Construction sector’s performance is supporting continued growth

After recording 6.6% growth in 2011, Colombia’s economy experienced a slowdown in the second half of 2012 and the first half of 2013. GDP grew by 4% in 2012 and by just 2.8% in the first quarter of 2013. However, the second half of the year was very positive. The sound performance of the construction sector, along with strong investment in public works, a recovery in the hydrocarbons industry and restored consumer confidence, allowed Colombia to finish 2013 with 4.7% growth, up 0.7 percentage points on 2012.

By Sector

The economic strength shown in the third and fourth quarters of the year was crucial to maintaining momentum. GDP grew by 5.8% and 5.3%, respectively, in those periods, primarily led by a year-on-year (y-o-y) rise of 12% in activity in the construction sector. Bold government plans in low-income housing, which included building 100,000 free homes for the poorest citizens and over 80,000 highly subsidised homes for low-income households, together with subsidised interest rates for low to middle-income citizens, helped the housing segment achieve 11.4% growth.

Meanwhile, the value of new mortgages saw a 9% rise in 2013. The oil and gas sector reached 7.8% growth, while retail and agriculture also made progress. The latter, one of the most vulnerable sectors due to Colombia’s open trade policies, has a promising future despite logistical, social and competitiveness challenges. This all contributed to maintaining the economic dynamism of previous years. In manufacturing, however, logistical cost overruns and technological and productivity deficiencies resulted in a 1% decline, according to the National Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE).

Trade

Colombia continues to demonstrate its resilience to global economic dynamics. While the US is beginning to display signs of a gradual recovery, the expansion rate of the EU is as varied as its constituent parts, and the pace of growth in many large emerging economies has slowed significantly. In March 2014 Standard & Poor’s downgraded Brazil’s sovereign rating by one notch to BBB-, the lowest investment-grade rating, from BBB. Colombia’s exports, primarily oil and coal, face the prospect of a slight drop due to a decline in demand and prices of these products. Colombian exports also include nickel, gold and coffee, among others. The prices of these commodities, with the exception of gold, are still on the up, while traditional exports such as coffee experienced a remarkable recovery in 2013. Manufactured products, fuel and agricultural supplies top the list of imported products.

Total Colombian exports in 2013 reached $58.8bn, 2.2% down on 2012’s $60.1bn, mainly due to a 33.6% decline in gold’s export value, according to DANE. These exports were $1.14bn lower than the previous year. Coal was another product harmed by the global weakening of commodity prices and saw a $1.11bn decline in exports in 2013. Meanwhile, Colombian imports grew by 0.5% in 2013 over the previous year, reaching $56.6bn, resulting in a trade surplus of $2.2bn.

As in previous years, oil was the highest-value export, totalling $32.5bn, just up on the $31.9bn of 2012. Coal exports amounted to $6.7bn, down from $7.8bn in 2012, with sales affected by a drop in prices, along with labour protests and guerrilla attacks that hit production at Colombia’s largest coal operations. The best-performing product was coffee, which had an encouraging 2013. The 7.74m bags produced in 2012 was the smallest harvest of the past 30 years, which saw exports fall by 6.8% in 2012, according to the National Federation of Coffee Growers of Colombia. Happily for the industry, the $395m export figure of 2012 rose to $542m in 2013, a 37.2% increase, according to DANE.

For Manuel Arévalo, country manager at credit insurance firm Coface, an export culture has still to be developed. “We are seeing the first steps in the generation of export risk awareness. Associations responsible for promoting exports, such as the National Association for Foreign Trade, are key allies in the creation of this culture. Increased promotion by government entities is also essential,” he told OBG. According to DANE, manufactured goods accounted for 76.8% of Colombian imports in 2013, while fuels and extractive industry products comprised 12.3%, followed by agricultural products, food and beverages (10.7%). The remaining 0.2% came from other sectors. The main foreign trade partner in both exports and imports was the US, though the level of oil exported to that country fell. The US absorbed 31.4% of all exports, followed by China (8.7%) and Spain (4.9%). Imports came mainly from the US (27.7%), China (17.4%) and Mexico (9.4%).

Foreign Investment 

Foreign direct investment (FDI) had a major role in the economy’s success in 2013. FDI inflows beat the expectations of local economic authorities, which had maintained conservative predictions in light of limited growth in the year’s first half. The Ministry of Finance and the central bank foresaw a major impact from the contraction of other emerging economies. Yet FDI hit $16.36bn in 2013, an 8.2% rise on the previous year and a record for Colombia, according to the central bank. Hydrocarbons remained the leader in terms of FDI, accounting for $13.73bn, 81.6% of the total and 2.9% up on 2012. Portfolio investment enjoyed 50.5% y-o-y growth and reached $11.1bn, according to the central bank. Direct and portfolio investment from Colombians abroad hit $7.7bn and $4.1bn in 2013, respectively.

