Colombia has been closed to investors for decades, not only due to its once heavily regulated economy but mainly due to ongoing political instability and an unstable internal security environment. It is a country that for many still has a reputation of violence and is associated with being one of the world's most dangerous countries with high rates of kidnapping, terrorism and narco-trafficking, as well as Latin America's longest running insurgency. Yet despite this it is fast turning into an investment hotspot.
In my opinion it is now the hidden investment gem of South America, with the country opening up to tourism, foreign investment and experiencing enviable rates of economic growth. All of which can be attributed to a government that is focused on stabilizing the internal security situation, reforming the economy, creating optimal conditions for economic growth and encouraging foreign direct investment ('FDI'). This has seen the economy grow at a staggering rate over the last 10 years, except during the peak of the global financial crisis ('GFC'), the increased growth of an entrepreneurial and educated middle class, growing domestic consumption, the substantial expansion of the local business sector and the solid growth of the local bourse, the Bolsa de Valores de Colombia ('BVC'). In my opinion this can only continue and create further solid opportunities for investors.
Colombia has been experiencing solid economic growth since the early 2000s, in fact the Colombian economy has had GDP growth of over 4% annually since 2003, except during the peak of the global financial crisis in 2008 and 2009. For 2011 the International Monetary Fund ('IMF') forecast GDP growth of 4.9%, but in a recent report from José Darío Uribe the governor of Colombia's central bank, the Banco de la Republica Colombia, GDP growth was reported as being between 5.6% to 6% in 2011. Furthermore in 2011, the Colombian economy saw its greatest quarter of GDP growth since 1979, with third quarter GDP growth of 1.7%, which equates to an annualized rate of 7.7%.
For 2012 the IMF has forecast Colombia's 2012 GDP growth rate to be 4.5%, which is more than quadruple the IMF's GDP growth forecast for the eurozone of 1.1% and three times the forecast rate for the U.S of 1.8%. Colombia also has the fifth highest 2012 GDP forecast for South America, behind Peru's 5.6%, Paraguay's 5%, Chile's 4.7% and Argentina's 4.6%, as the table below shows.
Table 1: 2012 GDP Forecasts
2012 Forecast GDP Growth
In fact, all of Colombia's economic indicators demonstrate that the economy is gathering further momentum and continuing to grow, with increasing FDI, strong performance from the local stock market, increased foreign investment, falling unemployment and companies expanding their operations. Such strong economic growth not only bodes well for the performance of Colombian companies but further fuels the growth of Colombia's middle class leading to higher domestic consumption.
Colombia's key industries are textiles, food processing, oil, clothing and footwear, beverages, chemicals, cement, gold, coal and emeralds. In 2010 Colombia's domestic industrial production grew at an estimated 4%, which was a drop from the 5.5% for 2010. However, much of this can be attributed to the growth in the service industry with the agricultural sector accounting for 18% of employment, the industrial sector 13% and the service sector accounting for the majority of employment at 68%. For 2010 domestic demand grew by 7.68% which was a substantial increase in growth from 2009 domestic demand of 5.61%. So far the for 2011 domestic demand has grown strongly with an average rate of domestic demand over the first three quarters of 12.36%.
Much of the growth in the Colombian economy and the solid GDP growth can be attributed to the explosion in FDI in Colombia due to the government focusing on creating a favorable trade climate. For the first half of 2011 Colombia saw FDI totaling $7 billion and for the full year reached over $15 billion, which is a 122% increase on the $6.76 billion of FDI received by Colombia in 2010. This growth in FDI is continuing with FDI having risen in the first two months of 2012 by almost 25% when compared to the same period in 2011. The majority of the FDI in Colombia is invested in the mining and oil sectors.
