BY WALTER T MOLANO
After decades of civil war, Colombia is one of the hottest investment destinations in Latin America. International investment bankers throng the corridors of hotels, trolling for the next M&A deal or IPO. Official Chinese delegations are a common sight at the arrival hall of El Dorado International Airport. Leagues of Asian businessmen, accompanied by interpreters, replaced the teams of DEA agents who once filled the top restaurants of Bogota. There is such a dearth of qualified interpreters that many grammar schools are now requiring students to study Mandarin in addition to English. Colombia is a transformed nation. The shame, associated with extreme violence, poverty and narcotics, is a fading memory. The situation has improved so much that Mexican businessmen, such as Carlos Slim, are looking to Colombia as a relative safe haven to escape the terror that is spreading through their country. This is why there was little surprise when the national statistics agency (DANE) reported that the Mexican economy expanded 5.2% y/y during the second quarter of 2011. This was up from the 4.7% y/y GDP growth that was posted during the first quarter. Meanwhile most of the planet is in the midst of a synchronized slowdown, Colombia is the one of the few outposts of strong economic activity.
There are two reasons why the Colombian economy remains so resilient. The first, and foremost, is a consumption boom. Private consumption drove 80% of the economic growth during the second quarter. The commercial sector, which includes restaurants and retail, jumped 7.2% y/y. After decades of pent-up demand, due to the high level of violence and terror, Colombian households are letting loose. Not only are the roads choked with new cars, luxury property developments are transforming most of the large cities, such as Bogota, Cali and Medellin. Construction expanded 8.8% y/y during the second quarter. An aggressive financial sector is also helping the consumption boom. Banks, retailers and developers are offering a variety of new credit cards, mortgages and consumer loans. The banking and financial sector grew 6.1% y/y during the second quarter. Although the Colombian financial system is well-capitalized and supervised, there are concerns that the banks are over-extended. It is not so much their direct exposure to consumer lending, but the indirect exposure through the shadow banking system. Many of the banks provide credit facilities to property developers, distributors and commercial establishments, which in-turn give out consumer loans. Unfortunately, the quality of these loans can be poor and it could produce serious problems when the economic cycle turns.
The other reason for the resilience of the Colombian economy is the mining sector. Colombia has a treasure-trove of mineral deposits, from precious metals to oil fields. Many of the most promising areas are in remote regions of the jungle, which were off limits due to the civil war. Now, the surge in commodity prices and the perception of better security convinced many international mining and oil firms to make a foray. Billions of dollars in Foreign Direct Investment (FDI) are pouring into Colombia to develop the cornucopia of natural resources. The mining sector surged 10.3% y/y during the second quarter, up from 9.1% y/y growth during the first quarter. This is allowing the country to maintain a trade surplus, despite the sharp increase in imports. The government reported a trade surplus of $545 million in July.
There is clearly a new emphasis on trade and investment. The Santos Administration recently consummated a free trade agreement with the European Union. It is in the midst of similar negotiations with South Korea, and there is hope that it will finally secure a free trade agreement with the U.S. before the end of the year. Despite the buoyant economic environment, there is a lot of criticism of President Juan Manuel Santos. Security is an issue. There have been several high profile kidnappings in rural areas, suggesting that the FARC is making a comeback. Crime is also on the rise. Many criminal elements from the rural areas shifted to urban areas, due to the greater military presence. As a result, there has been a large uptick in homicides and organized criminal activities. Some critics claim that President Santos does not have the same commitment for public safety as his predecessor. It does not help that former President Uribe Alvaro retains a very high profile, constantly criticizing government policies through interviews and a hyperactive Twitter account. Still, the resilience of the Colombian economy is making it an oasis of prosperity in a challenging global environment.
Walter Molano is head of research at BCP Securities.