Colombia financial markets profile 2008-09

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1. Colombia's crisis made worse by diversification deficit

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Colombia has long been known as a politically volatile nation. Over the past few years - thanks largely to roller-coaster crude oil prices - it appears to have developed an economy to match.

Like other emerging nations over the past 12 months, Colombia had seen rapid economic growth turn quickly to slump following the credit crunch that began in the summer of 2008. In that it mirrors fellow frontier market nations Kenya and Vietnam in seeing booming export markets, fuelled by growing foreign investment, suddenly slugged by falling commodity prices. Colombia is currently in the midst of a downturn. Its economy shrank in the fourth quarter of 2008 and the government in March 2009 slashed its 2009 growth estimate by more than half.[1] Financial analysts expect growth to be barely 1% in 2009 while the International Monetary Fund (IMF) predicts growth in Latin America as whole - which contains most of Colombia's trading partners - will be barely positive in 2009.[2]

As in other stricken frontier markets, the Central Bank of Colombia (CBC) has made repeated interventions to prop the currency up throughout the 2008-2009 financial crisis. First, in October 2008, the bank lifted controls over foreign borrowing that had caused funds to be held for 6 months by the CBC before being released to market. The move was aimed at stemming the flow of forex from Colombia's credit markets and bolstering the sliding Colombian peso.[3]

The CBC then embarked on a round of rate-slashing that cut official interest rates four times to the current level of 7.0%. Nonetheless, CBC governor José Darío Uribe in April 2009 predicted further contraction amid unexpectedly serious economic weakening and steadily depreciating Colombian peso.[4] Financial analysts agree, predicting further depreciation of the peso of around 10% by the end of 2009.[5]

And as with Vietnam's roller-coaster economic growth run over recent years, the CBC had raised official interest rates to double figures in early 2008 in an effort to stem growing inflation in Colombia. That following a period of strong growth in Colombia driven largely by rising global prices for crude oil in 2007-2008 that are only now recovering from a hard fall in late 2008.

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Oil makes up almost one quarter of all Colombia's exports, Bloomberg reported, and its price has dropped more than 60% from a high in July 2008 of $147.27 per barrel to $58 per barrel on May 8, 2009.[6] The country's largest listed company on the Colombia Stock Exchange, oil major Ecopetrol, is a global top-50 petroleum giant whose combined capitalization and liquidity comprised more than 37% of the CBC's IGBC Index as of late 2008.[7] The Colombian economy's heavy reliance on oil prices also extends to its trading-partner neigbors in South America, in particular oil-rich Venezuela. Colombian exports to Venezuela make up 17% of total exports, and Venezuela in turns relies on oil for more than 90% of its total exports.[8] That means the recent weakening of oil
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prices has also had a major knock-on effect in Colombia because Venezuela, hit even harder by the oil price falls, has slashed imports from Colombia.

And to add insult to injury, the Colombian government in November was forced to put down riots after perpetrators of a Ponzi scheme fleeced investors in the south-western Cauca province.[9] Unlike that perpetrated by American money manager Bernard Madoff on his largely very wealthy customers, the Cauca scammers targeted ordinary Colombians unwilling to use retail bank deposits because of high fees

Nonetheless, the Colombian government remains confident about the rest of this year. Finance Minister Oscar Zuluaga (right) told a recent Reuters conference that he believed Colombia could achieve zero growth in 2009 and 1.3% growth in 2010 despite current negative numbers.[10] Zuluaga admitted, however, that his predictions depended on a recovery in Colombian exports and global commodity prices.

Similar predictions for other frontier-market economies in 2010 and later will likely have similar contingencies.


2. Oil, banking behemoths dominate Colombian equities market

Colombian equities investors are likely bracing for a another slide in the stock market after a promising start to 2009. And as usual, it will take bad news at only a few major listed Colombian companies to bring a downer on the stock market as a whole.

Colombian stock analysts polled in April 2009 by newsagency Dow Jones expect the IGBC Index to give up the early gains and fall as much as 20% for 2009 despite a first-quarter gain of more than 6%.[11] The IGBC Index fell 28% over 2008 as the global financial crisis wiped away gains from the spectacular run-up of crude oil prices earlier in the year (see above story).

