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Country Profile: Oil risks cloud Colombia’s improved trade environment

IT starts like this. Pablo Escobar, perhaps the most notorious drug lord in the world, is smuggling contraband into Colombia when he is stopped by government agents who are determined to bring an end to his illegal trade.

Apart from letting them know that he knows where they live, Escobar (according to the writers) says this: “I am Pablo Emilio Escobar Gaviria. My eyes are everywhere. … You can stay calm and accept my deal. Or accept the consequences.”

That is the chilling opening scene of Narcos, the new critically acclaimed Netflix series and a drama that might just leave you with the impression that Colombia is a country sinking beneath a cocaine mountain, riddled with corruption, riven with revolutionary strife and essentially unfit for trade in the 21st century.

But that is no longer how things are in Colombia. Indeed, the word is that today’s Colombians are somewhat dismayed at the picture Narcos paints of their country, a state which has undergone considerable change, cleaned up its act and generally turned the former territory of drug cartels and smuggling barons into a thriving economy. It no longer relies on the cocaine trade for a substantial chunk of its gross domestic product.

According to Gabriela Castro Fontoura, an export adviser who travels frequently to Colombia on business: “Everybody in the world now wants to do business there. It’s stopped being the place you were afraid to mention in your export strategy.”

Transformation

Colombia has gone through substantial change. The drugs trade has migrated to Mexico (though still a risk), the violence of revolutionary guerrillas has been quelled (though not quite removed entirely), radical town planning projects have transformed the once no-go cities of Bogotá and Medellín and commodity exports – rather than illicit products and the cocaine business – are now driving the economy. Though it has its challenges, Colombia is a different place.

Indeed, the one-time drug king Pablo Escobar is no longer the country’s most famous son. Colombians would far rather the rest of the world focus on celebrities like novelist Gabriel Garcia Márquez, the rock star Shakira, Chelsea footballer Radamel Falcao, racing driver Juan Pablo Montoya or cyclist Nairo Quintana. Far from exporting illegal highs, Colombia is sending the world entertainment and sports stars. “Colombia has become cool,” says Castro Fontoura.

And it is also doing business. The government is investing and there are opportunities. In October UK Trade & Investment listed six major opportunities for British companies: road systems, bridge building, the construction of waste water treatment plants, cultural centres, consultancy for Bogotá airport and a new metro system.

According to Castro Fontoura, there are opportunities for trade in everything from luxury consumer goods to infrastructure development. British consumer goods companies like Mothercare even position themselves as premium brands. “There is no one sector that is growing; it’s all expanding,” she says.

The figures reveal their own story about the development of Colombia. In 2005 GDP stood at $146.5bn (£96bn) but in 2014 it reached $377bn. GDP growth in 2014 was 4.6% , the highest in the region. And even though most economists expect GDP to dip next year, potentially to 2.5%, it is still forecast to be the biggest among the region’s economies.

Colombia has also worked to create the right environment for trade. According to UKTI, it has put in 13 free trade agreements, with neighbours as well as the European Union. The World Bank’s Ease of Doing Business Index has Colombia ranked at 34, or first in Latin America, while UKTI lauds the fact that it can take as little as 11 days to set up a company. In the past ten years, Colombia has also frequently made the World Bank’s list of the most reformed economies. More importantly for UK exporters, Colombia has run a trade deficit every year (except 2011) since 2005. Last year’s $11.2bn deficit was by far the biggest, helped by falling oil prices.

Fuel on the fire

And it is in oil that weaknesses in the Colombian economy emerge. In the first nine months of 2015, the country’s exports declined by 34.9% compared to the same period in the previous year – due to plummeting oil prices. The value of exports from fuel and mining products fell by 58%, creating worrying times.

According to Jalil Munir, chief economist for Citibank in Bogotá, oil is a big short-term risk. He told Financial Director: “We have a big dependency on oil. The largest investor is the government so, of course, that affects government finances. Until last year 50% of exports were related to oil, so we have to find new products, commodities.”