Inflation 

According to DANE, inflation ended 2013 at 1.94%, Colombia’s lowest rate in more than 50 years. The sectors with the highest rates that year were health care (4.44%), education (4.37%) and telecoms (2.75%), while leisure (1.84%), transport (1.39%), clothing (0.94%) and food (0.86%) remained below the average. The capital, Bogotá, ranked third by cost of living increase, with inflation of 2.43%. Inflation rates increased more than expected in the first quarter of 2014, reaching 2.51% in March, mainly due to rises in the price of food and regulated goods and services.

Loans

While bank loan growth slowed throughout 2013 as a result of a weaker economy in the first six months, the year as a whole was positive, with disbursements by Colombian banks totalling $14.2bn. The recovery in the second half of the year was partly due to improved performance in business and housing loans, which led credit expansion, with y-o-y growth rates of 12.7% and 28.1% as of December 2013. Housing loans were the fastest-growing segment, with $12.95bn outstanding by December, a $2.84bn rise on 2012. Consumer credit, though up 11.7% on 2012, dropped 0.5 percentage points as a share of total credit, to 27.9%.

Microcredit grew steadily, at 17.7% as of December 2013, with a total balance of $4.38bn, though its growth rate had softened by year’s end. “Guarantees on payments for microcredit have increased steadily over the past two years, bringing the loss ratio to 7.83% in September 2013,” Juan Carlos Durán, president of Fondo Nacional de Garantías, a state funding agency for small and medium-sized enterprises, told OBG.

In light of stable loan growth, the central bank kept its reference interest rate unchanged in the first quarter of 2014 at 3.25%. By June 2014, the central bank had announced a series of interest rate hikes to 4% in light of a faster-than-expected increase in consumer price inflation and stronger economic and credit expansion. In August the main interest rate rose once again to 4.25%. The central bank has been able to pursue a counter-cyclical monetary policy strategy in recent years, which has allowed raising its main interest rate in every period of economic buoyancy in order to slow credit growth, thereby reducing the threat of economic overheating and higher-than-desired inflation.

Peso 

The Colombian peso weakened significantly in the summer of 2013 after the US Federal Reserve signalled its intention to gradually scale back its large-scale asset purchases by the end of the year. After a slight recovery in the fourth quarter of 2013, the peso weakened further at the beginning of 2014. By February it had lost 5.45% of its value against the US dollar and the exchange rate exceeded COP2000:$1 for the first time since December 2010. This depreciation was, according to the minister of finance, Mauricio Cárdenas, “much needed by the productive sector”. Following this exceptional drop, the peso regained some strength as global market volatility nearly fell to record lows and by early June it remained just below COP1900:$1. Despite the depreciation of the local currency since the second quarter of 2013, the central bank stuck to its intervention policy of buying dollars. The institution considers the accumulation of foreign reserves a key goal. Net reserves hit a y-o-y 16.4% rise by the end of 2013, reaching a record high of $43.6bn. The central bank continued purchasing foreign reserves in the first half of 2014, which led to a new record of $45.02bn by June 2014.

External Debt 

Foreign indebtedness increased marginally in 2013, yet remained at a comfortable level. According to the central bank, external debt stood at $91.9bn in December 2013, a 16.7% y-o-y rise, and represented 24.4% of GDP, 3.1 percentage points more than the previous year. Such a ratio is enviable given Colombia’s sustained economic growth over the past decade and the optimistic predictions for the coming years. The rise in the outstanding debt was mainly driven by an increase in long-term debt, which grew by 16.8%, and short-term debt also rose, albeit at a more moderate rate of 15.9%. Public sector external debt rose by 13.1% in 2013, according to the central bank. This segment totalled $52.1bn, equivalent to 13.8% of GDP. Growth of 13.1% in long-term debt was slightly counterbalanced by a 22% fall in short-term debt. Private sector debt also rose in 2013, although at a faster rate of 21.8%. The financial sector saw a $3.45bn rise in its foreign liabilities. The long-term debt of the private financial sector grew by 37.6%, partly due to the rise in bond issuances by financial institutions in international markets. Colombian banks are using the capital markets to finance acquisitions in Central and South America (see Banking chapter). The non-financial private sector also increased its debt, with external liabilities growing by 15.6% ($3.6bn) in 2013.

Public & Private Spending 

Private spending is expected to rise in 2014 and, in the public sector, the government has increased the budget allocation. The 2014 budget was up 6% on 2013. Agriculture was the sector benefitting the most from this rise, in response to the farmers’ demands for more state support. The sector received an extra COP3.1bn ($1.55m) to hit COP5.2bn ($2.6m), while there was a 19.5% increase in the budget of the National Centre for Vocational Training (Servicio Nacional de Aprendizaje, SENA) to enhance its technical training programmes. This illustrates government expectations of a need for more specialised human resources over the next decade, and should see SENA achieve the capacity to train over 7m young people in the short term (see analysis).

