There is a sense of optimism in Colombia these days – like the sun shining after pouring rain in Bogota, the country’s Andean capital. While not under-estimating the uncertainties that remain (see below), businessmen, bankers, officials and investors believe the improvements in security during president Alvaro Uribe’s six years in government will last, and that this particular Latin American emerging economy is on a path of sustainable growth.
The clearest sign of renewed confidence is foreign direct investment. FDI was only $2bn in 2002, when Mr Uribe took office (he is now halfway through his second term), but it soared to $9bn in 2007, equivalent to 28% of the country’s 2007 gross national product (see interview, page 84). This year, FDI is forecast by Proexport, an official export, investment and tourism promotion agency, to reach $10bn.
These are the biggest FDI increases, real and forecast, in 2007 and 2008 in any Latin American country except Brazil; and, as well as improvements in security (significantly lower crime and kidnapping rates and success against drug barons and left-wing Farc guerillas), they reflect Colombia’s business environment, which is among the region’s most welcoming.
The economy has been opening up fast. Foreign banks are now able “to create a bank or buy Colombian banks under the same conditions, and with the same obligations, as a Colombian investor”, Jorge Londoño, president of Bancolombia, the largest bank in Colombia by deposits with a market share of over 18%, told The Banker from the bank’s headquarters in Medellin (total Colombian bank deposits on June 30, 2008 were 116,522bn pesos, equivalent to $57.7bn).
Rapid consolidation
Consolidation in the banking sector, which started during a banking crisis in the late 1990s and the difficult years that followed, has been rapid, with the total number of banks falling from 34 in 1999 to 17 today. Some of the biggest mergers, sales and acquisitions have taken place since 2005.
One of the most prominent of these was the December 2005 purchase of local mortgage bank Granahorrar by Spain’s BBVA, which established BBVA (which had already been in Colombia for some time, along with Spain’s Santander, which owns a small bank), as the country’s fourth-biggest bank. Subsequently the UK’s HSBC and Royal Bank of Scotland, and GE Money of the US, also acquired small banks in Colombia.
Low foreign influx
Currently 25% of banking assets are foreign-owned. That is significantly less than the percentages of banking assets owned by foreign banks in Mexico and Argentina, says Maria Cuellar, president of Asobancaria, Colombia’s banking association.
Local banking groups currently control 75% of the country’s banking assets, which totalled 173,547bn pesos at the end of June.
Local banks are giving their multinational competitors a run for their money. That has been evident from the fact that, with the exception of BBVA’s purchase, some of the biggest recent acquisitions have been by Colombian banks.
Take May 2007, when Bancolombia was a trailblazer, becoming the first Colombian bank to buy a Central American bank, Banco Agricola, El Salvador’s biggest bank, for $900m.
Banco de Bogota, Colombia’s second bank by deposits, meanwhile, bought consumer bank Megabanco in 2006, “doubling (overnight) our participation in consumer credits from 4% to 9% of the market”, says Alejandro Figueroa, who has been president of Banco de Bogota for 20 years.
| Oscar Cabrera, who took over as president of BBVA Colombia only seven months ago, is impressed by the local banks. He says: “The local banks are very competitive. This is certain. They are very well positioned. They are well connected with industrial groups. They do banking very well.” And they also have more branches than foreign groups. |
Roberto Albisetti, the World Bank’s International Finance Corporation (IFC) manager for Colombia, adds: “The distinguishing feature of the [banking] system is that local banks are very strong. They are not easy prey for foreign banks.”
Superior management also helped protect local banks from foreign takeovers during the late 1990s crisis. Also, the three largest domestic banking groups, Aval, which owns Banco de Bogota, Bancolombia and Davivienda (in third place), which control 65% of banking assets between them, have affiliates abroad so they do not have trouble accessing capital.
On top of that, in the year to the end of June 2008, Bancolombia had a return on equity, a key measure of profitability, of 41.5% which compares with a return-on-equity rate of 23.6% for the same 12 months at BBVA, Colombia’s biggest foreign-owned bank. In the first six months of 2008, the average return-on-equity rate of the whole banking system increased 28% compared with January to June 2007.
Mr Londoño, Bancolombia’s president, is convinced that, in the long term, foreign banks will increase their share of the market. “As globalisation advances, the relative weight of companies that are regional or multinational will increase,” he says.
No more mergers
However, Cesar Prado, the secretary-general of Superintendencia Financiera, Colombia’s financial regulator, says: “It is very difficult [currently] for there to be more mergers in the case of Colombian banks. It is not very probable that Colombian owners will want to give up their banks. Some analysts also believe local bank shares are over-valued.”
But after four years when the banking sector has been “very robust”, with significant profits and with credits growing very fast, “there are now factors of uncertainty”, Mr Prado warns. As well as the US free trade agreement, these uncertainties include the US presidential elections; a slowdown in the US economy (responsible for 40% of Colombia’s exports); developments in Venezuela (Colombia’s second most important trade partner after the US); and the international financial crisis.
The latter has pushed up the cost of loans, while the recent sharp increases in the prices of commodities, especially oil and food, is fuelling an annual inflation rate of 8%, when the central bank’s goal for 2008 is between 4% and 5%. Meanwhile, central bank measures to reduce inflation and liquidity, increasing interest rates (the benchmark interest rate is now a high 10%), and significantly raising commercial banks’ cash reserves with the central bank (from 6% of their total deposits in April 2007, to 10% in August 2007), have put a brake on economic and credit growth. GDP growth was 7.5% in 2007 but it is now about 4%. Simultaneously, bank credits, which surged 50% in 2007, grew 20% from January to the end of June this year and totalled 114,626bn pesos.
