A new generation of emerging markets

Emerging markets have commanded the world’s development focus for the past two decades. In particular, four developing countries gained a key position since the start of the 21st century. The retiring chairman of Goldman Sachs, Jim O’Neill, was the first to consider Brazil, Russia, India and China the most powerful emerging markets in 2001 and call them the BRICs. Now these countries are slowing – especially China and Brazil – while new markets arise. Brazil has been downgraded by Standard & Poor’s, while Russia faces a crisis over its conflict with Ukraine and a wobbly economy. The delicate situation of China led to a threat of bank runs in that country by April 2014.

Neo-Emerging Markets

O'Neill also helped create the term MINT for the economies of Mexico, Indonesia, Nigeria and Turkey. These markets share the fact that they are large receivers of international investment through sovereign bonds. Shortly after the creation of the MINT concept, the director of The Economist Intelligence Unit, Robert Ward, first spoke of CIVETS. These are countries that have “a special dynamic in the coming years”, according to Ward. Colombia makes up part of the CIVETS, along with Indonesia, Vietnam, Egypt, Turkey and South Africa.

More recently, French credit insurance company Coface published its own list of "neo-emergent markets” in March 2014. Coface included two groups of countries within this model. The first is called the PPICS and is formed by Peru, Philippines, Indonesia, Colombia and Sri Lanka. According to the multinational company, these economies have high growth potential and growth rates of over 4%, diversified economies that help avoid excessive dependence on commodities and provide resistance to shocks, as well as strong financial systems. One step behind these economies, Coface mentions a second group of emerging markets with promising outlooks but riskier profiles. These are Kenya, Tanzania, Zambia, Bangladesh and Ethiopia.

Opportunity

Following the publication of a report by global consultancy Ernst & Young (EY) in March 2014, the president of the area responsible for emerging markets at the company, Rajiv Memani, told reporters, “Governments in emerging markets must make structural reforms and reduce regulations to restore investor confidence.” According to Memani, it is essential for neo-emerging markets to fully leverage on the depreciation of their currencies in favour of export-oriented sectors. EY forecasted 4% GDP growth for Colombia in 2014, against the 5% estimated by the local central bank, Banco de la República de Colombia. According to the consultancy firm’s report, the only country in the region with similar growth rates to Colombia will be Chile (4.3%). Despite the relative instability China has suffered in recent months, it will maintain a leading position with a 7% growth rate. Colombia is 13th among the emerging countries in terms of growth, according to the study.

Challenges

While this is good news for Colombia, the country must tackle a number of challenges to consolidate its position as a leading emerging market. Colombia has a very high incidence of confidence from international investors. As a consequence, in 2013 FDI exceeded $16.7bn. Inflation remains below the 3% target set by the central bank, and debt levels are below 25% of GDP. Meanwhile, unemployment remains underneath the double-digit (an annual average of 9.3% in June 2014), according to the National Statistics Department. However, the issues to overcome are numerous. These include corruption, poor infrastructure, limited industrialisation and potential economic dependence on natural resources.

Transparency

The 2013-14 Global Competitiveness Index from the World Economic Forum (WEF) attributed Colombia with a “high level of corruption”. The country ranked 129th in transparency among the 148 countries surveyed. The only one considered more corrupt in the region was Brazil (133), while Peru (111) and Ecuador (68) have shown more discipline in their public administration. Most firms consider corruption a primary barrier to economic growth. Helio Duenha, general director of Bosch in Colombia, told OBG, “The government has made big investments and we hope these will pay off. Corruption levels need to be decreased for the country to keep developing.”

Infrastructure

Infrastructure development is another element that worries economists. While the country has spent decades trying to narrow the gap in development (particularly in the past four years with the fourth-generation (4G) concessions – see Construction chapter), Colombia has lost ground, particularly against its neighbours. Ecuador, for example, has experienced unprecedented development in the past five years under President Rafael Correa.

Although Colombia has experienced significant progress in its ports and airports, immediate improvements are needed to the country’s roads, railways and navigable rivers. While some experts are sceptical about the success of the National Infrastructure Agency’s 4G projects, others are optimistic. Carlos Jacks, president for Colombia of Mexican cement producer Cemex, told OBG that much work is still to be done, since Colombia has only 1000 km of double-lane road. The WEF currently ranks Colombia 103rd among 140 countries in terms of road infrastructure. “The impact of the 4G infrastructure concessions will be tremendously large, and it is realistic to expect a decade of massive investments in infrastructure and consequently in cement, which represents about 10% of the total investment in a road project,” Jacks said.

Diversification

Another matter that Colombia has been trying to define in the past few years is its economic vocation. Emerging countries like Venezuela and to a lesser extent Brazil have shown that excessive dependence on natural resources (known as “Dutch disease”) is risky. Natural resources account for about 70% of Colombia’s total exports and manufacturing has lost share in the domestic economy.

A study by BBVA Research showed that in January-February of 2014, manufacturers generated $737m, against the $2.8bn coming from hydrocarbons. Michael Krauss, the president of Grasco, a grease and oil-producing group of firms, told OBG, “Colombian industry has been forgotten and suffers from a highly expensive Colombian peso and infrastructure deficiencies, which couple with growing informality and illegality.” In light of the gradual decline of some industrial sub-sectors, Colombia must define the segments where it can generate added value. All countries in the region are beginning to find ways to reduce dependence on commodities as they see volatility in the rate of China’s economic growth, which will imply a medium-term reduction in the demand for commodities.

Colombia’s food industry, in particular the meat market, has great potential for exports. Yet the sector needs to improve in terms of meeting phytosanitary standards. Alejandro Valencia, the president of the Poultry Association of Colombia (Federación Nacional de Avicultores de Colombia, FENAVI), told OBG about the country’s progress in this area. “Countries with importing needs often protect their industries, hindering our export potential,” said Valencia. “Japan recently recognised the equivalency between them and Colombia, which helps us know that in a scenario of free trade the poultry industry will be able to find many destinations for exports.”

There are many other challenges for Colombia to establish itself as an attractive emerging market for international investors. The peace process is a key element due to the effect it can have on investment levels in Colombia. The Andean country has, notwithstanding the internal conflict, been able to position itself favourably in the World Bank’s Doing Business index, in which it occupies 43rd position out of a total of 189 countries assessed. In the ranking, Colombia maintains an enviable position (sixth) in the “protecting investors” category, but it is ranked 155th in terms of “enforcing contracts”. The improvement of the justice system therefore seems essential in improving investor confidence. If Colombia is able to define its economic vocation, reduce bureaucracy and increase transparency, its position as a first-class emerging market over the coming years will be guaranteed.