President, Colombian Agriculture Association (SAC). 

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Research & Innovation

The 2015 Global Innovation Index ranked Colombia 67th out of 141 countries for its innovation potential, below Chile (42nd), Costa Rica (51st) and Mexico (57th), but ahead of Brazil (70th) and Peru (71st). In a bid to strengthen its competitiveness in international markets, the Colombian government plans to double expenditure on science, technology and innovation (STI) from 0.5% of GDP in 2015 to 1% of GDP by 2018. As a regional comparison, Brazil spends 1.74% of GDP on STI activities, while Mexico spends 0.73%, according to the Ibero-American and Inter-American Network for Science and Technology Indicators. Even lower is the country’s annual expenditure on research and development activities, which reached 0.19% of GDP in 2014, according to the Colombian Observatory for Science and Technology. Authorities are now implementing legal measures to encourage expenditure on research and innovation activities in the private sector, including improving access to financing for research for small and medium-sized enterprises.

This chapter includes an interview with Daniel Quintero Calle, Executive Director, Innpulsa.

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Telecoms & IT

Following the macroeconomic expansion of the past decade, Colombia’s telecommunications industry has experienced significant growth. The weight of the sector nearly doubled from 1.6% of GDP in 1994 to 3.14% in 2014, according to the Mobile Industry Association of Colombia, while annual revenues reached $7.99bn in 2014 and are expected to jump to $8.6bn by 2018. An increase in regulatory oversight has helped ensure service quality and a reduction of average communications prices, though market players are now operating in an increasingly competitive arena. Meanwhile, governmental implementation of IT policies under the Vive Digital plan has helped broaden the use of IT across all levels of society. According to Colombian think-tank Fedesarrollo, as of mid-2015 the ICT sector accounted for 7.5% of GDP and had been expanding by an annual average of 9.9% for the past decade.  

This chapter includes an interview with Seong Hyun Lee, President, Samsung Colombia. 

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The expected signing of a formal peace agreement between the government and Colombia’s main rebel group, the FARC, promises to be a key event for the country’s tourism industry in 2016. A settlement is expected to formalize and extend the reduction in political violence seen in recent years, with tourism among the sectors set to benefit the most from the peace accord. The sector has registered significant growth in recent years, a trend set to continue in the short-term. Tourism arrivals rose by 12.1% in 2014, with over 2.5m visitors, while data for the first half of 2015 shows growth of 12%, with a 16.3% drop in cruise ship arrivals offset by an 18.2% increase in arrivals by air. According to the World Travel and Tourism Council, the tourism industry’s direct economic contribution in 2014 was equivalent to 1.9% of Colombia’s GDP, while its total contribution reached 5.9%.

This chapter includes an interview with Arturo García Rosa, President and Founder, South American Hotel & Tourism Investment Conference. 

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As Colombia debates a settlement to long-running internal political conflicts, sport is increasingly seen as a powerful instrument for social inclusion and community development. Despite fiscal austerity, the government, through sports institute Coldeportes, has been promoting sport for all. According to a mid-2015 report by Forbes magazine that examined public sector sports budgets across 20 Latin American countries, Colombia was ranked fourth by total spending. Brazil was ranked in first with $842.4m - the lion’s share because of preparations for the 2016 Rio Olympic Games - followed by Mexico with $233m, Chile with $213m and Colombia with $169.3m. According to the report, the 20 countries were spending a combined $1.9bn on sporting venues, infrastructure and the training of athletes. The development of sport in Colombia has important spillover effects on the economy, with a number of sectors benefiting, including tourism, transport, hotels and restaurants, and the textile industry, among others.

This chapter includes an interview with Andrés Botero, Director, Administrative Department of Sport, Recreation, Physical Activity and Use of Free Time. 

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In the past two decades, Colombia’s educational system has grown in importance for the country’s policy-makers. This has translated into a stronger link between education and human resources development, as well as a gradual rise in overall expenditure. The sector continues to face a number of challenges, including a significant gap in school coverage and completion rates for secondary schooling in rural and urban areas. Moreover, educational attainment remains tied to students’ socio-economic status. Nonetheless, authorities have set the ambitious goal of turning Colombia into the most educated country in Latin America by 2025. The current drive to develop internet access is helping to overturn some of the discrepancies, while a series of innovative programmes have strengthened educational practices in the more isolated regions of the country, pointing to continued positive progression for the sector. 

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As it undertakes its most fundamental reform in over 20 years, Colombia’s health sector is in a period of transition. Demographic change, new challenges in disease management and a lack of financing have led to an overhaul of the system that has shown significant advancements since it was established in 1993. Today Colombia has nearly universal coverage and vastly improved health care indicators, and a new law is set to expand the services available to all citizens. While the government considers the options available to secure the necessary funding, the Ministry of Health and Social Protection is determined to tighten costs of drugs and products. While the full implications of the new law will not become known before 2017, it is clear that the heath care sector is set to expand significantly in the coming years as more patients gain access to cutting-edge treatments.

This chapter includes an interview with Alejandro Gaviria, Minister of Health and Social Protection. 

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Legal Framework

As part of the long-term measures adopted by the government to develop Colombia’s infrastructure, the country has undertaken certain material legal reforms which aim to promote public-private partnerships (PPPs), increase and diversify financing sources for infrastructure projects, and create a more attractive framework for foreign investors and lenders who take an interest in Colombia’s key assets. This chapter provides an overview of recent changes to the Colombian legal framework, in particular of the country’s PPP law, the recent infrastructure law and amendments to pension funds’ investment regime, among other areas of interest to international investors. This chapter includes an interview with Martín Acero, Partner and Co-Chairman, Philippi, Prietocarrizosa & Uría Colombia.

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For some time now Colombia has been adapting its tax system with the best tools provided by international tax law in order to compete in the global arena. At the same time, the government is focusing on internal tax collection and is searching for a better distribution of the tax burden among the various actors who contribute to producing the country’s riches. This chapter provides an overview of Colombia’s tax system, covering in particular areas of special interest to international investors, such as income tax, taxation of foreign companies, value-added tax, wealth tax, as well as recent measures to harmonize the tax code in line with international guidelines.

This chapter includes a viewpoint from Zandra Guerrero, Acting Partner, BDO.

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The Guide

This chapter contains information on hotels, government agencies and other listings, as well as useful tips for visitors on a range of topics such as visa requirements, currency and transportation, among others. 

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