Colombian Economy Outline+ Sovereign Debt 19.03.2012

7/30/2019 Colombian Economy Outline+ Sovereign Debt 19.03.2012

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Author: Ana María Montoya Durana, Bogotá March 16th 2012

COLOMBIAN ECONOMIC ENVIRONMENT

1.1.1. GENERAL VISION

Colombia’s economy is relatively diversified by regional standards. The country is well endowed with

natural resources, including oil, coal and natural gas; energy, manufacturing and services sectors are also of

importance. Improved security combined with business-friendly investment rules led to a surge in foreign

direct investment (FDI).

The World Bank last Doing Business Report that measures 138 world economies shows that the Colombian

economy has been improving principally in three areas: facility for the creation of an enterprise, tax

reduction and facilities for tax payments and insolvency resolution. Colombia got the highest classification in

America Latina on foreign investment protection insolvency resolution1.

The 3rd edition of the annual LatinFinance Finance Ministry scorecard qualified Colombian minister finance

minister who arrives in June 2010 on the first place. Colombia has the proper reforms oriented towards

fiscal responsibility and infrastructure growth. The internal demand has been growing sometimes over 11%.

The Latin Finance ranking incorporates currency appreciation, inflation management, fiscal behavior,

independence towards political pressure, transparency and clarity in the communication to the markets, the

capital markets and financial innovation2.

Newsweek magazine declared in 2010 Colombia as the new star of the south3: after multiplying foreign

investment 5 times from 2002 to 2010 Colombia is learning how to manage the Dutch disease. The

Colombian Central Bank Chief, Jose Darío Uribe said on February 2012 that the Colombian economy grewbetween 5.6% and 6% in 2011

4due to strong investment in energy sector and is predicted to grow

approximately 5% in 20125

supported by investment that continues at energy sector, public works related to

reconstruction of large areas after the 2010 – 2011 floods, social housing construction and consumer

spending.

Colombia is part of the CIVETS, acronym that corresponds to Colombia together with Indonesia, Vietnam,

Egypt, Turkey and South Africa. Following The Intelligence Unit of The Economist, the CIVETS economies are

interesting for foreign investors due to projections of GDP increase around 4.5% annual for the next 20

years. This growth is over the estimation of G7 counties that is around 1.8% All of this countries have big and

young populations from 240 million people of Indonesia to 46.9 million people of Colombia. These

economies are diverse and doesn´t depend on basic products and except Egypt maintain inflation under

control. None has a high fiscal deficit despite it has grown after the last world financial crisis. Finally the

CIVETS are economies that weren´t very much impacted by the global financial crisis due to their accurate

policies a solid economical base.

1 “Economía colombiana, entre las mejores de América Latina”, El Mundo.com, 20 de Octubre de 2011

2 Schwartz, Karen “The right moves”, LatinFinance, Mar 1

st2012

3“Colombia becomes the New Star of the South”, Newsweek Magazine, Jul 16

th2010

4“Central bank sees Colombia's 2011 GDP growth at 5.6% to 6%”, Colombia Reports, February 13

th2012

5 Dan Molinski, “Colombia targets inflation as economy booms”, WSJ , January 20

th2012



1.1.2. ECONOMIC OUTLOOK

The economy expanded by 7.7 % in the third quarter of 2011. Demand-side growth is driven by private

consumption and investment with the financial, commerce and mining sectors as the main supply sideengines.

The GDP has been growing constantly in the last decade from 1.7% in 2001, with a yearly increase of around

1% reaching percentages around 5% during the years from 2004 to 2006 and touching its highest level of

6.9% in 2007. The decline of 2008 and 2009 was related to the economical cycle as well as the impact of the

World Financial crisis. The recovering of the growth has been outstanding since 2010 based principally on

Gross Capital Formation followed by Consumer Spending. Those two variables have been determinant for

Colombian economical growth during last decade.

Graph 1. Gross Domestic Product (GDP)

Constant Prices 2005. Percentage annual variation

-10

-5

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

GDP Consumer SpendingGCF ExportsImports GDP

Source: National Accounts, National Administrative Department of Statistics -DANE.



