Moody s Baa2 / S&P BBB- / Fitch BBB 1 Economy: Agriculture 7%, Industry 33%, Services 60%

Transcription

1 Colombia Summary Moody s Baa2 / S&P BBB- / Fitch BBB 1 Economy: Agriculture 7%, Industry 33%, Services 60% Economic management in Colombia has improved significantly in the past decade thanks to prudent fiscal and monetary policies, enhanced security, a market-friendly investment climate, and a favorable debt profile. However, Colombia has faced economic challenges resulting from the decline in global oil prices, which reduced revenues, eroded the current account, fueled inflation, and contributed to low growth rates. The government responded with a tax reform in 2016, but further fiscal consolidation will be needed. The central bank tightened monetary policy in response to an uptick in inflation resulting from currency depreciation, but has been cutting rates since December 2016 as inflationary pressures have subsided. The government spent recent years negotiating a peace deal with the FARC rebels that was ultimately approved under a revised agreement in December The accord will help to stabilize the country, but the cost of reintegrating former rebels will add to fiscal pressures. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 8,068 7,937 6,036 5,798 6,154 6,489 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Bloomberg, Central Bank of Colombia, IMF, Ministry of Finance, NSI 327

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency BBB+ Local Currency A- BBB BBB- BB+ BB BBB+ BBB BBB- BB BB Moody s S&P Fitch Moody s S&P Fitch As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Local Yield Colombia EMBIGD Colombia GBI-EM Global Div As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 328

3 Colombia Strengths Infrastructure Program Prior to the recent slowdown, Colombia s growth was been among the highest in the region and, indeed, in all emerging markets, thanks to the country s abundant natural resources, business-friendly environment, relatively strong institutions, and educated labor force. With the end of the commodity boom, growth in the coming years will be driven by an ambitious $70 billion infrastructure development program scheduled through 2035 that aims to expand the country s road network, railways, ports, and airports. 2 Companies participating in the projects and the government have embarked on the first phase of a highway development program, with financing agreements negotiated for the first wave of this program, consisting of 10 projects totaling $5.2 billion. Bidding for the second wave of nine projects totaling $5.2 billion was scheduled to conclude in 2016, and bidding for the third wave, also nine projects and $5.2 billion, is in the preliminary stages. 3 In addition, the government has approved multiple private-sector projects with total investments projected at nearly $9 billion. The economic slowdown in Colombia and tightening global credit conditions has slowed the pace of this infrastructure program somewhat, as did a bribery scandal involving a Brazilian construction company that has spread to other South American countries, including Colombia. Despite these delays, the infrastructure program is unlikely to be derailed, and it should provide an important stimulus to economic activity in the coming years. Infrastructure has been a key impediment to growth in Colombia, as production centers are usually far from coastal shipping centers and Colombia s main cities are separated by mountainous terrain. Moreover, most major Colombian cities are close to neither rivers nor the ocean, which are essential for transporting goods. Between 2016 and 2021, these infrastructure projects are projected to boost potential GDP growth by 0.2 to 0.3 percentage points per year, raise investment an average 0.8 percent annually, and deliver an additional 7,000 kilometers of new primary roads. 4 Government Balance Sheet Colombia s fiscal deficits regularly exceeded 5% of GDP in the late 1990s, but shortfalls amounted to closer to 2% prior to the recent fiscal deterioration. The improvement was largely due to tax reforms that included a fiscal rule that went into effect in 2012 targeting a gradual reduction in the central government s structural fiscal deficit. However, the rule allows for flexibility of the deficit target based on the cyclical variations of oil prices and GDP growth on tax revenues. The headline consolidated fiscal deficit amounted to 4.0% of GDP in 2016 owing to the delayed budgetary impact of global oil price declines. However, the structural fiscal deficit amounted to 2.8% in 2016, which was consistent with Colombia s fiscal rule. 5 A tax reform was approved in late 2016 that takes into account a permanent decline in oil-related revenues by increasing the value-added tax rate by three percentage points of GDP, simplifying the tax code, reducing the corporate tax burden, formalizing tax revenues, and improving tax administration. 6 This tax reform should help to stabilize the fiscal accounts over the longer term, but additional fiscal measures may be needed to absorb fiscal costs projected at nearly 1% of GDP resulting from the peace agreement reached in late 2016 with the FARC rebels. 7 Public-sector debt levels have crept up in recent years as a result of higher fiscal shortfalls, but the stock of public sector debt is expected to stabilize going forward and remains manageable, at about 50% of GDP. Foreign-currency debt accounts for about one-third of the total, compared to about 50% in 2001, reducing Colombia s vulnerability to exchange-rate depreciation

