BY CHRONICLE STAFF
At a time when foreign investors are increasingly growing concerned about the news from Latin America, Colombia has provided some welcome relief. Against strong odds, the government of President Alvaro Uribe has managed to significantly improve the security and thus investor confidence.
"The possibility of the re-election of the president gives us hope for a strong recovery of confidence in Colombia," says Gustavo Cañonero, chief Latin America economist at Deutsche Bank.
Colombia's economy has grown annually 4.0 percent or more the past three years and will likely do so again next year, according to the International Monetary Fund (IMF). The economy grew by 4.6 percent during the first half of 2005 and another 5.3 percent in the second half, according to DANE. By comparison, GDP expanded 1.5 percent in 2001, the last full year before Uribe assumed office. Meanwhile, inflation has declined and this year will likely end at 5.2 percent, the lowest rate in more than 25 years. Next year, inflation should fall further to 4.8 percent, the IMF forecasts.
The growth has been spurred by a combination of increased investments and exports and more recently a rebound in consumer spending, according to Colombian think-tank Fedesarollo.
"External balances remain strong and the economy is growing at a good pace," CSFB analyst Carola Sandy writes in a reserch report this month. "We remain optimistic about export performance in coming months."
Colombia's traditional exports (commodities such as coffee, oil, coal) and non-traditional exports (mainly industrial goods) should benefit from still robust global GDP growth, while imports are growing strongly in tandem with domestic demand without deteriorating the current account deficit, she points out.
Exports grew by 25.1 percent last year, while imports grew by 19.8 percent, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Two-way trade has continued to grow at strong levels this year.
Trade should expand further thanks to a free trade agreement being negotiated with the United States.
Foreign direct investment reached $3.0 billion last year, the best result since 1997, helped by such investments as the $1.0 billion acquisition of BellSouth Colombia's operations by Spanish Telefonica Moviles, the $364 million acquisition of airline Avianca by Brazilian Synergy and the $311 million acquisition by Philip Morris of the Coltabaco shares they didn't already own. (See Top 100 M&A's).
This year, foreign direct investments are expected to reach a new record, thanks to the $6.0 billion acquisition of Bavaria, Colombia's largest and South America's second-largest brewer, by SABMiller. Bavaria acquired 71.8 percent of the brewer in July for $4.8 billion and a further 25.2 percent stake in December for $1.2 billion.
"We are ... proud of the fact that, for the first time, Colombian interests will have such an important role in a company of the size and magnitude of SABMiller and that SABMiller will establish their South American regional headquarters in Bogotá," Bavaria Chairman Julio Mario Santo Domingo said in a statement in July.
Meanwhile other major sectors of the economy - ranging from automotive and telecommunications to tourism and advertising - are also seeing strong growth.
Car sales are up 27.9 percent in the one-year period ending in October, according to Colombian consultancy Econometria and Bear Stearns forecasts total car sales to reach 146,000 units by year-end 2005, the highest car sales reading on record.
"Looking ahead, now that the re-election of President Uribe has been given a go-ahead by the Constitutional Court, we see it as a likely occurrence that domestic demand will remain buoyant, on the back of lingering high-confidence readings," Bear Stearns analyst Alberto Bernal wrote in a research paper recently. "Therefore, we forecast that car sales will increase by yet another 23 percent year over year in 2006, totalling 180,000 units by the end of next year."
Colombia last year replaced Venezuela as Latin America's fourth-largest wireless market after seeing a 68.1 percent increase in the number of wireless subscribers, according to the International Telecommunications Union (ITU). (See our special report Record Wireless Sales)
Also tourism is growing strongly. Last year, Colombia posted a 24.2 percent increase in the number of international visitors and during the first half this year arrivals grew another 15.4 percent, according to the World Tourism Organisation (WTO). After much lobbying, Colombia in December won the venue for the 17th Assembly of the WTO for 2007. The meeting will be held in the resort city of Cartagena and gather 150 tourism ministers and more than 1,500 tourism industry officials.
Much of the economic improvements are the combination of improved business regulations and reduced crime and violence.
And Uribe, 53, gets most of the credit. The former mayor of Medellin, Colombia's second-largest city and the key business city, had ample experience before becoming president in August 2002. His many public jobs included director of civil aeronatics, secretary general of the Labor Ministry, governor of Antioquia state and senator.
