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Vis a vis the hopelessly stalled Colombia Free Trade Agreement (FTA), Democrats in Congress still hold their collective noses at Colombia’s appalling human rights record (though some would argue that any high ground the U.S. had on that issue was regrettably thrown away, circa 2001), as well as the claim that Colombia’s government is hostile to labor unions (citing union members’ deaths at the hands of paramilitaries as evidence). Furthermore, before even considering the deal, Democrats would like Congress to first pass legislation to help those here who would lose their jobs because of “shifting patterns of trade.” In the meantime, Colombia remains a class divided country (the gap between the rich and the poor in Colombia is one of the biggest in Latin America, with the top one-fifth of the population retaining 60% of the national income, according to the World Bank) of 44 million, now in ‘trade limbo.’
The United States for years has regularly renewed its preferential tariffs on nearly all Colombian exports, and in 2006 Colombia agreed to drop its barriers to American goods, as well, in exchange for the arrangement being made permanent (hoping, in turn, that said deal would create a new wave of inward flowing capital). Now, that arrangement looks doomed, and with it could go the political fortunes of its leader, Álvaro Uribe, who is in his second term and who has been considered over the years to be a staunch ally of the U.S. in the fight against the drugs and terrorism trades which have constantly threatened to engulf the poor country.
This is an issue to keep an eye on in terms of guaging investors’ future sentiments towards the nation as a whole. Back in February, Ben Laidler, a strategist at JPMorgan Chase, stated that Colombian equities “could positively surprise” in 2008, and that “key catalysts would be the lifting of capital controls, as well as strong economic growth, attractive stock valuations, the low level of foreign participation in the equity market and the recent listing of state oil company Ecopetrol.” But what kind of growth would follow in the event that the FTA falls through? Critics of the Democrats’ alleged politically driven protectionism argue that Uribe should ignore the petty interests of US politics, and negotiate actively other trade liberalization agreements with the European Union and the Pacific rim. But losing the U.S. would surely takes its toll, especially in light of other economic factors weighing against it.
Free trade aside, to many, Colombia (and pretty much all of Latin America) has never looked riper. Interest-rate cuts in the U.S. have prompted a number of investors there to buy higher-yielding Latin American shares and bonds (although fears of inflation are increasing, and Colombia’s central bank, along with Chile’s, missed its inflation target). The lawlessness and drug trafficking that has forever been associated with the country was somewhat tempered by Uribe and a tough security policy that greatly weakened Colombia’s left-wing FARC guerrillas who once ruled the countrysides with relative ease. “The fundamental backdrop has improved significantly in recent years, driven by a dramatic turnaround in the country’s security situation and the center-right reformist presidency of Alvaro Uribe, the most popular major leader in the region,” Laidler said.
However, cynics wonder how entangled the government still is with rogue groups. “Paramilitaries” were created in the 1980s by wealthy ranchers to protect themselves from FARC attacks. But over time, and especially in light of FARC’s waning power, said groups have turned into defacto warlords, accused of killing thousands in the name of drug trafficking and money laundering. They also may have deep-rooted political ties. In 2006 a senior paramilitary leader boasted after the 2006 election that a third of Congress’ members were elected with his movement’s backing. And last month Mario Uribe, the president’s cousin and close political ally, was arrested for his allaged paramilitary links. Yet Uribe seems genuinely keen on a nationwide crackdown, especially after the recent announcement of th extradition to the U.S. of 14 of Colombia’s most sought after paramilitary warlords on drug trafficking charges. But, goes the counterargument, might this have been only to hush up the men with the most information about illicit-government links, as well as to get in good graces with U.S. Democrats?
Back to the numbers. Colombia’s economy grew by about 7% last year and is expected to grow by 5.5% this year, although unemployment is still around 11.5%. Its top three exports are oil, coffee and coal; other exports include nickel, emeralds, apparel, bananas and cut flowers. One primary concern to investors should be its sparse capital flows. According to fund tracker EPFR Global, during the best month of 2007, inflows totaled $34 million, while during the worst month outflows were $15 million. In comparison, regional neighbors, like Brazil, receive hundreds of millions of dollars of foreign inflows. One glaring problem was that in May 2007, as unproductive capital flows caused the artificial appreciation of the Peso and put pressure on some exports, the government imposed a 40% non-remunerated, six-month deposit requirement on all short-term foreign inflows. For example, Geoffrey Dennis, an equity strategist at Citigroup, reiterates that capital controls drag down Colombia’s equity market, but states that “their removal could catalyze equities to outperform.” Also hurting the local market, he says, are rising fiscal and current account deficits, and unattractive equity valuations. And “once capital controls are lifted, we would focus on growth stocks, such as beneficiaries of infrastructure spending,” Dennis stated. However, it’s questionable whether or not this policy change will ever happen, especially given the government’s well founded concerns over inflation.
Despite the red flags, Laider has specific plays in mind for those interested in the present. After all, the IGBC Index–the benchmark index of Bogotá’s (pictured) Bolsa de Valores that holds rapidly growing components such as Bancolombia and Chocolates–has surged nearly fourteen fold since its October 2001 low. The three biggest and most liquid stocks, he says, are the aforementioned Bancolombia (CIB), the country’s largest bank and Colombia’s only level three ADR, as well as Ecopetrol and Suramericana, a conglomerate with stakes in the insurance, social security, finance, cement, food, retail and textile sectors.
Interesting quote from Franklin Templeton’s Mark Mobius, which I found over on Controlled Greed from January 5, 2007.
“Mobius says his Emerging Markets Small Cap Fund will place greater emphasis on the relatively small companies in more established emerging markets like Taiwan or Malaysia, rather than on the bigger stocks in frontier markets. ‘Frontier is good if the stocks are cheap and overlooked,’ he says. ‘Otherwise, you’re better off in the bigger emerging markets. A lot of these (frontier) markets have been picked over, and their prices have already gone up. Very little money going into frontier markets can drive prices up quickly.’”
Contrast that with the sentiments of Christian Deseglise, HSBC’s global head of emerging markets, who said back in January that ”as mainstream emerging markets move to become high-income economies, it [only] makes sense to look at countries that are still in an embryonic stage of development.”