4 Lazard Emerging Markets Debt Solid External Position Bolstered by IMF Support Although Colombia s current account deficit has grown with the fall in oil-related export revenues, the country s external shortfall continues to be financed largely by foreign direct investment (FDI). Moreover, Colombia s inclusion in J.P. Morgan s global bond and currency indices has improved portfolio inflows, and increases in the country s index weightings in recent years have boosted inflows to a net 1.3% of GDP at year-end Colombia s external balance remains solid, with foreign-exchange reserves at nearly US$47 billion, compared to US$28.5 billion just five years ago. 10 Current reserve levels represent about 180% of the sum of short-term debt and the current account deficit, above the median for commodity exporters. 11 Colombia is one of only three countries, along with Poland and Mexico, with access to an IMF Flexible Credit Line (FCL), a program introduced amid the financial crisis to provide large and upfront financing to countries with strong fundamentals and institutional policy frameworks. Colombia has had access to an FCL since 2009, renewing the agreement most recently in June 2016 for a total of US$11.35 billion. 12 The FCL provides Colombia with an additional buffer to foreign-currency reserves, giving the country added protection against potential external shocks, although the country has always treated the arrangement as precautionary and never drawn on these funds. Social Cohesion and Political Stability Colombian society is relatively harmonious, thanks to the even distribution of economic and political power across the country, which has minimized the tensions between urban and rural areas that are prevalent in neighboring Andean countries. The capital, Bogotá, accounts for only about 25% of GDP, which is low by Andean standards; while other major cities are also important, such as Medellín, the industrial center, and Cali, the manufacturing and agriculture hub. 13 Moreover, states and municipalities have more political and economic independence, which minimizes friction with the central government. Legislative and presidential elections are scheduled for March and May 2018, respectively, and preliminary polls show a leftist candidate is leading the presidential race. The formalization of the FARC rebels into the political process has also injected uncertainty into the upcoming elections. However, political power in Colombia has rotated for decades among a small group of centrist political parties that share a commitment to orthodox and market-friendly economic policies. Education levels are relatively high, and public services are efficient; for example, most Colombians have access to health care. Strong economic growth and well-targeted social programs have reduced the poverty rate to 24.1% in 2015 from 50% in 2002, although income inequality remains among the highest in the world. 14 Weaknesses Commodity Dependence Colombia produces 912,000 barrels of oil per day, making it the 23rd-largest oil producer in the world and the fourth-largest producer in Latin America. 15 The country was also the fifthlargest coal exporter in the world in 2014, with the largest reserves of coal in Latin America. 16 The importance of the mining sector leaves Colombia vulnerable to fluctuations in global commodity prices, as has been seen with the sharp decline in global oil prices. Between June 2014 and November, the price of Colombia s oil mix has fallen 45.6% in US dollar terms. 17 Oil-related revenues have fallen to 1% of total government revenues from 17.4% in 2013, and oil exports have declined to 30% of total exports from 53%. 18 The fiscal rule aims to reduce the country s vulnerability to oil-price fluctuations, but it cannot fully offset the impact on fiscal and external accounts of large and sustained price declines like those experienced since mid

5 Colombia Security Challenges Colombia has a long history of guerilla-related violence that killed an estimated 220,000 people between 1958 and Drug-related crime has been an additional challenge for the country. In addition to the human toll, violence from guerrilla attacks and drug activity has had a substantial economic cost owing to direct damage from bombings of oil pipelines and other infrastructure, as well as the indirect cost of forgone investment. In 2002, newly elected President Alvaro Uribe launched an aggressive crackdown on FARC and National Liberation Army (ELN) guerrillas, and these efforts resulted in a dramatic weakening of these groups and a sharp drop in violence. 20 The improvement in security has contributed to a surge in private investment. However, the government continues to allocate substantial resources to military and security expenditures that could be used for more productive purposes, such as infrastructure development. The government spends about 3.5% of GDP annually on security, among the highest by far in the region and the world. 21 In 2012, current President Juan Manuel Santos initiated peace negotiations with the FARC, and these discussions continued fitfully for nearly four years. Santos invested a significant amount of political capital on the successful negotiation of this accord, but a final agreement was narrowly rejected in a popular referendum in October The president and the FARC negotiated a revised peace agreement that was approved by Congress in late December. The government has also entered into peace talks with the ELN. The success of these negotiations could boost economic activity and result in significant fiscal savings over the longer term due to lower security expenditures. However, the peace accords will also result in additional costs estimated at nearly 1% of GDP per year to fund the social programs promised by the government during the negotiations. Monetary and Exchange Rate Policy Inflation/Monetary Policy Banco de la Republica (BanRep) has been independent since 1992 but did not adopt an inflation-targeting regime until BanRep s board is made up of seven members: the Minister of Finance and six others who are nominated for four-year terms. The board meets 12 times a year to define the base policy rate. The framework targets headline CPI at 3% (with a tolerance range of ±1% around the mid-point) over a two-year horizon. Monetary-policy implementation: BanRep manages the liquidity in the banking sector through repurchase (repo) operations. The regular repo is done overnight or for short maturities. In case of excesses in the system (excess surplus or deficit), BanRep also uses central bank certificate of deposits (DRNCE) auctions to manage liquidity. The 12-month headline CPI printed slightly above the upper bound of the target at 4.05% in October. Non-tradable inflation remains stubbornly above 5%, at odds with inflation expectations (24-month ahead) trending downwards to the midpoint of the target. We expect inflation to decelerate toward 3.5% in1q18, but transitorily. By end of 2018 we expect headline CPI to print between 3.5% 4%. Demand pressures are mixed: real wage growth has bottomed out, unemployment of 9% is low by historical standards, and consumer credit growth has stabilized around 13%. BanRep has eased its monetary policy rate by 275 bps in the year through November ; bringing the target rate to 4.75%. In real terms (policy rate deflated by 12-month CPI), the policy rate is 0.95%, slightly below its 10-year average (1.15%). If our target for December 2018 CPI (3.5 4%) is on the mark, BanRep should stay put in

