Colombia advanced to the quarter final of Copa America last week, and looks like a contender for the final win, too. But in terms of its capital market development, it would get sent home in the qualifying rounds.
Yet the tide can turn quickly. If Colombia continues to implement key reforms, it can consolidate its status as one of Latin America’s top capital markets by the date of the next football tournament.
Colombia has already come a long way in recent years. Capital markets in Colombia evolved substantially during the commodities fuelled boom between 2002 and 2012, a period when the Colombian economy performed so well it was called an emerging market star and a regional dynamo. Favourable macroeconomic conditions allowed the bond market to double in size over that decade, with government issues counting for the vast majority of activity (though its overall size remained small compared to other emerging markets).
Meanwhile, the Colombian equity market experienced significant growth, with market capitalisation increasing from 34% of gross domestic product (GDP) in 2005 to 73% in 2012. Driving this rapid development were strong economic growth, development of the private pension system, increased interest from foreign investors, as well as large democratization programmes that produced a number of landmark initial public offerings and the development of a retail investor base.
However, the party ended together with the commodities boom in 2012. The slowdown exposed some of the remaining fragilities in Colombia’s capital markets, but especially the need for further deepening of the market.
Take the equity market. Despite significant growth before 2012, Colombia’s equity market currently looks pale compared to some of its neighbours. The size of the Colombian equity market as a share of GDP declined by almost half in two years after 2012, returning to its 2005 level and falling behind its emerging market peers. Liquidity significantly declined over time as well – Colombia’s turnover ratio is among the lowest in emerging markets.
Overall, the total number of listed companies remains significantly lower than regional peers – Colombia only has 74 companies listed on its stock exchange with a total value of $153 billion USD, compared to 159 in Mexico ($481 billion USD) and 230 in Chile ($233 billion USD). Furthermore, the market has a significant proportion of issuers with very small market capitalisation and low levels of free float — state run Ecopetrol almost accounts for half of market capitalisation on its own.
That matters more than just for statistics. In the new post global financial crisis world, regulatory reforms have restricted the role banks can play, particularly for long-term investments. Government coffers also suffer from a lack of funds. In this vacuum, capital market development has become an imperative, particularly in emerging economies. Capital markets not only ensure an efficient and effective allocation of resources and reduce overreliance on short-term financing for long-term projects, but they also encourage inflows of foreign capital.
Given that Colombia is currently embarking on the most ambitious infrastructure program in Latin America and in its own history — a $70 billion infrastructure plan that includes the Fourth Generation (4G) road infrastructure program involving 47 projects spanning 8,000 kilometres of roadway and 3,500 kilometres of four-lane highways as well as expansion of ports and railways — further deepening of local capital markets could not be more timely.
The good news is that all the ingredients are present for Colombia to be a powerhouse in Latin America. The country has a high share of well-educated and entrepreneurial people, is Latin America’s third largest oil producer, and boasts strong investor protections. According to the World Bank’s “Doing Business Report,” Colombia ranks 14th in the world for investor protection, the only Latin American country in this league (Brazil comes next at 29th).
Unlike its football team, it is also winning by cooperating with the competition. Colombia is one of the founding members of MILA — the Mercado Integrado Latinoamericano – that integrates the stock exchange markets of Chile, Colombia, Mexico, and Peru. Only six years since its creation, this Pacific alliance now boasts a market capitalisation slightly ahead of the continent’s largest capital market — Brazil.
At home, the government is working to end the nation’s 50 year civil war this year by concluding peace negotiations with the Revolutionary Armed Forces of Colombia (FARC) — the anticipated “peace dividend” is estimated to be an additional 1.5% of growth per year, and it will represent another strong signal to foreign investors.
So what then does Colombia still need to do? Let’s come back to the equity market. Working with the Colombian government and Oliver Wyman, the consultancy, over the past year, we undertook a year of research and interviewed almost 100 market participants to answer this question. Through these efforts, we published a White Paper and identified four major barriers to the development of the depth and liquidity in the Colombian equity market — the limited number of investment opportunities, the low diversification of the investor base, regulatory barriers on leverage, and market access and transaction costs.
Through these same interviews -and at a high-level event we organised in Bogota last December – we identified 4 areas of action that could bring the most results. They are:
- Encouraging greater issuer participation
- Improving the investor value proposition
- Enhancing market efficiency and transparency; and
- Attracting global interest
The changes can be implemented, by and large, in the scope of three years. At the end, Colombia will still be beating the United States only on the football pitch, but closer to home it will be even better positioned to win the competition with its regional rivals, including Chile, Peru, and perhaps most importantly one of its long standing football rivals but recent returnee to global financial markets — Argentina.
Football success at the international level and capital markets development can both be unpredictable — yet to excel at both it helps to attract and develop the right players and outthink your competition with the right tactics. By 2019, it won’t be hard to see how well Colombia is doing. That is the year of the next Copa America tournament, and its location just happens to be in a continental football and capital markets powerhouse – Brazil.
Michael Drexler is the Head of Investors Industries for the World Economic Forum. Andre Belelieu is the Head of Investor Infrastructure Initiatives for the World Economic Forum
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