Colombia, the New Latin Dynamo, Looks to Trade to Sustain Growth

Political stability and a surge in foreign investment are driving the economy. Now Bogotá, along with finance minister Mauricio Cárdenas, wants to deepen ties with its Pacific partners.


Ten years ago the streets of north Bogotá were patrolled by gun-toting soldiers guarding against attacks by the Revolutionary Armed Forces of Colombia, the Marxist guerrilla group known by its Spanish acronym, FARC. Today soldiers have been replaced by heavily armed police who are protecting rather than repelling a new invading force: investors and business executives seeking to take advantage of one of Latin America’s most vibrant economies.

At a time when Mexico is struggling to revive growth and Brazil is confronted by a sluggish economy and social protests, Colombia is enjoying a sustained economic revival. The quelling of a decades-long guerrilla war has allowed the country’s entrepreneurial instincts to thrive. A doubling of oil production in the past eight years has bolstered the government’s coffers. A welcoming attitude toward foreign capital — Colombia ranked sixth out of 148 countries for investor protection in the World Economic Forum’s latest Global Competitiveness Report — and a flexible exchange rate regime have attracted strong inflows of foreign direct investment. And the government of President Juan Manuel Santos is seeking to entrench those advantages with an aggressive trade agenda focused on deepening commercial ties among the main Pacific nations of Latin America.

Those factors have combined to pay rich dividends. Since 2007 the Colombian economy has grown, on average, 4.2 percent a year, ahead of Brazil’s 3.5 percent pace and Mexico’s 1.9 percent and rivaled among large Latin countries only by Chile’s 4 percent rate. The International Monetary Fund expects growth to rise to 4.2 percent in 2014 from 3.7 percent last year. In January, following the devaluation of the Argentinean peso, Colombia overtook Argentina as the third-largest economy in Latin America, with a gross domestic product of $344 billion, trailing only Brazil ($2.2 trillion) and Mexico ($1.3 trillion).

“Colombia is emerging from a very difficult half century,” says Daniel Osorio, co-founder and principal of Andean Capital Management, a hedge fund firm based in Bogotá. “Yet a feeling exists in this country that is hard to define — it’s a kind of yearning for greatness. It is a bit like when Nelson Mandela emerged from jail and the whole of South Africa wanted to move forward. We want people to visit our country. We want to attract FDI.”

Colombia is certainly succeeding on the latter score. Last year the country of nearly 48 million people lured a record $16.8 billion in foreign direct investment, a 9 percent increase from 2012, according to Finance Ministry figures.

“Colombia is now on the global investor’s map,” says Mauricio Salgar, who runs the Bogotá office of Advent International, a $31.6 billion, Boston-based firm that is part of a wave of private equity players that have been moving into the country in recent years. “It’s a very stable country. Institutionality is pretty high. It’s never had hyperinflation, never had a currency crisis, never had long-standing dictators. It’s open to foreign investors; the sanctity of contracts is high. It has good universities, good business schools.”


Those factors led Advent to open its Colombian office in 2011 and staff it with ten professionals. Since then the firm has made three investments in the country. In the latest, in December, Advent teamed with two leading Colombian pension funds to acquire 22 percent of Oleoducto Central, or Ocensa, the country’s largest oil pipeline network, for $1.1 billion.

Colombia’s turnaround began under the presidency of Álvaro Uribe, who cracked down on FARC and wooed foreign investors with equal vigor during his terms, from 2002 to 2010. Santos, his handpicked successor and former Defense minister, has maintained a business-friendly economic environment but broken with Uribe by pushing for a peace deal with the rebels. Santos has said he would like to reach a comprehensive peace agreement with FARC — which has fewer than 10,000 guerrillas but still commands popular support in the remote parts of the country — before the presidential election in May, and talks between the two sides have been taking place in Cuba. An early agreement seems unlikely, though, because FARC’s leadership is insisting on immunity for past actions, something that most Colombians are not prepared to accept.

Santos, who leads the Social Party of National Unity, a liberal-conservative coalition, appears to be a shoo-in for reelection. According to U.S. pollster Gallup, Santos would beat right-wing candidate Óscar Iván Zuluaga by 34.7 percent to 10.8 percent in the first round of voting, on May 25. A runoff will be held three weeks later if no candidate receives 50 percent of the vote in the first round.

“I am very optimistic about the talks” with FARC, Finance Minister Mauricio Cárdenas tells Institutional Investor. “They are difficult negotiations, but they are moving ahead.”