It is also notable that neighboring countries such as Venezuela and Bolivia have shown resistance to foreign investment, whereas Colombia has differentiated itself from other nations in the region by looking favorably upon foreign investment. There is also a higher degree of transparency in governmental policies towards both business and foreign investment. This pro-business attitude bodes well for investing in Colombia and is the key reason I believe in reducing the degree of country risk attached to any investments in Colombia.
Finally FDI and economic growth have been enhanced, with country risk being further reduced through Colombia signing a Free Trade Agreement ('FTA') with the U.S in 2011. The FTA was ratified by the U.S Congress in October 2011 and is currently pending implementation in 2012. Colombia has also signed, or is negotiating FTAs, with a number of other countries including; Canada, Chile, Mexico, Switzerland, the EU, Venezuela, South Korea, Turkey, Japan, and Israel. All of which can only lead to greater transparency, reduced country risk and further investment opportunities.
Despite these positives that make investing in Colombia extremely appetizing, there are still a number of risks associated with investing in Colombia and Colombian companies. The greatest risk is country risk, although I do believe that many investors are unaware of the true degree of country risk associated with investing in Colombia. In my opinion it is a lot lower than many people realize. Now I will show what these risks are and how they can be managed.
Country risk in my opinion is the key risk that arises and needs to be measured and understood when investing in a foreign country or company, especially when the country is an emerging market. Country risk is essentially a collection of risks including political risk, exchange rate risk, economic risk, sovereign risk and transfer risk. For Colombia the country risk has traditionally been perceived as high, primarily due to the ongoing low intensity civil conflict that has been ongoing for 48 years between the Revolutionary Armed Forces of Colombia (FARC), various para-military groups and the Colombian government. However, in recent years the security situation has improved immensely through the demobilization of the para-military groups in 2006, a military surge to secure key infrastructure, towns and cities and military strikes that have pushed the FARC further away from populated areas, as well as decimating their leadership.
The Colombian government's ongoing economic reforms, deregulation of the economy and attempts at reforming the legal system combined with its pro-business are also reducing the degree of economic risk associated with investing in Colombia.
However, some risk remains, this includes a degree of exchange rate risk as the Colombian central bank faces an ongoing struggle with controlling inflation. However, as the Colombian Peso appreciates in value against the U.S dollar, it is generally a positive outcome for investors as the value of their investment appreciates. In fact as highlighted in a previous article, 10 Dividend Yielding Latin American Stocks For 2012, emerging market currencies are typically undervalued in comparison to the U.S dollar, and as their economy strengthens causing those currencies to catch up in value, investors are provided with an additional opportunity to enhance returns. It also appears that the central bank has inflation under control, having set a target of 2% to 4% and with inflation being contained within that target at 3.55% for February 2012.
There are also risks with regard to the security situation, which is quite fluid and changes quite quickly. This is due to the number of organized crime groups, urban street gangs and armed neo-paramilitary gangs still operating in the country, all of whom wield substantial power. The FARC is also still conducting operations predominantly in the oil rich south-eastern departments, the southern departments near Ecuador and along the border with Venezuela in the northeast and centre-east of Colombia. All of these make the security situation in Colombia more dangerous relative to most other countries in the region, but these issues tend to affect the social climate to a greater extent than the investment and business climate.
There are also substantial problems associated with infrastructure in Colombia, especially roads, ports and transportation. An example of this is that by road it takes over ten hours to travel from Bogota to Medellin, a journey of only 245 kms. However, this is improving with the Colombian government focused on improving internal infrastructure, building new roads and improving internal transportation and communication with $3 billion being allocated to improving roads and transport infrastructure.
Another concern contributing to the degree of country risk in Colombia is corruption. A key indicator of this is Transparency International's Corruption Perception Index. As table 1 below shows for 2011 Colombia was ranked 80th out of 184 countries on this index, where New Zealand was rated as the least corrupt and Somalia along with North Korea as the most corrupt. In comparison to Colombia's position Brazil was rated as 73rd and the U.S as 24th. However, the government of Juan Manuel Santos is currently implementing an extensive program aimed at reducing corruption, but how successful this will be is unknown as the system of patronage is well entrenched in Colombian politics and government.