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In fact, the performance since mid-2008 of the Colombia Stock Exchange (CSE), also known by its Spanish acronym BVC, and its benchmark stock indicator the IGBC Index has mirrored - without the huge spike - the price of crude oil over the same period. Up, then down, and now struggling uncertainly upwards again.

That's appropriate considering that more than a third of the IGBC's weighting as of late 2008 and some 60% of daily trading volume on the CSE,[12] consisted of a single listed stock: state-owned petroleum giant Ecopetrol. Big movements in the share price of Ecopetrol have a significant impact on the IGBC Index and the Colombian stock market in general. Ecopetrol's performance, in turn, is directly impacted by the state of the volatile global oil market.

Ecopetrol is Colombia's largest publicly-traded listed company by market capitalization and makes up around 37% of the weighting of the IGBC Index, according to a
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September 2008 survey by blogsite InakolaNews.com.[13] The IGBC weighting of Ecopetrol, referred to by IncakolaNews as "Colombia's own mini-Petrobras", was more than three times that of second-weighted Bancolombia, whose combined preferred and ordinary shares comprised just under 12%.

Third-placed Suramericana de Inversiones registered a 10.11% weighting, giving Colombia's top-three listed corporations just under 60% of the total weight of the stock index, IncakolaNews reports. The same three companies top the weightings of the the newly released Colombia-based Global X/InterBolsa FTSE Colombia 20 ETF exchange-traded fund. [14]

With such an overweighting of Colombian stocks' main benchmark, bad news for Ecopetrol is often worse news for the market as a whole. The recent fall in oil prices has led to gloomy profit forecasts for Ecopetrol through the rest of 2009 and even beyond from Colombian stock analysts without either a surge in oil prices or a major new discovery.[15] That has concided with similar downbeat outlooks on Colombian equities in general.

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Second-weighted Bancolombia, the country's largest retail bank with about 20% of all banking deposits and checking account, may do a little better. Bancolombia avoided the worst of the 2008 financial crisis through conservative lending habits, posting an 18% earnings increase in 2008,[16] but the bank's stock price nonetheless fell 31% from September 2008 to April 2009.[17] Over the same period, the IGBC Index has fallen around 15% from 9010 to 7611, making Bancolombia look oversold.[18]

Investors in Colombian stock-tracking ETFs and similar vehicles who opt for the FTSE Colombia 20 Index rather than the "official" IGBC Index could be more likely to benefit from any possible Bancolombia rally in 2009. Bancolombia's combined preferred and ordinary shares have the same weighting in the FTSE Index as the much larger Ecopetrol (20%), compared to the factor-of-three difference in the two stocks' IGBC Index weighting.[19]

But with analysts predicting 10-20% stock-market falls for Colombia in 2009, neither lending at interest nor drilling for more fossil fuels looks like the stock market savior.


3. Inflation recedes, currency slides as central bank cuts rates

Despite plenty of activity in response by the Central Bank of Colombia (CBC), Colombia's currency has been on a losing value streak since the credit crunch began in the summer of 2008. But after a tough start to 2009, the Colombian peso may at last be on an upswing.

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The peso began shedding significant value in September 2008 following the collapse of Lehman Brothers and the onset of the financial crisis. That prompted the CBC a month later to scrap rules that forced many foreign borrowers to deposit funds with the CBC for six months to help bolster the sliding peso.[20] The currency responded by sliding further to a low of 2,422 to the US dollar by November 3, 2009.[21]

As in other frontier markets like Vietnam, Colombia's previously-overheated economy had ramped up inflation and discouraged the central bank from wielding interest rates to bolster the currency. But on December 17, 2008, the CBC made the first of its four consecutive interest rate cuts, knocking 50 basis points off the intervention rate to 9.5%. The central bank cited inflation's slide in its decision to begin cutting interest rates.[22]

CBC Governor José Darío Uribe recently told Dow Jones that Colombian interest rates could continue to fall over the year from the current rate (as of May 11, 2009) of 7.0% as the inflation threat recedes.[23] Colombian financial analysts surveyed by the CBC predicted interest rates to end 2009 at 4.48%, down 17 basis points from one month ago.[24] At the end of 2008 Colombia's inflation stood at 7.67%.