6 Lazard Emerging Markets Debt Exchange Rate Policy The COP is a nonconvertible currency that has traded in a managed float exchange-rate regime since BanRep intervenes in the spot market and through derivatives options and swaps with the goal of controlling foreign-exchange volatility, preserving financial stability, and building international reserves. The central bank has favored rule-based intervention rather than discretionary intervention. Colombia s basic balance deficit was 2.1% of GDP (2Q17) vs 2.7% in 2Q16. FDI inflows were down in the 12 months through 2Q17 at 2.0% of GDP (vs 2.9% 12 months ago) while the current account deficit narrowed to 4.1% of GDP v 5.6% in 2Q16. The improvements in the trade balance surplus on the back of weaker import bills than previous year (to a large degree due to lower capital goods and construction material) are mostly responsible for the change. The income balance deficit deteriorated in the period, reaching 2.1% of GDP. Financial account inflows remained dominated by FDI (2% of GDP) and portfolio flows (1.3%). In aggregate, FDI and portfolio inflows were down by 2.5% of GDP. International reserves were $ 47 billion in October (unchanged vs 2016). US represents 24% of Colombia trade; China 20%; the EU 13%; Mexico 11%. Following the global financial crisis of 2008, the USD-COP exchange rate reached a high of 3,440 in February Over the past 12 months, it has traded in a wide 2,839 3,160 range. The COP real effective exchange rate (REER) is currently 15% below its 15-year historical average. Adjusted by terms of trade, COP REER is 10% cheap to fair value, in our view. While the REER has adjusted, the wide current account deficit should keep COP REER below its historical average, barring a rebound in oil prices and/or volumes. 332

7 Colombia Inflation 12 USD/COP Inflation Reference Rate As of December Source: Bloomberg REER REER Median since Dec 1999 Median last 10 yrs Median last 5 yrs As of December Source: JP Morgan, Lazard 333

8 Lazard Emerging Markets Debt Country Background Size Capital Population 1,141,748 KM 2 (27th) Bogotá 47.7 Million Religion Roman Catholic 90%, Other 10% Median Age 30 Years Literacy Rate 94.2% Independence 20 July 1810 Political System Government Leadership Next Election 2018 Legislative Branch Presidential Republic President Juan Manuel Santos Bicameral Congress Economy Agriculture 7.1%, Industry 32.6%, Services 60.3% Labor Force Agriculture 17.0%, Industry 21.0%, Services 62.0% Merchandise Exports Petroleum, Coal, Emeralds, Coffee, Nickel, Cut Flowers, Bananas, Apparel Export Partners United States 33.5%, Panama 6.3% Currency As of November Source: CIA Colombian Peso (COP) 334