Unemployment policy: Supported by the economical growth, the unemployment rate has been descending

from 15.52% in 2002 to levels around 11% and 12% between 2005 and 2009, and continues descending to

10.8 % in 2011. Unemployment is one of the most important goals for the actual government. The month to

month variation got 9.8% on December 2011 and came around 9% since the last four months of this year.

Graph 2. Colombia Unemployment rate. National Total

Despite poverty has fallen since 2003, it remains high at 31% in 2010. The relatively slow response of

poverty to growth is explained by a highly unequal income distribution: the Gini coefficient is the 7th highest

worldwide6. The government goals are to reduce poverty to 22% in 2014

7. For this purpose the actual

government created the Administrative Department for Social Prosperity8

that includes the National Agency

for Overcoming Extreme Poverty-ANSPE.

Monetary and exchange rate policy: Colombia’s Central Bank is the only one in the region that is currently

tightening monetary policy on concerns about rising inflationary pressures, rapid housing price increases on

the backdrop of robust domestic demand. Three recent rate hikes elevated the monetary policy rate from

4.5 to 5.25 %. Consumer price inflation rose by 3.73 % during 2011, 0.7 percentage points higher than the

middle of the central bank's target, range driven primarily by consumer demand and higher food prices,

approaching the ceiling of the 2-4 % target range. The exchange rate has appreciated substantially in 2012,

as FDI surged on the back of strong fundamentals and portfolio inflows resumed as global risk aversion

6World Bank, Colombia – Country Br ief, 2011

7“Bajó la pobreza en Colombia pero la desigualdad no”, Portafolio.co, agosto 28 de 2011

8 Department for Social Prosperity at http://www.dps.gov.co/portal/default.aspx

14,9515,52

14,0513,65

11,79 12,03

11,17 11,27

12,00 11,76

10,80

8

9

10

11

12

1314

15

16

17

18

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: National Household Survey, National Administrative Department of Statistics - DANE



receded. To reduce short-term fluctuations in the exchange rate, the Central Bank has re-introduced a

dollar purchase program.

As shown in the graph below the inflation has been historically controlled oriented to be around 3% duringthe last two years. Colombia has a serious and consistent monetary policy oriented to manage inflation in

the actual growth context. The 2008 7.67% CPI over the middle target of 4% was properly managed at that

time, remaining inflation into the target during 2010 and 2011.

Graph.3. Consumer Price Index and Inflation Target 2000 – 2011

Source: CPI: DANE. Inflation Target: Board of Directors Central Bank of the Republic of Colombia

Fiscal policy: Colombia exhibited a very good fiscal performance in 2011 thanks to high economic growth,

favorable oil prices and tax reforms. The structural reform on the health system and the labor formalization

as well as tax reform were part of fiscal government policy during 2011. Tax revenues-to-GDP soared in 2011

by 1.3 %, as a result of tax reforms and reduced evasion. Colombia’s fiscal institutions are strong and were

further strengthened in 2011 through the approval of important fiscal reforms. Partly as a result of these

reforms, all three major rating agencies (S&P, Fitch, Moody’s) upgraded Colombia to investment grade in2011

9

The government deficit as a percentage of the GDP has been descending from – 4.1% in 2009 to – 2.9% in

2011. During the last decade the deficit touch its highest level of – 5.1% in 2002 descending annually in

average of 0.4 percentage points until 2008.

9 Ibid , World Bank

0,00

2,00

4,00

6,00

8,00

10,00

12,00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation Target

Consumer Price Index (CPI)



Graph 4. Central National Government - CNG. Income, Expenses & Balance COL $ Bill. and GDP %

International reserves: The international reserves have been growing constantly since 1999 as shown in

Graph 5. and have more than double its amount from USD 14,947 million in 2004 to USD 32.400 million in

2011 a record for the country; 3.1 times the short-term external debt balance by original maturity and 2.1times the repayments of external debt with residual maturity of one year.

