Tuesday, Oct 24, 2017
Finance | South America | Colombia

Economic development in Colombia

Solid financial fundamentals help transform economy and entice foreign investors


2 years ago

José Darío Uribe, Governor of the Colombia’s central bank, left, and Mauricio Cárdenas, Colombia’s Minister of Finance, have introduced successful fiscal policies that have led to growing investor confidence in the economy and banking system
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Strong institutions, precise macroeconomic policy and a solid financial system are seeing Colombia through an unprecedented period of economic development

Latin Finance says Colombia has the best finance minister in the region. He has won awards from América Económica, Emerging Markets, and most recently, The Banker, who named him Latin American Finance Minister of the Year in 2015. His name is Mauricio Cárdenas Santa María. And under his watch Colombia has consistently produced the economic policies and aggressive free trade stance that has seen the country grow by more than 4% over each of the last four years.

All three major rating agencies have upgraded Colombia’s investment grade. Foreign direct investment (FDI) has never been higher, with record levels registered in 2013 and 2014. And multilateral commercial ties are thriving: free trade agreements (FTAs) with more than a dozen countries have been signed or are being negotiated. The US-Colombia FTA went into force on May 2012. Colombia is a founding member of the Pacific Alliance, and in 2013, it began its ascension process to the Organization of Economic Cooperation and Development (OECD).

Not one to blow his own horn, the award-winning Mr. Cárdenas gives much of the credit for Colombia’s positive economic performance to President Juan Manuel Santos, and the rest to his team. “There is no doubt that these are awards for a team effort, and the president has played a very important role. President Santos was minister of finance before. He knows what this position means and has been a continuing support. He is probably the most concerned person in the entire country about the issue of fiscal responsibility, just as he was when he was minister himself, and now as president he has made very important decisions, such as the fiscal law and changing the constitution in order to include fiscal sustainability as a right for all citizens. He makes the job of minister of finance a lot easier.”  

It helps that the model Colombia has adopted is actually working. It is one that emphasizes fiscal responsibility and discipline but that also focuses on wealth redistribution. The wealthy are taxed more heavily; those in need receive more. “We are not afraid of the word redistribution. We are very progressive in matters of allocating state resources, but we are quite conservative when it comes to macroeconomics. It is like blending together two ideas that used to be considered incompatible,” Mr. Cárdenas explains.

Incompatible or not, it is unquestionable that the approach is working. When Fitch updated Colombia’s ratings to ‘BBB – outlook stable’ a few years back, it did so based on the country’s debt dynamics and credible and consistent policies. Fitch highlighted that Colombia’s general government debt of 37.1% of GDP remains below its peers and is forecasted to steadily decline. Fitch’s upgrade followed investment grade ratings by both Standard & Poor’s and Moody’s.


“We have trust and credibility in the markets, and we know that these are two very important assets for any economy to be successful. We want to safeguard that trust so we do our best to communicate everything the government does. That is a very important aspect of our economy”

Mauricio Cárdenas Santa María, Finance Minister

“Fitch said that our economic policies have continuity, and indeed, they have been very consistent, and include fiscal discipline, inflation control, and a strong financial system. The agency also mentioned that our policies are appropriate given current lower oil prices. So we have trust and credibility in the markets, and we know that these are two very important assets for any economy to be successful. We want to safeguard that trust so we do our best to communicate everything the government does. That is a very important aspect of our economy,” adds Mr. Cárdenas.

The social impact of this economic progress has been felt acutely. Between 2010 and 2014, 4.5 million Colombians rose out of poverty, while 2 million more escaped from extreme poverty.  Unemployment, while still high, has been in steady decline. Efraín Forero, president of Davivienda, part of Bolivar Group, the third largest bank in the country, says, “I believe that Colombia is a country that, among emerging economies, is in a process that has over the past 15 years considerably improved many things, in terms of employment, the reduction of poverty, the growth of the middle class, and the strengthening of government institutions and of private business.”


“Fiscal order gives credibility in the government’s management of public finance, and it is that credibility that keeps the growth rates, the inflation and general macroeconomic policies under control. This is why, despite the deceleration in the price of commodities, we are still seeing great confidence from investors”

Jorge Castaño Gutierrez, Superintendent of Colombia Financial Superintendence (SFC)

Ricardo Avila, director of Colombia’s business journal, Portafolio, agrees: “It is very clear that Colombia has made a fundamental turn in terms of viability and stability, perspective and concrete advances, especially when it comes to the social side.”

The rise of FDI in the country has helped significantly in the country’s recovery. Camilo Reyes, executive director of the American Colombian Chamber of Commerce says that in 2000, Colombia received $2 billion in investment while in 2015, it received nearly $17 billion. “That means it has grown eight-fold. There are many reasons for this, but one of the most significant is the stability of the country’s financial system,” he comments.

Jorge Castaño Gutierrez, superintendent of the Colombia Financial Superintendence (SFC), the financial supervisory authority, says that beyond being the economy with the most promising growth projections in the region, investor trust in Colombia stems from the government’s responsible fiscal management. “Fiscal order gives credibility in the government’s management of public finance, and it is that credibility that keeps the growth rates, the inflation and general macroeconomic policies under control. This is why, despite the deceleration in the price of commodities, we are still seeing great confidence from investors,” he says.