Many business executives have doubts about the prospects for an accord. “I don’t think FARC has much will in the talks’ succeeding,” says one longtime investor in the country. “The government seems to be a bit too desperate to talk to FARC.” Nevertheless, most executives regard the conflict as a relic of the past that won’t derail today’s investment opportunities.

The government has stressed continuity and stability in its economic policies. A record of fiscal discipline has kept government debt down to a low 32.3 percent of GDP. Colombia’s inflation, at 1.94 percent in December, is one of the lowest rates in Latin America and below its central bank’s target range of 2 to 4 percent. The Banco de la República slashed its policy rate by 100 basis points in the first quarter of 2013, to 3.25 percent, and unlike authorities in many other emerging-markets countries, it hasn’t had to raise it in response to market turmoil over the past nine months. FDI easily covers a current-account deficit that ran at a rate of 3.4 percent of GDP in the first nine months of 2013. Foreign exchange reserves rose to a record $43.71 billion in January. If a crisis were to hit, the government can draw on a $5.8 billion flexible credit line with the IMF, which it renewed last June.

“Colombia has had a long tradition of sound economic management,” says Cárdenas. “We have only had one year of negative economic growth since the country’s economic statistics started to be collected 40 years ago,” he adds, noting that it came in 1999, in the fallout of the Asian financial crisis.

The country hasn’t been immune to the selling pressure that’s hit emerging markets since the Federal Reserve Board first hinted last May that it would make an exit from its quantitative easing policies. Colcap, the index of 20 leading stocks on the Bolsa de Valores de Colombia, declined 16.6 percent in the 12 months ended February 20. Yields on Colombian ten-year government bonds rose by nearly 2.50 percentage points over that period, to 7.24 percent, and the peso slipped by 12 percent, to 2,034 to the dollar.

The currency has weakened since President Santos vowed last year that monetary authorities would use “all the weapons in their arsenal” to soften the peso and protect Colombia’s large export sector. “The strong peso was starting to kill the tradable sector,” says Finance Minister Cárdenas. “We could not allow that to happen.” Even after the recent depreciation, the peso is up 39 percent against the dollar over the past decade — one of the best performances among all the major emerging-markets currencies.

Far from being a cause for concern, the peso’s recent decline validates Colombia’s flexible exchange rate policy and should help bolster competitiveness, says Banco de la República governor José Darío Uribe. “The ability to implement countercyclical policies, the strength of the financial system, high levels of international reserves and low levels of currency mismatches all contribute to Colombia having a high resistance to negative external shocks,” he says.

Cárdenas says one of the few policy changes he’d like to make would be to drop two decimal places from the peso, a move currently being debated, which would give an exchange rate of about 20 to the dollar.

COMMODITIES, PARTICULARLY OIL, have been key drivers of Colombia’s expansion in recent years. Oil production has nearly doubled, to about 1 million barrels a day currently from 525,000 in 2005 — a stark contrast to the declining output in neighboring Venezuela during the same period. Oil and coal accounted for 59 percent of the country’s exports last year, and gold contributed 5 percent.

The oil sector has benefited from reforms introduced by former president Uribe in 2003 that stripped the national oil company, Ecopetrol, of its monopoly over production and allowed foreign companies to compete for drilling rights on an equal footing. Colombia’s oil industry has also enjoyed a windfall from economic mismanagement across the border. In 2002 then-president Hugo Chávez sacked 20,000 workers of state-owned Petróleos de Venezuela, which he saw as a bastion of the opposition. Many of them headed west to Colombia.

In a broader sense, the growing economic and political tensions in Venezuela, where Chávez’s successor, Nicolás Maduro, arrested opposition leader Leopoldo Lopez last month in the midst of a currency crisis, serve to underscore Colombia’s attractions. Many Colombians have friends and family living in Venezuela. “They hear what a nightmare it has become — the security problems, the lack of toilet roll — and think what a miracle it is that Colombia has improved so much,” says Juan Munoz, head of investment banking for J.P. Morgan in Colombia.

Colombian officials know they can’t count on raw materials alone for the country’s future prosperity given the recent weakness in the prices of many key commodities. As a result, the government has embarked on a major highway program that aims to invest $25 billion in new roads over the next five years. The initiative will boost spending on infrastructure to roughly 3 percent of GDP from an average of about 1 percent a year over the past five years, according to the National Infrastructure Agency (ANI).

Colombia is putting out to tender about 40 projects to build or upgrade a total of some 8,000 kilometers (5,000 miles) of highways — badly needed in a country where only 10 percent of the roads are paved. To that end, the government is offering 25-year toll-road concessions to consortia of domestic companies and foreign partners.