Consumer finance hit
The lending that has been hit the hardest by spiralling interest rates and declining demand is consumer finance, as well as credit card operations. Consumer credits, which increased their share of the total credit market from 18% to 28% between 2004 and 2007, due largely to a doubling in the nation’s per capita income, fell by more than 7% between January and June 2008, compared with the previous year.
At the same time, banks were obliged to increase their provisions by 64% in the first six months of 2008, compared with a year earlier, largely because of a high 6.8% non- performing loan (NPL) rate in consumer finance in 2007, as well as, to a lesser extent, higher NPL rates that same year in micro-credits, which currently represent only about 2% of all bank lending.
Credit booms
But in contrast to consumer finance and microcredit, corporate credits, especially to small and medium-sized companies (which predominate in Colombia and account for most of the country’s employment) grew more than 60% in the first six months of 2008, compared with the previous year. Corporate lending also only had a 2.6% NPL rate in 2007 despite representing 62% of all banking credits. The other key segment of the credit market, accounting for about 8% of all credits, is mortgage loans.
These mixed results, as banks come out of a four-year credit boom, have stoked a debate over whether the central bank’s measures are too drastic.
Colombia’s banking association, in its August bulletin, warns that the “recessive impacts of these (central bank) policies on economic growth in 2009 could turn out to be more than the government anticipates”.
But Mr Figueroa, president of Banco de Bogota, Colombia’s second bank, believes the central bank’s increases in interest rates and in banks’ cash reserves are needed, not just to halt inflation but “to break expectations of higher inflation”.
Mr Cabrera, president of BBVA Colombia, says that because bank activities are currently hemmed in by restrictive policies that reduce liquidity, and by government caps on interest rates for consumer finance, credit card loans and microcredits, which limit earnings, “the market banks are willing to operate in is more reduced”, as bankers concentrate on business with known (corporate) clients, eschewing riskier investments.
This last is particularly negative, many bankers think, in a country where only 31.5% of the population has a bank account, according to figures from Colombia’s banking association.
Moreover, Mr Cabrera says, there is a contradiction between a market that is “very big”, with a potential to grow in “every activity” from consumer finance to credit card operations to microfinance to developing capital markets and pension industries, and the banks’ current limited business (bank assets are equivalent to about 30% of GDP, which is even less than the 36% of GDP they represented before the 1998 banking crisis, says Mr Londoño).
Limited though current bank business is, the government is at least encouraging specialised banks to increase activity in microfinance, a crucial plank in a country where there is a 38% poverty rate and 59% of jobs are in the informal sector, according to government figures.
In addition to Banca de las Oportunidades, the government’s own microcredit institution launched a few years ago, there is Germany’s Procredit Holding, a specialised microcredit bank that obtained a licence in Colombia over the summer; and Spain’s Fundación BBVA and a New York-based non-governmental organisation will establish another microcredit bank before the end of this year which, though both founders are not-for-profit organisations, will be run sustainably, the owners insist.
THE FREE TRADE PACT
The Colombian government and ANDI, the country’s biggest private business association, were shocked last April when US Congress stalled ratification of a controversial free trade pact, the US-Colombian Trade Promotion Agreement, by denying it the “fast track” timetable under which most significant US free trade deals have been ratified since the 1970s.
| But another visit by Colombian president Alvaro Uribe to Washington, DC last month as well as by his trade minister and representatives of various Colombian chambers of commerce, is unlikely to change the opposition of the Democratic Party, which controls Congress. Congressional Democrats and Washington analysts say Democrats’ opposition to the proposed trade pact will continue at least during the current legislature, which ends in January. |
Among the reasons: Democrats are finding protectionism popular in a US presidential election dominated by economic anxieties. The Democratic Party dislikes the support shown by Mr Uribe towards the US president, George Bush in the past few years. And labour unions, with whom the Democratic Party is traditionally close, have long claimed trade union leaders are being killed in Colombia (40 trade unionists were killed in the first six months of this year, more than in the whole of 2007, America’s labour federation says).
On top of that, recent editorials in prominent US newspapers, including The New York Times and The Los Angeles Times appear to have strengthened the Democrats’ resolve against the pact. The commentators criticise Mr Uribe, notwithstanding his 80% domestic approval ratings, for not respecting democratic institutions, by not making it clear whether he will seek a third term in office – a move that will require changing Colombia’s constitution; and for allegedly trying to halt Supreme Court investigations into ‘para-politics’, focused on connections between the government and paramilitary groups.
Roberto Albisetti, the International Financial Corporation’s manager for Colombia, says, “Companies and individuals [in Colombia] do not grasp the political complexities on the US side” of the debate on the free trade agreement. Colombians might be forgiven.
Loyal ally
Meanwhile businessmen, bankers and officials in Bogota argue the trade pact is crucial because Columbia is one of the US’s most loyal allies, and because the agreement will boost growth and reduce poverty. It could also help weaken Colombia’s powerful drug barons and two guerilla movements.
Furthermore Colombia already benefits from duty-free access to the US for 92% of its exports, as a result of preferential access agreements. So the main changes brought about by ratifying the free trade pact will be to allow US farm and manufactured products duty-free access to Colombia, and to make Colombia’s current temporary trade benefits with the US permanent.