Graph 5. Annual Evolution Balance of Payments

Source: Central Bank of the Republic of Colombia - Economic Studies Division.

-4,6-4,8

-5,1

-4,2 -4,5

-4,0

-3,4

-2,7

-2,3

-4,1-3,8

-2,9

0

20

40

60

80

100

120

-6,0

-5,0

-4,0

-3,0

-2,0

-1,0

0,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Income Expenses Fiscal Situation CNG

Source: Ministry of Finance and Public Credit, Republic of Colombia.

-15.000

-10.000

-5.000

0

5.000

10.000

15.000

20.000

25.000

30.000

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

U S D

M i l l i o n s

International Reserves Current Account



Trade in Goods & Services: The commercial balance has been historically negative, affecting the GDP in

around -3.5%. The principal commercial partners are U.S.A, followed by the European Union, the ALADI

(Latin America Association of Integration), and China.

Actually, Colombia has diverse in force free trade agreements with CAN (Peru, Ecuador and Bolivia),

MERCOSUR (Argentina, Paraguay, Uruguay and Brazil), Chile, G2 – Mexico, North Triangle (Honduras,

Guatemala, El Salvador), Switzerland (Since 1st

July 2011), Canada (Since 1st

August 2011). Also Colombia has

in execution free trade agreements with United States, European Union and EFTA (Switzerland, Iceland,

Norway and Liechtenstein) is negotiating FTA with South Korea, Panama, Turkey and Australia and in the

future will negotiate with Japan and the Gulf Community10

.

Foreign Investment: Actually Colombia has three in force bilateral agreements of investment with Peru,

Switzerland and Spain, five in execution agreements with United Kingdom, South Korea, India, Belgium and

China and is negotiating bilateral investment agreements with Kuwait, Japan and United Arab Emirates.

By sector, in the period of January – September 2011, the foreign direct investment was distributed as

shown in the Graph 7., highlighting 36% of the foreign investment in manufacturing, 26% in commerce,

restaurants and hotels, followed by 15% in mining and energy sector, 12% in transportation, storage and

communications and 11% in others.

Graph 7. Foreign Direct Investment in Colombia by sector January - September 2011

Source: Central Bank of the Republic of Colombia - Economic Studies Division.

Colombia has healthy levels of international reserves, a Flexible Credit Line with the IMF, a flexible exchange

rate, room to cut policy rates and moderate inflation rates. The deterioration of the external economical

environment hasn’t impact strongly the Colombian growth and the increase of the internal reserves. With

the actual government policy is expected to get a better The GINI coefficient, space for investment in

10 Colombian Foreign Affairs Ministry

Mining and

Energy Sector

15%

others

11%

Manufacturing36%

Commerce,

Restaurants,

Hotels

26%

Transportation,

Storage and

Communications

12%



infrastructure sector and policies oriented to increase the internal demand by the poverty reduction.

Colombia is moderately vulnerable on the fiscal, in the case of lower oil prices, preventing this vulnerability

the government has been promoting the natural gas exploration as well as energy investment both sectors

oriented to increase the country energy exports.

COLOMBIAN SOVEREIGN DEBT

1.2.1. BACKGROUND

Colombia has enjoyed in recent years a tradition of impeccable payments on its foreign debt, not only to

commercial banks but also to bondholders in the active bond market of sovereign debt, which dominates

since the eighties the scene of external f inancing economies for both developed and emerging economies.

The country has gone through almost all debt crises of the twentieth century and so far this twenty first

century, without any interruption of payments to commercial banks or bondholders.

Such position was confirmed at the end of 1980’s a time when major restructuring of bank debt through the

issuance of Brady Bonds11

was done. A total of 17 countries totaling $ 170 billion got involved in that

program, and Colombia did not issue a single one of them, despite maintaining several outstanding

Eurobond issues and so commercial bank loans.

1.2.2. THE COLOMBIAN FOREIGN DEBT. EVOLUTION 2003 – 2011

The size of the Colombian external debt projected by the Central Bank of the Republic of Colombia by the

end of 2011 is estimated at USD 73.466 million, a figure that represents a 93% increase for the period 2003

to 2011.