“Huge highway construction projects are already under way in the country, and more will start this year and next,” Finance Minister Cárdenas says. “Conservatively, they should add 1 percent to GDP. A peace accord with FARC would add 1 to 2 percent.”

ANI president Luis Fernando Andrade says Colombia will need a decade to bring its highway network up to the standard of those of Chile and Mexico. “It’s a huge challenge but creates amazing opportunities for local and foreign companies,” he says.

Overall, the government expects corporate equity investments to cover some $6 billion of the infrastructure program, with two thirds of that coming from foreign companies. Colombian banks and Financiera de Desarrollo Nacional, the national development bank, are projected to kick in about $11 billion; other funding should come from multilateral lending agencies and bond markets. In addition, the government plans to contribute proceeds from the privatization of Isagen, one of the country’s biggest power-generating companies. Officials plan to sell a 57.66 percent stake in the business in coming months, amid projections that the deal could raise more than $2.3 billion.

“How well that goes will be an important test of foreign investors’ appetite for Colombian assets,” says Juan Luis Franco, head of the Colombia office of Brazilian investment bank BTG Pactual.

Trade is Colombia’s other big growth driver. The country has enacted free-trade agreements with eight trading partners, including the U.S. in 2012 and the European Union last year. And with more than 100 designated free-trade zones within its borders, Colombia ranks as the third most business-friendly country in Latin America and the leading country for economic reforms, according to the World Bank.

In April 2011 the government joined with those of Chile, Mexico and Peru to establish the Pacific Alliance, which seeks to promote free trade and economic integration — including visa-free travel and a common stock exchange — among its member states. The bloc has a combined GDP of more than $3 trillion in purchasing power parity terms, or some 36 percent of the overall Latin American economy.

One of the Alliance’s most important initiatives so far has been the creation of the Integrated Latin American Market. Known by its Spanish acronym, MILA, the platform allows investors from Chile, Colombia and Peru to trade on one another’s markets through local brokers. Under new securities legislation introduced in Mexico in January, the Bolsa Mexicana de Valores will join MILA later this year, making it the largest exchange in Latin America, with a combined market cap of some $1.05 trillion and more than 1,000 listed companies.

“On its own, Colombia has a small stock market, and it is difficult to attract significant sums of capital,” says Juan Pablo Cordoba, CEO of the Bogotá stock exchange. “We are able to attract larger sums by tying up with Chile and Peru. The exchanges do not have to be merged to create an integrated index.”

COLOMBIA’S ATTRACTIONS have not been lost on investors, who have flocked to the country in growing numbers in recent years. São Paulo–based BTG Pactual entered the market two years ago through the purchase of a leading local brokerage, Bolsa y Renta. The bank sees big opportunities in Colombia’s vibrant midsize cities. Besides the capital, with its 6.8 million inhabitants, the country boasts four cities with populations of more than 1 million.

“Many of the provincial cities are very underserved,” says BTG Pactual’s Franco. “There are huge opportunities in retail, financial services and real estate. Some ten to 15 years ago, one of the ways BTG Pactual developed in Brazil was by seeing the opportunities in other cities in the country, such as Curitiba or Belo Horizonte. We are now doing the same in Colombia.” He is particularly bullish about the Caribbean port city of Barranquilla because of its prominence as a logistics hub and its strong industrial base.

BTG Pactual thrives by coinvesting with its clients. The bank recently raised $40 million for a Colombian real estate fund and expects to have $100 million to $150 million under management by the end of this year, Franco says. BTG Pactual is also considering teaming up with construction companies that require financing, he notes.

Eduardo Elejalde has focused his attention on the Colombian oil sector. The Peruvian national launched his investment firm, Latin America Enterprise Fund Managers, in Miami nine years ago and today runs most of its operations out of Bogotá.

LAEFM was quick to jump on the opening of the oil sector, raising a $62 million fund in 2005 that included $25 million from national oil company Ecopetrol. It has since launched two more, most recently a $220 million fund in 2010. The firm acts as a financial partner with exploration companies, typically taking a stake of 30 percent in individual fields.

“We do not buy equity stakes because share prices can be too volatile,” Elejalde says. “We believe we can make more money from the cash flows of the projects once they become productive.” The strategy appears to be working: The firm has returned $90 million to investors in its first fund.

Elejalde has now set his sights on forestry, raising $26 million for a fund that creates joint ventures with companies to tap Colombia’s rich timber resources.