From an overall qualitative assessment of country risk, in January 2012 the OECD awarded Colombia a 4 on a scale of 0 to 7, where 0 is the least risky and 7 the most, making Colombia the fifth riskiest country in South America after Chile, Brazil, Uruguay, and Peru but far less risky than Argentina or Venezuela. These risk ratings are set out in the table below.
On a more positive note Colombia's country risk was perceived to have reduced in 2011, with Standard and Poors lifting their credit risk rating for Colombia to BBB-, which is the minimum investment grade rating. This upgrade was made on the view that Colombia's economy was showing increasing resilience to shocks as well as favorable growth prospects. In addition, as table 1 below shows is higher than Argentina's B but lower than Brazil's, Peru's and Mexico's BBB.
Table 1: South American Country Key Risk Measurements
Corruption Indicator (Position out of 184 Countries)
OECD Country Risk Rating
As we you can see there is definitely a degree of additional country risk associated with investing in Colombia that typically doesn't exist when investing in companies in the U.S, Canada or the eurozone. However, I would argue that since the GFC a significant degree of country risk has been shown to exist in those countries.
Overall the degree of risk inherent in investing in Colombia is lower than would be expected and a lot lower than many other South American countries especially Venezuela and Argentina, and even in some aspects lower than Mexico. Much of this can be attributed to government policies that have been implemented to increase FDI, grow tourism and entice investors.
There are a number of options available to investors who wish to invest in Colombian companies they can either:
- invest directly on the local exchange the Bolsa de Valores de Colombia ('BVC');
- invest in Colombian companies that are listed on a U.S exchange either directly or via American Depositary Receipts ('ADRs');
- invest in Colombian companies that have issued "over the counter" ('OTC') ADRs; or
- invest through an Exchange Traded Fund ('ETF') that invests in locally listed Colombian stocks.
It is my preference when investing in Colombian companies to purchase stock or ADRs that are listed on a major exchange or to invest through a Colombian ETF. This ensures that the degree of investment risk is minimized as investors are able to access the greater liquidity associated with a major U.S exchange and the security of knowing that the company has met the listing rules and U.S regulatory reporting requirements associated with listing on a U.S exchange. This creates further transparency as to the performance and operation of the company.
Investment risk is further mitigated when investing through an ETF as a team of investment managers are regularly researching and monitoring the performance of the basket of stocks in which the ETF has invested as well as allowing the investor to diversify across a broad range of stocks. However, this does come at additional cost when compared to investing in a stock directly.
There are currently three Colombian companies listed on U.S. exchanges, with both Bancolombia (CIB) and Ecopetrol (EC) listed on the NYSE, and Andina Acquisition Corporation (ANDAU) listed on the NASDAQ. The details of each company are summarized below but it is essential to remember these are only summaries and as an investor more in depth analysis is required prior to investing.
Is a partially Colombian government owned integrated oil and gas company operating in Colombia, Brazil, Peru and the U.S. Gulf Coast. At the time of writing its NYSE listed ADRs are trading at $59, giving it a market cap of $122 billion. Since listing on the NYSE in 2008 it has risen by 139% in value and since the start of 2012 it has risen by 32%. It pays a dividend with a healthy yield of 3.5%. For further information on Ecopetrol refer to our latest review; 'Ecopetrol: A Solid 2012 Latin Oil Investment'.
Is one of the largest banks in Latin America and at the time of writing its NYSE listed ADRs were trading at the time of writing at $65, giving them a market cap of $51 billion. Since listing on the NYSE Bancolombia has risen in value by 348% in value and since the start of 2012 it has risen in value by 8%. It pays a dividend with a moderate yield of 2% and a payout ratio of 24%. For further information on Bancolombia refer to our latest review; 'Bancolombia: A Latin American Banking Investment For 2012'.
