Investment push

Investment push

Features

Colombia’s new president arrives at the presidential palace, Casa de Nariño, with the wind at his back.                                                                  

Foreign investors have poured into the local debt market. The equivalent of $25 billion in local-currency bonds are in the hands of foreigners, up from $2 billion in 2013, according to Scotiabank.

“Colombia has received a tremendous amount of bond investment over the last five years, more than any other country in the region,” says Joe Kogan, head of Latin America strategy at Scotiabank.

This inflow helped the government finance its deficit, but investors are watching, given that the local currency market is relatively new. “Colombia needs to keep that investment grade [rating] in order for the money to stay and for more to keep flowing in,” Kogan says.

Despite the increase in inflows, the country’s fiscal challenges and reliance on oil and gas revenues may test investor confidence. S&P Global Ratings downgraded Colombia’s long-term foreign currency sovereign credit rating by a notch to BBB- at the end of 2017, maintaining a stable outlook. The agency cited Colombia’s “weakened fiscal and external profiles.”

“We highlighted the fiscal challenges as well as external vulnerabilities being higher for longer than we expected,” says Lisa Schineller, managing director of sovereign ratings at S&P.

In a June report, Fitch Ratings said Pres- ident-elect Iván Duque will face the chal- lenge of boosting growth and improving Colombia’s finances when he takes office in August. Higher oil prices may provide a cushion, but reaching the government’s 2019 fiscal target will be “more difficult,” Fitch said, citing his campaign pledge to cut corporate income taxes.

“We expect economic growth to acceler- ate, but not enough to avoid spending cuts or revenue measures to reduce the fiscal deficit,” says Samar Maziad, a senior analyst at Moody’s.

During the campaign, Duque promised to cut taxes, lower spending and overhaul the pension system. He has appointed Alberto Carrasquilla to oversee those efforts as the new finance minister. Carrasquilla was previously finance minister from 2003 to 2007, during Álvaro Uribe’s first term.

Duque inherits a macroeconomic and institutional framework that has drawn praise from multilateral lenders and led to an invitation for Colombia to join the Organization for Economic Cooperation and Development (OECD). His business-friendly stance may help to continue to lure investment to Colombia.

“Colombia is in good shape to attract capital,” says Martín Castellano, head of research for Latin America at IIF. “It is one of the markets that has been very consistent in terms of macroeconomic policies within the Pacific Alliance.

“The country has been financing its current account deficit through high foreign direct investment inflows over the past years, and I don’t see that they would have trouble continuing to do so in the future.”

Even with dollars flowing in, economic growth slowed to 1.8% in 2017 and industrial production slumped as oil and gas production fell nearly 4% and platinum and silver output plunged.

Duque has promised to revitalize the oil and gas sector while crude prices are on the upswing. But like any oil-producing nation, Colombia is captive to global market fluctuations.

Castellano says Duque’s promise to reduce the burden on business by cutting taxes and tackling red tape can help spur growth.

“His economic platform, macroeconomic policies and plans to boost the oil and mining sector given that external conditions are favorable sound promising.” LF