In July 2013, Acon Investments, a Washington-based private equity firm, teamed with Los Angeles–based fund manager Capital Group to acquire Vetra Energía, one of the largest privately held independent oil producers in Colombia, from Inveravante Gestión de Inversiones, a Spanish investment firm. Successful drilling programs helped Vetra increase its oil output by 68 percent in the first half of 2013, to 8,243 barrels per day.

“Colombia’s oil and gas industry is among the best regulated in the world,” says Alberto Hernandez, a principal at Acon. “But many portions of the country are unexplored because of the complicated geography and the security situation.”

Acon also likes consumer and industrial plays in Colombia. In 2010 the firm made an undisclosed investment in Credivalores-Crediservicios, the country’s largest nonbank consumer lender, with assets of more than $300 million. And in July 2011, Acon acquired Aseo Urbano, a leading waste management company, from Spanish company Urbaser.

“What makes Colombia unique is the sheer number of medium-size family-owned businesses,” says Hernandez. “Many of these are exporters and suffered because of the strong peso. Now that the currency has softened, they are well positioned to start exporting in greater volumes again.”

Advent International placed a big bet on Colombian resources with its purchase of a sizable stake in Ocensa. The company moves about 60 percent of the country’s oil output and 70 percent of its oil exports through its 830-kilometer pipeline network.

“Ocensa is a core strategic asset for Colombia given the importance of oil exports to the country’s economy,” says Advent’s Salgar, a former chief operating officer at Ecopetrol. “Additionally, the company operates the most cost-efficient and reliable pipeline in the country and has an attractive business model.” Salgar cautions that Colombia needs to develop more engineers, expand its ports and auction more exploration and production licenses if it wants to foster the oil sector’s continued growth. “All three are incredible bottlenecks, and the government must invest to alleviate them,” he says.

LIKE MANY OTHER FIRMS, Advent is taking aim at Colombia’s fast-growing consumer market. Some 2 million households have joined the ranks of the country’s middle class over the past decade, doubling its size, and it is expected to double again in the next ten years. Banks have fueled domestic demand by liberally providing credit, which has expanded to 45 percent of GDP currently from 33 percent in 2003. Wealthy Colombians who would have been reluctant to drive a Mercedes or BMW in north Bogotá a decade ago now show few such inhibitions. The consumer market has developed to such an extent that American heiress Paris Hilton opened an outlet of her boutique chain in Bogotá last year.

Advent has so far made two investments geared to Colombian consumers. In November 2011 the firm acquired a majority interest in Biotoscana, a licensor and marketer of specialty pharmaceuticals. In June 2013 it purchased a 50 percent stake in Alianza Fiduciaria, the country’s leading independent trust and asset management company.

Abraaj Group, a Dubai-based, $7.5 billion private equity manager, has been active in Colombia since raising its first Latin American fund in 2008. Daniel Wasserman, a partner who runs the firm’s Bogotá office, says Abraaj looks for companies with a strong local presence that can benefit from the firm’s global expertise and connections.

In November 2008, Abraaj bought a controlling stake in Rentandes, a company specializing in the long-term rental of transportation and construction equipment and machinery, for an undisclosed sum. About one third of the company’s sales come from infrastructure-related work, such as civil-engineering, housing construction and energy projects. Rentandes is capable of expanding its revenue by 30 percent a year for the foreseeable future, Wasserman says. “The company has such a bright future that we would like to cash in on some of that,” he says. “However, we are in no rush to exit and will look for the right opportunity.”

In 2009, Abraaj purchased a stake in Iasacorp International, a women’s accessories business based in Peru; since then it has helped the company expand into Colombia and Chile and more than double its outlets in the process, to more than 200. “We like to leverage the experience of our teams in each of the Latin American countries in which we operate,” says Wasserman. “One of the chief aspects of a business that we consider is to what extent can we expand it into neighboring countries.”

All this activity makes a welcome change from the days when Colombia was known more for its left-wing terrorism and narcotics trafficking.

“It’s remarkable how Colombia has changed in my generation,” says Finance Minister Cárdenas. “In the space of two decades, the attitude of the world toward the country has transformed from almost pariah state status, from a failed state — in which it was difficult for Colombians to travel, difficult to get foreign visas — to almost the opposite attitude. It’s full of opportunities; it’s a great overperformer. It’s become so fashionable. The reality lies somewhere in the middle.”

The minister is characteristically cautious. Colombia’s security problems have been drastically reduced, not eliminated. Yet the reality really does lie in the middle — as in middle class and middle income. • •