How have low oil prices affected Colombia’s economy?
MA: While it is true that traditionally Colombia’s economy has been highly influenced by oil prices, in recent times the country has entered a period of diversification. Between 2013 and 2014 oil exports fell almost 50%, moving from USD60bn annually to around USD30bn, which resulted in an extremely high fiscal deficit. To counterbalance that, the government has tried to invest in two main sectors: agriculture, and tourism.
In 2016, tourism was for the first time the second largest source of government revenue – USD5bn annually, surpassing coal. The tourism industry has been growing at rate of 10% annually for the past decade, and still maintains impressive potential for new investment. In agriculture, Colombia is internationally known for its coffee, but non-traditional exports have also been growing around 10% year-on-year. These sectors, combined with positive exchange rate dynamics, have allowed Colombia to mitigate the negative effects of low oil prices.
However, we do see that oil prices have stabilized, even though we don’t see it ever hitting USD100 per barrel again, but it is reasonable to think in terms of USD40 per barrel, or even higher if the political tension in the Middle East continues. Having said that, Colombia has become more resilient to low oil prices. Ecopetrol, which accounts for 80% of Colombia’s oil production has become a more efficient company and is able to produce profits with a price as low as USD30 per barrel.
To what extent is the banking system insulated from some of these shifts?
MA: The banking system is pretty isolated from oil prices. According to data from July 2017, that sector represented less 1% of the bank’s credit portfolios. It is true that some companies struggled when oil prices fell, but this has already been priced into banks’ balance sheets. The companies that did struggle had very diversified funding bases, which included not only local banks but international investors as well. While the economic slowdown, the rise of unemployment, impacted the credit profile of the country, Colombian banks remained solid and stable institutions.
Additional investment, not only for Banco de Bogotá but other local lenders in Central America have helped us mitigate any adverse impact of an economic downturn in Colombia. Colombia remains exposed to the volatility of oil prices, but so does Central America – in the opposite direction, as they are net oil importers. The further down oil prices go, the better it is for the region. BAC Credomatic – a regional lender which Grupo Aval acquired in 2011 – helped us stabilize our revenue during this period.
What are the most prominent risks facing Colombia’s economy today?
MA: The most pressing international risk for Colombia is a more aggressive interest rate hiking cycle in the US. We see disassociation between what the markets are pricing in – that the FED will raise rate once or twice – and what Yellen, until recently, was saying – that we are likely to see at least one more rate hike this year and three more in 2018. However this manifests, it will likely have some impact on emerging markets and Colombia’s Treasury.
The other major risk is China, which is experimenting with a soft landing. While it continues to grow it is doing so around 6% and will eventually slow to 5%. The fear is a sudden deceleration in economic growth in China; together with India they represent almost 50% of global economic growth. In August 2015 we saw the impact China can have in the commodities markets, which affects most of Latin America, as almost all countries in the region are commodities exporters. This risks however are somewhat mitigated because both developed and emerging markets are experimenting with techniques that should generate a positive environment for trade – new trade deals being among them.
Locally the biggest risk we see is the upcoming elections. Colombia has become well known for being a politically stable nation, especially if you compare it to some of its neighbours. As a country, we have a track record of respecting democratic institutions, of electing business friendly governments and respecting international and local private investment. And while some investment decision might be delayed due to the elections, we believe citizens will cast their vote in a peaceful environment.
The fiscal deficit is another risk. In Colombia the law states that by 2022 the fiscal deficit should hit 1%; today it stands around 3.6%. Efforts to reach that target will become more urgent as time passes but with 2018 being an election year we don’t see the government making any significant adjustments to spending for obvious reasons. This means that the upcoming administration will have to significantly reduce public spending. We believe this will be balanced out; as inflation continues to fall the Central Bank will have more room to lower interest rates, which will give both companies and families higher spending capacity.
How will the peace accords impact Colombia’s economy?
MA: There is still a persistent degree of uncertainty around the peace accord. What we see in the medium and long term is investment will eventually reach more war-torn territories, both in agriculture and tourism. Entire regions will now see greater formal inclusion with the economy and this will impact the entire productive chain of the country. We suspect the benefits of the peace accords will be more evident after 2020. The banks will benefit because thousands of people will enter the formal economy.
With two outstanding Eurobonds, what is the bank’s funding strategy over the next year? In what way can local banks like Banco de Bogotá diversify their funding base?
JD: We have no plans to hit the international markets any time soon. Our last issuance covered all of our short- term funding needs. It is important to emphasise the opportunities that Colombian banks have at their disposal to diversify their funding base. The government has a good market-marker programme through placements of Treasury Bills (TES).
We have assets placed in every part of the curve and a very liquid market, which gives us a good reference to invest in the market. There is also a private debt market – local banks are securing funding in the form of deposit certificates, which also has a very liquid market.
Institutional investors in Colombia are constantly demanding fixed-income assets with up to three-year maturities and inflation-linked assets with up to a 10-year maturity. Some entities have also issued both senior and unsubordinated bonds of up to 10-years. In some rare cases we have seen 30-year issuances, which is very uncommon. In the short-term, local banks will have to secure longer term funding, as the payments for the 4G projects are due on the horizon. The good news is that there is space for lenders to secure this long-term funding in the local markets.
When it comes to international funding, until very recently banks had restrictions when it came to buying dollars to finance in pesos. Now we are able to fund with peso or dollars as long as we cover it up to a year. Local banks are starting to diversify their funding base; we no longer rely solely on the traditional local base and international issuances, but we can now get dollar-denominated loans and convert them to pesos.
We still believe that we could explore other markets, like Asia. We haven’t seen a lot of syndicated loans in the Asian markets and we see a lot of potential there. Diversifying, of course, comes at a cost, but it must be noted that in the past year it has become cheaper to secure funding in hard currencies and exchange them than to tap the local markets.
For now, we will remain in the local markets. We don’t have the need to issue bonds anytime soon. When you see the sovereign rates they seem reasonable, but for the local corporates there is a premium, though that should come down in the future. We are also studying medium-term green finance, which is a very niche and different market.
I do believe foreign investors are not exploiting all of Colombia’s potential. In the past, foreign investors had to pay a very high tax to invest in Colombia, this has now been reduced to 14%. While we see global capital holders have increased their public debt exposure – until August 2017 that growth was running around 25.7% – they are not buying private debt. In order to change this, the government has rolled out tax exemptions for pension funds from Chile, Peru, Mexico, and we believe Canada will be next. We hope to continue opening up new markets and diversifying our investor base.