9 Colombia Country Timeline 1985 Eleven judges and 90 other people killed after M-19 guerrillas force their way into the Palace of Justice; Patriotic Union Party (UP) founded. Nevado del Ruiz volcano erupts. An estimated 23,000 people are killed in four Andean towns Virgilio Barco Vargas (Liberal) wins presidential elections by record margin. Right-wing paramilitary groups begin murder campaign against UP politicians, amid continuing violence by left-wing groups and death squads run by drugs cartels M-19 becomes legal party after reaching peace agreement with government. Liberal and UP presidential candidates murdered during presidential election campaign, reputedly at the behest of drug cartels; Cesar Gaviria elected on anti-drug platform Andres Pastrana Arango a Conservative elected president, begins peace talks with guerrillas. Pastrana grants FARC a safe haven the size of Switzerland in the southeast to help move peace talks along. The zone is off-limits to the army Pastrana breaks off three years of tortuous peace talks with FARC rebels, says hijacking of aircraft hours earlier is final straw. He orders rebels out of demilitarized zone. Government declares war zone in south after rebels step up attacks A Colombian cross-border strike into Ecuador kills senior FARC rebel Raul Reyes and sparks a diplomatic crisis with both Ecuador and Venezuela Relations with Venezuela deteriorate again after plans to allow US troops to use Colombian military bases as part of a drive to curb drug-trafficking are unveiled. Venezuela withdraws its ambassador from Bogotá and freezes relations after the Colombian government accuses Caracas of supplying arms to FARC rebels; Venezuelan President Hugo Chavez accuses Colombia of carrying out a military incursion into his country. The Marxist rebel groups the FARC and the smaller National Liberation Army (ELN) announce that they intend to stop fighting each other and concentrate on attacking the armed forces Juan Manuel Santos takes over as president, having won easy victory in run-off election in June. He responds to a FARC offer of talks by insisting that the rebel group must first release all the hostages it still holds. Colombia and Venezuela restore diplomatic ties FARC chief negotiator Ivan Marquez says the armed conflict is nearing an end at the Cuba talks and calls on left-wing parties and unions to join the peace effort President Santos says he hopes to sign a peace treaty with FARC rebels within the coming year. President Santos wins another four-year term in office President Santos says government ready for bilateral ceasefire with FARC, after welcoming FARC's December unilateral ceasefire. Both sides agree to work together to remove landmines. Colombia is one of the most heavily mined countries in the world The government and FARC sign a definitive ceasefire and disarmament agreement, a precursor to a comprehensive peace deal. The government and FARC sign a revised peace deal after an earlier agreement was rejected in a popular referendum amid objections that it was too favorable to the rebels. Source: BBC 335

10 Lazard Emerging Markets Debt Notes 1 As of November,. 2 Oliver Gordon, Colombian infrastructure: Bridging the bankability gap, TXF, 20 October, txfnews.com/news/article/6281/colombian-infrastructure-bridging-the-bankability-gap. 3 Colombia: Selected Issues Paper, International Monetary Fund, IMF Country Report No. 15/143, June 2015, 4 Colombia: Selected Issues Paper, International Monetary Fund, IMF Country Report No. 17/139, May, 5 Colombia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 17/138, May, 6 Colombia: Review Under the Flexible Credit Line Arrangement, International Monetary Fund, IMF Country Report No. 17/149, June, 7 Colombia: Macroeconomic and Fiscal Outlook, Ministry of Finance and Public Credit, July, %2F%2FidcPrimaryFile&revision=latestreleased. 8 Sector Público No Financiero, Ministry of Finance and Public Credit, as of June, minhacienda.gov.co/homeminhacienda/faces/oracle/webcenter/portalapp/pages/politicafiscal/ BalanceFiscalSPNF.jspx?_afrLoop= &_afrWindowMode=0&_afrWindowId=s7q505 7on_66#!%40%40%3F_afrWindowId%3Ds7q5057on_66%26_afrLoop%3D %26_ afrwindowmode%3d0%26_adf.ctrl-state%3ds7q5057on_94. 9 Source: Central Bank of Colombia. 10 As of November. Source: Central Bank of Colombia. 11 As of November. Source: Lazard Asset Management. 12 Colombia: Review Under the Flexible Credit Line Arrangement, International Monetary Fund, IMF Country Report No. 17/149, June, 13 Bogota, a sound and dynamic economy, Invest in Bogota, business-and-economy. 14 Colombia: Article IV Consultation, International Monetary Fund, IMF Country Report No. 17/138, May, 15 Colombia, U.S. Department of Energy, Energy Information Administration, 29 June 2016, eia.gov/beta/international/analysis.cfm?iso=col. 16 Ibid. 17 Source: Bloomberg. 18 Colombia: Review Under the Flexible Credit Line Arrangement, International Monetary Fund, IMF Country Report No. 17/149, June, 19 Basta Ya! Colombia: Memorias de Guerra y Dignidad, Informe General, Grupo de Memoria Histórica, Centro Nacional de Memoria Histórica, 2013, 20 FARC, ELN: Colombia s Left-Wing Guerrillas, Danielle Renwick and Stephanie Hanson, Council on Foreign Relations, 1 December 2014, 21 As of Source: Military Expenditure (% of GDP), World Bank, MS.MIL.XPND.GD.ZS. 336

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