Few countries have seen economic growth as consistently as Colombia, where I lived as a student in a university exchange programme in 1977 and 1978. Over the past 50 years, only once – in 1999 – did the growth take a negative turn. However, because of its recent history, challenged by security and drug-related conflicts, Colombia has been relatively isolated from international capital markets. Yet improved security, more conservative fiscal and monetary policies, and entry into free-trade agreements has paved the way for Colombia to re-establish itself in global capital markets.
In the early 1990s, Colombia undertook a series of policy reforms to facilitate the development of a local bond market, which at the time was minimal. Progress, however, was overtaken by events: the escalation of Colombia’s drug-related guerrilla conflict and resulting security costs; the drop in coffee prices (the main export at the time); and the Asian, Russian and Brazilian financial crises in international capital markets. The result for Colombia was an economic slowdown, which led to a banking crisis, abandonment of fiscal discipline and a non-investment-grade credit rating. The Colombian economy stagnated from 1999 to 2003.
Even so, a rebound was germinating. The success of former President Alvaro Uribe’s administration in improving security beginning in 2002, coupled with economic diversification through oil exports, doubled economic growth in 2004. The government and the private sector still depended largely on the domestic financial sector as cross-border financing remained difficult to obtain, especially for private sector debt. But foreign banks slowly began increasing their Colombian exposures through 2007, when the global financial crisis began. Meanwhile, the Colombian economy was benefitting from a jump in foreign direct investment to about $8bn, up from $2.5bn just a decade ago.
The improving situation gradually opened the doors to investors and the country began issuing bonds, both domestically and abroad. Eventually, Colombia recovered its investment grade rating (currently rated BBB+ by S&P with a positive outlook), which in turn helped the private sector tap the international bond markets.
In 2012 Colombian issuers more than doubled the amount of bond sales from 2009, to more than $4bn.
The development of capital markets in Colombia has been aided by the nation’s pension system. The country’s six pension funds have seen steady growth in assets under management (30% compound annual growth rate since 2001). Assets reached almost 19% of GDP in 2011, up from 13.8% in 2008. Of those, just under half were public sector debt. However, the development of the domestic bond market has been uneven, with a vibrant government bond market, but a corporate bond market that is still concentrated on a small number of large issuers. Consequently, bank credit continues to be the primary source of external financing for Colombian corporations.
There are other hurdles ahead, in particular the challenges of sustaining growth. The economy is experiencing signs of currency appreciation from strong natural resource exports resulting in reduced external competitiveness for other sectors like manufacturing.
Another key issue is boosting private sector competitiveness. In particular, there is a need for investment in infrastructure, including highways, railroads and ports. Furthermore, institutional weaknesses have held back the government’s infrastructure programme.
On the positive side, the government’s overhaul of the federal agency in charge of such projects augurs well for developments in the long term, as new federal projects begin in 2014. Financing for these undertakings may spur further development of Colombia’s capital markets. Colombia also recently entered into free trade agreements with the EU and the US, which should contribute to long-term growth and investor confidence. It also has free trade agreements with other Latin American countries. Colombia has an opportunity to transform itself into a powerful, export-oriented manufacturing centre. That would reduce dependence on commodities and pave the way for sustained growth.
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