Out of this previous total, it corresponds to the public sector USD 41.889 million and USD 31.577 million to

the private sector, which means that the participation of the latter increased from 35.41% to 42.98% in the

period.

It is also observed in Graph 8 that the widespread availability of external credit that was being used by bothsectors at the same pace until 2009, changes its trend in the last two years when the private sector gains

share in front of the public one in these two periods.

11 Sachar-Brauer and Chen (2001), “Brady Bonds”.



Graph 8. Colombian External Debt Public vs. Private 2003 2011 (USD millions)

Source: Central Bank of the Republic of Colombia – COLOMBIAN EXTERNAL DEBT, Economic Studies Division. March

2012

Graph 9. Colombian External Debt % of GDP 2003 2011


2012

The year 2003 was a critical year in the external front when the size of the country's external debt was

above 40% of GDP, a situation that was successively attenuated to achieve stabilization, on indicators in a

range slightly above 20% of GDP, a condition which confirms, at the end of 2011, a prudent use of these

sources in front of a growing economy.

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

40,00%

45,00%

2003 2004 2005 2006 2007 2008 2009 2010 2011

% GDP

% GDP

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

2003 2004 2005 2006 2007 2008 2009 2010 2011

PRIVATE

PUBLIC



The composition of external debt by instrument, grouped into two categories, one being bonds and the

other loans including commercial loans, long and short term bank debt and others, showed in the graph

below, illustrates that the latter increased from USD 25.553 million to USD 48,199 USD million, representingan 88.62% from 2003 to 2011.

Graph 10. Colombian External Debt-Loans vs Bonds 2003 2011 (USD millions)


2012

But the most significant aspect to highlight is the 102% increase that had the bonds as a funding source,

which have contributed to improve the profile of the Colombian external debt with a transformation of

longer terms and lower rates as it will be described at the end of this apart.

Graph 11, shown below, reveals that that country's foreign debt financed by bonds increased from USD

12.511 million in 2003 to a sum more than double or $ 25.267 million at the end of 2011.

Graph 11. Colombian External Debt-Bonds 2003 2011 (USD millions)


2012

0

5.000

10.000

15.000

20.000

25.000

30.000

2003 2004 2005 2006 2007 2008 2009 2010 2011

BONDS

BONDS

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

2003 2004 2005 2006 2007 2008 2009 2010 2011

BONDS

LOANS



1.2.3 COLOMBIAN SOVEREIGN DEBT. BEHAVIOR: SPREADS AND RATINGS. 2003 – 2011

When it comes to talk about emerging market bonds the obligated reference is the EMBI12

Global

composite, as calculated by JPMorgan, to represent the sovereign spread over U.S. Treasuries. The index was

introduced in August 1999, and is the most comprehensive emerging markets debt benchmark.

The Colombian sovereign spread, represented by the EMBI Global Colombia composite, is graphed in figure

1, for the time period from 2003 to 2011. The spread during this period has experienced two peaks and two

bottoms, has come to a high of 722 on 02/13/2003, to a low of 93 on 06/21/2007, and computes an average

price of 287.38 over the period shown.

Peaks are explained by to two large shocks. The first one due to the election Lula da Silva as Brazilian

President, who in earlier campaign, threatened to default on the Brazilian debt. The second one reflects the

impact of the 2008 debt crisis.

The Brazilian crisis had a severe impact on Colombian spreads, because the country was perceived with

economic structural similarities to Brazil, nevertheless Brazilian spread reached a high of 2,500 basis points,

while Colombia´s slightly reached 1,000 in September 2002 and started a notorious advance as Brazil

committed himself to service the debt fully, achieving an exceptional 93 mark on 2007.

Figure 1. EMBI Global Colombia composite 2003- 2011

Source: Ultrabursátiles S.A. Comisionista de Bolsa.