A currency devaluation has come with the oil issue: 41% over the past 12 months, potentially a boon for exporters and tourism, but a stumbling block for a country that depends so heavily on consumer goods.

This is not just because Colombia’s burgeoning middle class relies on imported luxury items, but also because many believe there is a significant relationship between the country’s imports and its ability to export effectively. Jalil Munir points out that Citibank found a connection between high growth and imports when it looked at the issue.

“What explains GDP growth? To our surprise, it was not exports. Imports have a higher correlation with growth. It looks like the basket of goods we purchase, we turn into GDP. If you stop imports; you kill GDP growth,” he says.

And that’s because imports are substantially made up of capital goods. According to trading economics, 39% of total imports is made up of machinery and transport equipment, 17% is chemical-related products while fuel and mineral lubricants account for a further 10%. Manufactured products account for 22%. Barring the discovery of substantial new exports unconnected to imported capital goods, Colombia will need to continue bringing in plant, machinery and raw materials to keep its existing industry in action. UK exporters also have another factor in their favour – Colombia’s expected spending spree on infrastructure projects. The country suffers from poor roads and transport links. Journey times between its major centres are three, four or even five times what they are over comparable distances in mature economies. That means building and construction on a substantial scale.

In 2013 the government of Juan Manuel Santos (now in his second term) announced a $100bn infrastructure plan to be implemented over eight years from 2014 to 2022. Along with it would come what was dubbed the Fourth Generation of Road Concessions (Vias 4G). This was seen as a major opportunity by UKTI, which launched UK Colombia, a new organisation to promote business links between the two economies.

Locally, economists are sceptical about Colombia achieving the total spend, given its economic issues, but projects have been awarded and they are expected to have a significant impact on the economy in two years following the expected 2016 dip.

“We expect a rebound in 2017 because of the 4G projects,” says Daniel Valendia, chief economist at CreditCorp Capital in Colombia. “The government has auctioned 26 projects with capex of $30bn and we expect them to be executed in three to four years and impact positively on the economy.”

Conflict costs

However, there are other challenges on the horizon. Valendia points out the government is currently consulting on tax reforms that could see a rise in VAT and the possible introduction of a tax on dividends. Though there is speculation that the changes could be accompanied by a sweetener. “We think one proposal will be to decrease corporation tax,” he says. Jalil Munir believes Colombia’s withholding tax, currently at 14%, could be reduced to zero.

But there can be no discussion of Colombia without considering the 50-year war with the guerrillas of FARC, a conflict that has seen widespread destruction and loss of life and made parts of the country, in particular some rural provinces, no-go areas for government forces. A peace process is under way in Cuba and there is optimism that a final agreement can be reached (some even speculate that this will happen in as little as six months).

Peace has its own dividends, but Munir also sees a negative. The government is wedded to compensation for those who suffered during the conflict, with more than six million so far registered as victims and potential recipients. “It implies cost. Peace is more of an initial burden to fiscal policy,” says Munir.

Daniel Valendia points out that academics in Bogotá have calculated that the upside of peace could be an additional 2% on GDP as a result of investment driven by renewed optimism: “The net effect is very difficult to assess. We will have a higher financing need for the government, but at the same time it’s likely to post higher rates of growth in the coming years.” ?

Colombia mapKey facts:
In an area almo

st five times that of the UK, Colombia boasts 46 million consumers, and is the third biggest GDP in South America at $322bn.

According to the Colombian government, foreign direct investment (FDI) has increased five-fold and exports have quadrupled since 2000. Its economy has grown faster than the Latin American average and it is a key member of the expanding economic powerhouses of CIVETS – Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – which are characterised by their dynamism and high growth potential.

The UK’s Institute of Export says Britain is the second largest investor in Colombia after the United States, with recorded investments of US$5bn (£3.29bn) in the past ten years.

 

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