“The implicit message behind this is that the perception of trust in the country’s institutions regarding the economic policy and sustainability of the financial system are all aimed at maintaining very good potential for growth and foreign investment. Today, over 17% of all public debt securities are owned by foreign investors, who also own a significant percentage of hedge bonds, which we see as a strategy for a stable investment in the medium and long term, not as something done by opportunists.”

Mr. Gutierrez points to the way Colombia responded quickly to the drop in commodities prices by moving towards different sectors. He feels that the positive impact of this will be felt in real terms in 2016. “Obviously 2015 has been a year of some uncertainty, but I think in 2016, we will see more clearly the different impact. There is not one single sector that is especially vulnerable. All sectors are contributing to GDP, especially the financial sector. This is a result of strong institutions, a precise macroeconomic policy and a solid financial system. Those are the elements that have allowed Colombia to transform itself.”

Solid banking sector
In 2015, Fitch Ratings stated that Colombia’s banks, along with those of Peru, were among the most solid in Latin America and well prepared to handle external shocks. Adequately capitalized with ample reserves, the banking sector is well positioned to support Colombia’s economic growth.

It is also profitable. In 2014, sector profits rose by 10.8%. Pension plans grew by an outstanding 85% and sector shares rose to $56 billion. In 2015, Colombia’s banks are estimated to have grown a further 4.5%, driven by private consumption, new infrastructure projects and a rise in housing demand. The sector is not overly exposed to the highs and lows of petroleum prices and boasts sufficient liquidity to cover its short term obligations. In short, it has the strength to weather unforeseeable storms and to support Colombia’s current needs.

José Darío Uribe, governor of the Colombian central bank, comments, “An important part of the Colombian economy is the strength of its financial system. We have a well-capitalized, profitable and liquid banking sector, which has expanded regionally and is increasingly reaching various sectors of the Colombian population. This has helped Colombia, despite slower growth, absorb negative external shocks and continue to excel in the region. Looking forward, we will see the financial sector making a valuable contribution to the development of the country, as it makes further progress in financial inclusion, especially in rural segments and small- and medium-sized producers, and as it participates in the financing of major infrastructure projects.”


“An important part of the Colombian economy is the strength of its financial system. We have a well-capitalized, profitable and liquid banking sector, which has expanded regionally and is increasingly reaching various sectors of the Colombian population”

José Darío Uribe, Governor of the Colombian central bank

Mr. Gutierrez says the sector plan is based on seven pillars, of which three are strategically aimed at financial inclusion, including the expansion of banking services like mobile banking. Growing the country’s stock market with an eye to regional integration and expanding microfinance are also priorities. “We have increased the number of people who have some kind of financial product, from 60% or 65% in 2012 to close to 72.5% today, and we expect this to reach 85% by 2018. We have also improved in the microcredit area, supporting SMEs (small- and medium-sized enterprises), and have had very good results. Our financial inclusion policies in the stock market are based on Collective Investment Funds (CIF), an instrument created by the government to democratize the market.”

Carlos Raúl Yepes, president of Bancolombia, the only Colombian financial institution listed on the NYSE, says that despite the slowdown this year, the economy is still growing and so is his bank. “I think that in moments like this, the economy is in good shape if it is growing between 3% and 3.5%. The IMF predicted a 0.5% of growth for all Latin America, which means Colombia is growing much greater than what the IMF is expecting for the region. It is not the level we want, but there are many global factors that have an impact on this slowdown. So we are optimistic, and in this financial institution, we are accompanying the growth. We have the ability to continue this trend. There are many opportunities and we just have to take advantage of them.”

The World Stage
Mr. Yepes also serves as a member of Colombia’s Advisory Commission for Peace and believes that the end of the conflict will have a significant positive impact upon economic growth. “Indeed, I think peace will create many opportunities. Our role is not only in the economic aspect, but also as members of society. Interaction with society and the ability to achieve different effects are very important aspects of any company. I’m convinced that achieving peace is the best thing that could happen to the entire Colombian society, which is why it is so important to stay together and support the government through this process.”

Mr. Cárdenas says that peace will pay for itself. “There are countless studies that show that Colombia will be able to grow at least an extra 1% per year. Why? Because peace will bring more tourism, it will allow us to expand our agricultural land, and it will bring more investment into the mining and energy sectors. That’s why we say that peace will pay for itself, because it will bring the commitment for further investment, for reparation to the victims, and for assisting those segments of the population who need help the most. The peace process will demand resources, but in fact it will be the peace itself that will allow us to cover the financial costs of those commitments.”

With economic and political stability within reach, Colombia has now set its sights on another great goal becoming a member of the OECD, the final nod to its maturity as a nation. Mr. Cárdenas is confident that it will happen soon. “We have excellent macroeconomic policy, we are doing great in matters of tax policies, we are a very open country and we comply with all the standards required by the Good Practice Guidance of the OECD,” he concludes. “Although there are a few chapters where there is still some work left to do, we are working on them. Colombia is going through a very exciting time.  The OECD representatives themselves say it. We are definitely on the right track. This is going to be a reality.”



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