Colombia’s capital markets may be on the up but legal barriers are hindering their development. Jason Mitchell reports.

Colombia’s capital markets are a few years into recovery from an economic crisis that lasted from 1998 to 2002. The growth in pension funds and financial stability, as well as a relatively benign political climate, look set to see an expansion in issuance and trading over the next few years, although major impediments remain, including the need for changes in Colombian law and the need for increased disintermediation.

According to the International Monetary Fund, outstanding corporate bonds in Colombia amounted to only 0.9% of gross domestic product last year, although this marked an increase on 2004 (0.6%). Highlighting the fact that the capital markets are only gradually recuperating, the figure for 1993 was also 0.6%.

Colombian stockbroker Suvalor notes that private bond issuance last year amounted to 1300bn pesos ($560m); in 2004 it was 3300bn pesos; and in 2003, 500bn pesos.

Camila Pérez, head of research at Suvalor, says: “The Colombian bond market is still in recovery stage. Bond issuance last year and during 2004 was stronger than 2003 and the period during the economic crisis.”

However, she adds that issuance was exceptionally high in 2004 because the beverages and soft drinks producer Bavaria placed about 1000bn pesos of bonds on the market.

Trading volumes

A better indication of the development of the market are trading volumes. “If you look at the annual volumes of trading in the secondary market for corporate bonds that increased to 49,000bn pesos last year, up from 40,000bn pesos in 2004 and 24,300bn pesos in 2003,” says Ms Pérez.

Colombia, with a population of 43 million, has about the equivalent of $13bn in private pension money. Although a small amount, it is doubling in size every three years, according to Felipe Gómez, director of research of Porvenir, the biggest private pension fund in the country with the equivalent of $5.4bn under management.

Still, there are impediments to the entry of these funds into the bond market.

“The bigger amount of funds available should help the bond markets. However, Colombian law means that private pension funds do not have to match their long-term assets and liabilities and there is not such a great incentive to buy long-term bonds,” says Mr Gómez. “We are punished if our funds do not meet certain performance targets. In this way, there has been a greater tendency to invest in equities.”

Another legal obstacle for the growth of the local capital markets is that President Alvaro Uribe’s government introduced capital restrictions, which prevent foreigners repatriating any of their investments during the first year.

Meanwhile, like capital markets all over the world, plentiful liquidity has been a major boost, as has a strong local economy.

The biggest bond issue in Colombia so far this year, in January, was by the Central American Bank of Economic Integration, the Honduras-based multilateral promoting economic development in central America, which raised 460bn pesos with an interest rate of 7.26% for a term of 9.7 years. Furthermore, in February, Comcel, the Colombian mobile phone company, issued a 10-year bond for 450bn pesos at 7.59%.

Bond issuance in Colombia has been restricted to about 20 listed companies, say analysts, as many big family-owned companies prefer to take out bank credit.

Mr Gómez says that Colombian companies can get bank credit on very good terms and have not felt the need to issue bonds. “Banks tell companies it is better to take out a loan because you can pre-pay it early and you don’t have all the supervisory issues that you have with bond issuance,” he says.

Shunning dollars

Colombia has not issued many dollar-denominated corporate bonds since the late-1990s, in part because many companies had high levels of indebtedness in these instruments and were burned when the peso devalued in 1999, but also because of the liquidity available in the local currency.

Interestingly, a high proportion of the bonds issued in Colombia have been mortgage-backed securities, backed by multilateral organisations. In 2002, the International Finance Corporation, part of the World Bank, got together with local financial institutions, including Banco Davivienda and BCSC, to set up Titularizadora Colombiana, the country’s first secondary mortgage market company.

The biggest issue in 2005 was a residential mortgage-backed security by Titularizadora Colombiana for the equivalent of $201m.

Atul Mehta, the IFC’s director for Latin America and the Caribbean, says: “I think our help with a number of securitisations and corporate bonds in Colombia has set benchmarks enabling similar transactions to take place by other companies.”

Colombia has a long way to go before it enjoys as deep capital markets as other Latin American countries – such as Chile and Mexico – but its bond markets are heading that way.


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