Expectations of interest rates and inflation in Colombia perhaps both declining to below 5% by year-end has spurred Colombia's large fixed income market. Recent news from the central bank has increased investors' appetite for peso-denomonated Treasury bonds, known as TES, with yields on TES in early April declining on three-year, five-year and 10-year issues on anticipated lower rates.[25]

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Recession aside, more positive financial forecasts for Colombia appear to have given its sickly currency a welcome boost recently. The Colombian peso rose 17% against the dollar in the two months to May 11 and the CBC recently reported that purchased $179.9 million worth of put options in March to slow its rise.[26] Prior to its recent bump the Colombian peso had been the poorest-performing of Latin America's major currencies, declining 6.4% in the first quarter of 2009.[27]
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And the peso rose sharply in late April 2009 after the Colombian government said it would emulate frontier markets like Hungary and seek a line of credit from the International Monetary Fund (IMF). That news strengthened the peso 2% to COP2,330 to the US dollar in a single day.[28] A CBC monthly survey of financial analysts in mid-May revealed a average forecast for the Colombian peso of 2,395 to the US dollar by the end of 2009.[29]

That compares to levels like COP2,600 to the dollar that analysts Morgan Stanley were predicting for the peso's 2009 year-end value five months ago.[30] Back then analysts were expecting Colombia to fall into a deep, region-wide recession throughout 2009 as major trading partners Argentina and Venezuela dragged Colombia's GDP growth negative.

Anticipated increasing consumer demand and rising crude oil prices could make the difference.

References

  1. BBVA Colombia Unit 1Q Net Profit Rises 21% To COP85.2Bln. Dow Jones.
  2. ECONOMY: The Colombian case. Daily Times (Pakistan).
  3. Colombia's Central Bank Lifts Controls on Foreign Borrowing. Bloomberg.
  4. Colombia Bank Says GDP Weakening Faster Than Expected. Bloomberg.
  5. Colombian Peso Sinks Under Weight of Venezuela Crash. Bloomberg.
  6. Oil prices bounce above 58 dollars per barrel. AFP.
  7. The Colombia stock market and IGBC index: An overview. IncakolaNews.com.
  8. Colombian Peso Sinks Under Weight of Venezuela Crash. Bloomberg.
  9. Colombia riots over pyramid swindles. The Independent (U.K.).
  10. Colombia seeks recovery in 2nd half 2009. Reuters.
  11. Colombia 2Q Stock Outlook: Weak Earnings To Crimp Recovery. Dow Jones Newswires.
  12. Colombian Government Eliminated Capital Controls For Equities. RGE Monitor.
  13. The Colombia stock market and IGBC index: An overview. IncaKolaNews.com.
  14. Interested in Colombia? A new ETF offers access. MarketWatch.
  15. Colombia's Ecopetrol 1Q Net Pft Seen Falling On Low Oil Price. Dow Jones.
  16. Bancolombia's Earnings Up Over 18% from 2007. Seeking Alpha.
  17. Colombia 2Q Stock Outlook: Weak Earnings To Crimp Recovery. Dow Jones Newswires.
  18. Colombia Stock Market Chart (IGBC GENERAL). TradingEconomies.com.
  19. FTSE COLOMBIA 20 INDEX. FTSE.
  20. Colombia's Central Bank Lifts Controls on Foreign Borrowing. Bloomberg.
  21. Conversion Table: USD to COP (Interbank rate). Oanda.com.
  22. The Central Bank of Colombia Lowers Its Intervention Interest Rate by 50 Basis Points. Central Bank of Colombia.
  23. Colombia Ctrl Bk Gov: Likely To Keep Cutting Rates - Report. Dow Jones.
  24. Analysts See Colombia Inflation Rate Ending 09 At 4.48%-Ctrl Bk. Dow Jones.
  25. Yields On Colombia TES Auction Fall On Rate-Cut Expectations. Dow Jones.
  26. Colombia Ctrl Bk Didn't Intervene On Forex Market In April. Dow Jones.
  27. Colombia Economy Faces 'Difficult' 2009, Roubini Says. Bloomberg.
  28. Colombia Bonds Climb to Two-Year High, Peso Gains on IMF Line. Bloomberg.
  29. Analysts See Colombia Inflation Rate Ending 09 At 4.48%-Ctrl Bk. Dow Jones.
  30. Colombian Peso Sinks Under Weight of Venezuela Crash. Bloomberg.