Andina Acquisition Corporation
Is the latest Colombian company to list in the U.S listing on the Nasdaq in early March 2012. It is a Colombian based company focused on business acquisitions that provides investors with an interesting but speculative opportunity to invest in Colombia. At the time of writing it is trading at around $10, giving it a market cap of $11.5 million. For more information on Andina refer to our latest review; 'Andina Acquisition Corporation: A Unique And Speculative Colombian Investment'.
In addition, to these three companies there are also five Colombian companies that have issued OTC ADRs in the U.S and these are listed below.
CEMENTOS ARGOS ADR (CMTOY.PK)
Cementos Argos produces and sells concrete and other materials made of cement, lime, or clay, purchases and sells minerals or mineral deposits used by the cement industry mixing business throughout the U.S, Colombia, and Caribbean. At the time of writing it is trading at around $30, giving it a market cap of $7 billion and a trailing PE of 72.
Corporacion Financiera Colombiana (OTC:CRPFY)
Corporacion Financiera Colombiana provides private banking, investment banking, treasury, capital investment and real estate services to high net worth clients and companies. At the time of writing it is trading at around $3.
Grupo de Inversiones Suramericana (OTCPK:GIVSY)
Grupo de Inversiones Suramericana is an investment company that specializes in investing in the financial, insurance and social security sectors in Colombia. At the time of writing it is trading at around $39, giving it a market cap of $14 billion and pays a dividend with a yield of 1%.
Grupo Nutresa (OTC:GCHOY)
Grupo Nutresa formerly Grupo Nacional de Chocolates, has diverse operations across the food processing sector. At the time of writing it is trading at around $12.45 giving it a market cap of $9 billion. It has a PE of 38 and a ROE of 4% and pays a dividend with a yield of 1.6%.
Interconexion Electrica operates and maintains high-voltage energy transmission systems in Colombia, Brazil, Peru, Chile, Bolivia, Ecuador, Panama, and Central America and has 38,551 kilometers of high-voltage circuit. At the time of writing it is trading at $89 giving it a market cap of $4 billion and a trailing PE of 21.
There are currently two ETFs available that have 100% exposure to Colombia. They are the Van Eck Market Vectors Colombia ETF (COLX) and the Global X Colombia ETF (GXG). Details for both of which are summarized below.
Market Vectors ETF
Is an ETF comprised of securities of companies domiciled and primarily listed on the Colombian BVC or those companies that generate at least 50% of their revenues in Colombia. At the time of writing it is trading at around $19, with a 52 week range of $15.86 to $21.37. It has a PE of 16, net assets of $1.9M and year to date produced a return of 17%.
Global X Colombia ETF
Is an ETF that tracks the FTSE Colombia 20 Index, which is a market capitalization weighted index of the 20 most liquid stocks in the Colombian market and is designed to measure broad based equity market performance in Colombia. At the time of writing it is trading at around $21, with a 52 week trading range of $16.75 to $21.95. It has a PE of 16, net assets of $147M and a year to date return of almost 20%.
Clearly Colombia's economic and investment climate are not without risks. The country faces many of the same risks chronic to other Latin American countries. However, the Colombian government is courting extensive foreign investment and is creating an economic and regulatory environment conducive to economic and business growth. In addition, the loosening of regulatory requirements and ongoing business incentives are creating an environment that is particularly appealing to investors further enhancing the opportunities for Colombian companies to grow into regional and global businesses. It is my opinion that Colombia is a less risky option for investors than many other South American countries including Venezuela, Argentina and Ecuador. Furthermore there are a number of options for investors to access the growing investment opportunities that are being created and with further research and due diligence investors will uncover the solid investment opportunities that are available in Colombia. Over 10 years the BRICS (Brazil, Russia, India, China and South Africa) were seen as high risk investments and now Brazil is seen as a mainstream investment opportunity, yet I believe Colombia is only marginally riskier.