The 2008 economic crisis which was driven by a housing bubble, excessive debt leverage and the crash of

the subprime debt market widened significantly spreads for emerging markets but the impact on Colombian´s, as shown in graph 1.2.5, though notable did not reached the peak of the period 2003 2011 and

remained well below the 1,000 mark during the Brazilian crisis.

12 EMBI: Emerging Market Bond Index



The period analyzed also exposes the lowest spread of 93 in mid 2007, which contrasts with the BB+ credit

rating for Colombia by Standard & Poor’s, an speculative grade at that time (Table 1), but one to be traded

for an investment grade economy.

Table 1. Credit rating history of Colombia

Effective on Credit Rating

S&P

16/03/2011 BBB-

05/03/2007 BB+

24/05/2000 BB

21/09/1999 BB+

21/06/1993 BBB-

Moody's

31/05/2011 Baa3

19/06/2008 Ba1

11/08/1999 Ba209/06/1999 Baa3

18/12/1998 Baa3

30/09/1998 Baa3

15/09/1995 Baa3

25/05/1995 Ba1

04/08/1993 Ba1

Fitch

22/06/2011 BBB-

21/06/2007 BB+

10/01/2002 BB+

19/05/2000 BB+Source: Corredores Asociados S.A. Comisionistas de Bolsa

Colombia is currently rated as an Investment Grade or BBB- with a stable outlook by Standard & Poor’s.

Fiscal strength, organized financial planning and the country’s projected economic growth were the reasons

that the risk assessment agency underlined on March 2011, when it upgraded Colombian sovereign debt.

Fitch also rated Colombia as an Investment Grade or BBB-. In recent declarations to Reuters Gabriel Torres

one of the vice-presidents of Moody´s mentioned a positive perspective for the country13

.

1.2.4 COLOMBIAN SOVEREIGN DEBT. ISSUES AND PRICING.

Current spreads over the US treasury bonds rate for five outstanding Colombian sovereign debt issues are

shown in Table 2, reflecting higher prices and very low spreads 44,9 and 83,9 basis points (bp) especially for

the shortest durations.

Other spreads like 155,4 bp and 278,6 bp for bonds with maturities on 2020 and 2028 respectively are also a

sign of active demand for Colombian debt in the market at the moment.

13A Moodys “le entusiasma” el panorama económico de Colombia, Dinero.com, 4 de enero de 2012



Table 2. Colombian sovereign debt current spreads

Issue Duration (yrs) Maturity Coupon Yield Price Spread Over T-bills (bp)

COL28 9,483 3/9/2028 11,85% 4,24% 187,6911 278,6

COL16 3,372 2/15/2016 8,70% 3,00% 120,845 315,9

COL13 0,790 1/15/2013 10,75% 1,21% 107,75 44,9

COL20 5,813 2/25/2020 11,75% 3,28% 158,75 155,4

COL14 2,484 12/22/2014 8,25% 1,46% 118,275 83,9

Source: Ultrabursátiles S.A. Comisionista de Bolsa.

While the markets were responding to the difficult situation in Europe in 2011, the Republic of Colombia

successfully issued USD 2 billion in a new global bond with a maturity of 10 years in the international

markets.

The transaction faced a demand of USD 7.3 billion and a participation of 293 investor accounts from the US,Europe, Latin America and others and marked a 130 basis points spread over the US treasury bonds rate,

which was the lowest ever seen in Colombian history. (See Table 3)

But again at the beginning of 2012 the Colombian government repeated last year success, this time with a

selling of USD 1.5 billion of bonds due 2041 to yield 4.96 with a 6,125% coupon rate, marked at 165 basis

points over US T-bills as shown in Table 3. At the end, 165 investors participated for a total demand for the

securities of USD 3.6 billion.

Table 3. Colombian sovereign debt latest issues

Issue Ammount USD Maturity Coupon Spread Over T-bills (bp)COL21 $ 2.000.000.000,00 07/12/2021 4,375% 130,0

COL41 $ 1.500.000.000,00 01/18/2041 6,125% 165,0

Source: Ministry of Finance and Public Credit, Republic of Colombia.

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Colombian Economy Outline+ Sovereign Debt 19.03.2012