How have low oil prices affected the Colombian economy?
MA: While it is true that the Colombian economy has traditionally been strongly influenced by oil prices, in recent times the country has entered a period of diversification. Between 2013 and 2014, oil exports fell by almost 50%, from $ 60 billion per year to around $ 30 billion, resulting in an extremely high budget deficit. To counteract this, the government has tried to invest in two main sectors: agriculture and tourism.
In 2016, tourism was the government’s second-largest source of revenue for the first time – $ 5 billion a year, surpassing coal. The tourism industry has grown at 10% per year over the past decade and still retains impressive potential for new investment. In agriculture, Colombia is internationally known for its coffee, but non-traditional exports have also grown by around 10% year-on-year. These sectors, combined with positive exchange rate dynamics, have enabled Colombia to mitigate the negative effects of low oil prices.
However, we find that oil prices have stabilized even though we never see them ever again reaching $ 100 a barrel, but it is reasonable to think in terms of $ 40 a barrel, if not more if the political tension in the Middle Orient continues. However, Colombia has become more resistant to low oil prices. Ecopetrol, which accounts for 80% of Colombia’s oil production, has become a more efficient business and is able to generate profit with a price as low as $ 30 per barrel.
How insulated is the banking system from some of these changes?
MA: The banking system is quite isolated from oil prices. According to data from July 2017, this sector represented less than 1% of the bank’s credit portfolios. It is true that some companies have struggled with the fall in oil prices, but this has already been factored into bank balance sheets. The struggling companies had very diverse funding bases, which included not only local banks but also international investors. While the economic slowdown and rising unemployment impacted the country’s credit profile, Colombian banks have remained strong and stable institutions.
Additional investments, not only for Banco de Bogotá but also for other local lenders in Central America, have helped us to mitigate any negative impact of an economic downturn in Colombia. Colombia remains exposed to oil price volatility, but so does Central America – in reverse, as it is a net importer of oil. The more oil prices fall, the better it is for the region. BAC Credomatic – a regional lender that Grupo Aval acquired in 2011 – helped us stabilize our income during this period.
What are the most important risks facing the Colombian economy today?
MA: The most pressing international risk for Colombia is a more aggressive interest rate hike cycle in the United States. We’re seeing a dissociation between what the markets are pricing – that the Fed will hike rates once or twice – and what Yellen, until recently, was saying – that we’re likely to see at least one more rate hike this year and three more in 2018 Either way, this will likely impact emerging markets and the Colombian Treasury.
The other major risk is China, which is experiencing a soft landing. As it continues to grow it does around 6% and will eventually slow down to 5%. The fear is a sudden deceleration of economic growth in China; together with India, they represent nearly 50% of world economic growth. In August 2015, we saw the impact that China can have on commodity markets, which affects most of Latin America as almost all countries in the region are commodity exporters. These risks are somewhat mitigated, however, as developed and emerging markets experiment with techniques that should generate a positive environment for trade – new trade agreements are one of them.
Locally, the biggest risk we see is the next election. Colombia has become well known for being a politically stable nation, especially when you compare it to some of its neighbors. As a country, we are used to respecting democratic institutions, electing business-friendly governments and respecting international and local private investment. And although some investment decisions may be delayed due to elections, we believe citizens will vote in a peaceful environment.
Another risk is the budget deficit. In Colombia, the law stipulates that by 2022, the budget deficit should reach 1%; it is now around 3.6%. Efforts to achieve this goal will become more urgent over time, but as 2018 is an election year, we don’t see the government making any significant spending adjustments for obvious reasons. This means that the next administration will have to cut public spending considerably. We think it will be balanced; as inflation continues to fall, the central bank will have more room to lower interest rates, giving businesses and families greater spending capacity.
What will be the impact of the peace agreements on the Colombian economy?
MA: There is still a lingering degree of uncertainty around the peace agreement. What we are seeing in the medium to long term is that investments will eventually reach more war-torn territories, both in agriculture and tourism. Entire regions will now see greater formal inclusion in the economy, which will impact the entire production chain of the country. We believe that the benefits of the peace accords will be more evident after 2020. Banks will benefit as thousands of people enter the formal economy.
With two Eurobonds in circulation, what is the bank’s financing strategy for the coming year? How can local banks like Banco de Bogotá diversify their funding base?
JD: We don’t intend to reach international markets anytime soon. Our last issue covered all of our short-term financing needs. It is important to highlight the opportunities available to Colombian banks to diversify their funding base. The government has a good market marker program through the placement of treasury bills (TES).
We have assets placed in every part of the curve and a very liquid market, which gives us a good benchmark for investing in the market. There is also a private debt market – local banks finance themselves in the form of certificates of deposit, which also has a very liquid market.
Institutional investors in Colombia consistently demand fixed income assets with maturities of up to three years and inflation-linked assets with maturities of up to 10 years. Some entities have also issued senior and unsubordinated bonds with terms of up to 10 years. In rare cases, we have seen shows at 30, which is very rare. In the short term, local banks will need to secure longer term funding, as payments for 4G projects are due on the horizon. The good news is that there is room for lenders to secure this long-term financing in local markets.
When it comes to international financing, until recently, banks had restrictions when it came to buying dollars to finance themselves in pesos. Now we are able to fund in peso or dollars as long as we cover it for up to one year. Local banks are starting to diversify their funding base; we no longer rely solely on the traditional local base and international issues, but we can now get loans denominated in dollars and convert them into pesos.
We still think we could explore other markets, like Asia. We haven’t seen a lot of syndicated loans in Asian markets and we see a lot of potential there. Diversification does come at a cost, of course, but it is clear that over the past year it has become cheaper to obtain and trade hard currency finance than to tap local markets.
For now, we will stay in local markets. We don’t need to issue bonds anytime soon. When you see sovereign rates they look reasonable, but for local businesses there is a premium, although it should go down in the future. We’re also looking at medium-term green finance, which is a very niche and different market.
I believe that foreign investors are not exploiting the full potential of Colombia. In the past, foreign investors had to pay a very high tax to invest in Colombia, this is now reduced to 14%. While we see that global capital holders have increased their exposure to public debt – until August 2017 this growth was around 25.7% – they are not buying private debt. In order to change that, the government has put in place tax exemptions for pension funds in Chile, Peru, Mexico, and we believe Canada will be next. We hope to continue to open up new markets and diversify our investor base.