As aeronatics director he decentralized the administration of Cali and Medellin airports and privatized the operation to collect airport and exit taxes. The latter led to reduced corruption and increased revenues for the government.
But it's his unique leadership style - combining hard work, a sharp mind, humor and humility - that has earned Uribe praise from businesspeople and ordinary Colombians alike. He appears just as ease with foreign business executives as with poor Colombian peasants and is often seen in the less-formal guayabera shirt instead of a suit as he travels throughout Colombia. He also awes foreign visitors with his detailed grasp of Colombian economics and data.
Uribe, who has a degree in administration and management as well as conflict negotiation from Harvard University, typically garners an approval rating of more than 70 percent in Colombia and is one of the most popular politicians in Latin America as well.
Thanks to an improvement in public institutions and the macro economic environment, Colombia jumped seven places on the latest ranking of the world's most competitive countries. No other Latin American country made as much progress, according to the Global Competitiveness Report 2005-2006 from the Swiss-based World Economic Forum. (See our special report Colombia More Competitive).
That follows news from the World Bank that Colombia was one of two countries in the world that made most progress in imrpoving its business climate last year.
"Slovakia and Colombia were the world's most successful investment climate reformers over the past year, creating electronic one-stop shops for new businesses, shrinking regulatory delays by weeks, improving credit registries, and increasing the flexibility of labor laws," the World Bank said in connection with the release of its Doing Business 2005 report in September 2004. The reforms have created 300,000 jobs in the formal economy, the bank says.
Since Uribe assumed office in August 2002, kidnappings are down by 79 percent to their lowest levels in a decade. Homicides are down 40 percent and reached the lowest rate in 20 years during the 12-month period ending in August 2005, according to official data. Meanwhile, incidents of terrorism have declined by 66 percent, with special improvements made in reducing attacks on infrastructure. The reduced terrorism is due to the successful war raged against leftist guerrillas, rightist paramilitary groups and drug traffickers. More than 18,000 members of illegal armed groups have been demobilized since Uribe became president. Drug confiscations are up, while coca cultivation has been significantly reduced.
Unlike his immediate predecessors, Uribe boosted the resources of Colombia's police and military to achieve these results. Between August 2002 and July this year, he added 83,000 uniformed soldiers, of which 24,000 have been assigned to the national police. While it long looked like Colombia's armed conflict was a stalemate between the government and the leftist guerrilla group FARC, armed insurgents are now on the defensive, giving real hope of ending the long-running conflict.
"Recent developments suggest that there could be further advances in the security front, which would boost domestic sentiment and Uribe's popularity," CSFB analyst Sandy says.
However, despite all the progress there are several major challenges that remain.
Colombia's personal tax rate of 38.5 percent is one of the highest in Latin America (behind Cuba and Chile). And despite the trade growth, Colombia is the third-least globalized country in Latin America, according to the Latin American Globalization Index of 17 countries. Exports as a percent of GDP only reached 19 percent in 2004, the second-lowest rate in the region.
And while unemployment has been falling, poverty rates are still high - 54.6 percent, according to Fedesarollo.
Last, but not least, fiscal performance needs to be imrpoved. "The economy still has a fiscal ... imbalance," Cañonero says. And the prospects for the passage of pending fiscal reforms are uncertain, Sandy points out. The March legislative elections will likely result in a fractured congress like today.
"The most likely outcome from the congressional elections is that there will be again various small factions, which will make support for any proposals difficult to garner," Sandy says. "Soon after being inaugurated, the next administration will have to push through congress a reform to the scheme of intergovernmental transfers and a tax reform (both reforms are key to contain the growth of the central government deficit)."
Yet, despite the challenges, it's clear that investors are feeling better about Uribe going into the elections as the leading favorite. According to a poll published by Semana magazine in October, Uribe would win the first round in May, garnering 56 percent of the votes.
"Colombia has changed spectacularly the past few years thanks to the current government," General Electric's international president Ferdinando "Nani" Beccalli-Falco said after meeting Uribe on December 1. "This government has made the country more attractive for investors."
For all his achievements this year, Alvaro Uribe has been selected by Latin Business Chronicle as Leader of the Year.
© Copyright Latin Business Chronicle.
Originally published in December 2005