Tue | Jun 19, 2018

Colombia: As good as it gets

Published:Friday | September 14, 2012 | 12:00 AM
Navy soldiers pose for a photo with tourists at the old city in Cartagena, Colombia, Tuesday, April 11, 2012 ahead of the sixth Summit of the Americas. - File
Walter Molano, Guest Columnist

Walter Molano, Guest Columnist

The past decade was a boom for Colombia. The rearmament of the Colombian military, under Plan Colombia, allowed it to step up its fight against the insurgency.

Consequently, the military turned the tide of the conflict and was able to regain control of most of the countryside.

The jingoistic nationalism of President Alvaro Uribe restored the country's pride and improved investor sentiment.

Likewise, the commodity boom boosted foreign investment, bringing in the capital needed to modernise the country's infrastructure and productive capacity. This year, foreign direct investment is estimated at US$17 billion, versus US$2.5 billion a decade ago.

Multinationals are pouring money into mining and energy. Oil production is soaring, and Ecopetrol has US$80 billion worth of investment projects on the drawing boards. At the same time, Colombian banks are tapping the international capital markets and obtaining the resources to feed the ravenous consumer appetite.

New apartments are sprouting out of the ground. Brand new shopping centres are filled to capacity, and fleets of new cars navigate the congested streets of Bogota, Cali and Medellin.

Armed with credit cards, mortgages and car loans, Colombian households are buying the latest electronic gadgets and embarking on expensive vacations overseas. There are so many Colombians vacationing abroad, that US-owned carriers, such as JetBlue and Sprint, are adding direct routes to Miami, Ft Lauderdale and Orlando.

It's been more than half a century since the country enjoyed such prosperity. Unfortunately, the party may be coming to an end, as the commodity supercycle runs out of steam, consumers reach their debt limits and age-old frictions return to the surface.

Just as billions of dollars are channelling into key natural resource sectors, the commodity supercycle may be coming to an end.

The slowdown in China is taking hold, and some commodity sectors are in free fall. The biggest problem is the Chinese housing sector. Overbuilding and overspeculation led to a glut of expensive homes and buildings across the Chinese landscape.

Now, the economy needs to retrench. The trouble is the huge size of the construction sector in comparison with the rest of the economy.

At the peak of the US housing bubble, construction represented 4.5 per cent of GDP. It went down to 2.5 per cent of economic output, and the impact was devastating. The Chinese construction sector represents 20 per cent of the economy.

Therefore, the impact of a slowdown in Chinese construction may be more damaging than what happened in the US. This is why many senior members of the mining sector are warning that the commodity supercycle may be coming to an end. Investment projects and mergers are being cancelled, and equity prices for many mining concerns are in free fall.

The same fate may soon follow in the energy sector. Oil prices recently saw a spike, due to concerns about a possible conflict in the Middle East. But the burgeoning energy production in the US will soon pull the rug out from under oil prices.

These two trends will surely waylay the various investment projects destined for Colombia, and we could see the economy take a blow.

Colombian consumers are also reaching their limits. Non-performing loans are on the rise, and the liquidity squeeze in Europe will eventually reduce the availability of credit for Colombian financial institutions.

Yet, more importantly, President Juan Manuel Santos is under fire for his attempt to end the conflict with the guerilla movements.

Last week, the president announced the start of talks with representatives of the FARC and ELN that will be held in Havana and Oslo. In most countries, such an announcement would be welcomed by the population, but this has not been the case in Colombia.

Openly derided by his mentor and former boss, Alvaro Uribe, Santos has been criticised for being weak on the terrorists. He has also been criticised for mending fences with Venezuela's President Hugo Chávez and Ecuador's President Rafael Correa.

Colombia has bitter memories of previous failed peace attempts, but the situation is now different. In the past, the Colombian government was negotiating from a position of weakness, and now it is doing so from a bastion of strength.

It would be best for the country to put an end, once and for all, to the conflict. But, the conservative elements of Colombian society are too well-entrenched to make room for the acceptance and forgiveness of the leftist insurgents.

Therefore, Colombia will be forced to fester and stew with its demons at the very moment when the external environment is taking a turn for the worse.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. Send feedback to wmolano@bcpsecurities.com