While education accounted for 17.6% of the national budget, health remained at 11.6%, and 20.3% of the budget is allocated to public investments. Pensions increased their share by COP5trn ($2.5bn). Defence and security had the largest single share of the budget – at $14.7bn it represented 17.9%, a 1.33% increase over 2013. This allocation has risen by 19.6% in the 2010-14 period over the previous five years.

Priorities

The central bank’s 5% GDP growth forecast for 2014 is based on the outstanding performance of various productive sectors. Construction’s contribution, along with that from the highly developed local financial sector, will be important if the target is to be reached. Increased labour formalisation and financial inclusion will further enhance the emergence of a middle class, meaning the retail sector could be a major booster of the economy. A recovering agricultural sector represents a pillar of the economy in the mediumto-long term, while the development of a new road network could boost public and private investment and generate more employment. Other sectors, such as insurance, will benefit indirectly from the launch of these projects. Since 2000 Colombia’s sustained GDP growth has been supported by the performance of four key sectors. A booming hydrocarbons industry, a sound and mature financial sector, an emerging retail industry and an agricultural segment with untapped potential have accounted for more than half of GDP.

OECD 

The development of the domestic economy is naturally influenced by the path of the global economy. Colombia’s application to join the Organisation for Economic Cooperation and Development (OECD) resulted in a series of highly demanding recommendations. Colombia is introducing structural changes affecting pensions, labour, wealth distribution and the education system, among others, to accomplish its dream of integrating into the exclusive organisation (see analysis).

Peace Talks 

Meanwhile, the dialogue that the government of President Juan Manuel Santos has continued with the Revolutionary Armed Forces of Colombia since October 2012 could lead to an historic agreement. The potential for economic benefits following success is substantial. The countryside, and consequently the agriculture and livestock sectors, would be the major beneficiaries of a peace agreement. On the other hand, demographic shifts and changes in the distribution of public spending, unless carefully managed, could substantially affect the country’s economic fabric.

After a peace deal, Colombia would need to rearrange its budget due to a fall in the defence and security needs. A larger capital injection could boost the development of key segments such as education, health, pensions and housing. However, the Colombian military and police forces are a major source of employment. Between the army, navy and air forces, Colombia has 585,842 professionals, according to the Ministry of Defence. The country would face a challenge in relocating these workers, in addition to integrating tens of thousands of demobilised guerrilla soldiers. These people would need training as well as psychological and economic support. Despite the process most likely taking several years, the task will still prove enormous.

The number of variables involved in an end to the 50-year conflict means that making predictions about its economic effects is risky. Yet finance minister Cá rdenas has stated that GDP could grow by 7% in the years ahead, instead of the current 4-5%, due to what he has called the “peace economic dividend”. Cárdenas believes that his estimates may be conservative, and he thinks that the fourth-generation infrastructure projects could also add an extra point to GDP growth rates. Fernando Ayala, general director at consultancy firm Indra, foresees opportunities after the signing of a peace agreement. “The development of cities in a post-conflict period would represent many challenges and opportunities,” he said. “Implementing cost-effective security systems will imply strong investment in technologies. The digitisation of government services, incorporation of cybersecurity processes and the evolution of transportation open a tremendous field of opportunity.”

Hydrocarbons 

The oil and gas sector decelerated in 2013. An increased number of guerrilla attacks on pipelines, delays in obtaining environmental permits and protests all had an impact on exploration, production and oil exports. Only 115 wells were drilled for exploration in 2013, a 12% drop from the previous year. According to the Colombian Petroleum Association (Asociación Colombiana del Petróleo, ACP) there was a 5% fall in FDI into the sector in 2012. Alejandro Martínez, former president of the ACP, confirmed that, despite the problems, production averaged more than 1m barrels per day (bpd) in 2013, ending the year with a bpd figure of 1.017m. “Despite a 7% growth in y-o-y production, we did not reach the established goal of 1.060m bpd,” Martínez told OBG. “Although oil and gas remains a priority focus for international investors, issues such as environment licences, security and social unrest need to be addressed,” Marcelo Cammi, general manager for Colombia at Weatherford, told OBG.

Financial Sector 

The financial sector has maintained its strength even in times of intensified global recession. However, Colombian banks have suffered from low levels of efficiency as they were working towards compliance with recent capital and liquidity requirements. The sector was strengthened by Decree 1771 of 2012, which redefined the capital requirements for credit institutions. This and other successive rules are a derivative effect of the application of the Basel III agreements, which establish voluntary regulatory standards on capital adequacy, stress testing and liquidity. Recent local laws require financial organisations to be better capitalised, implying a big rise in fixed costs for banks and insurance companies, as María Mercedes Cuellar, president of the Finance Entities and Banking Association (Asociación Bancaria y de Entidades Financieras, Asobancaria), told reporters.

“The initiatives taken by the authorities to make banks safer and more robust have contributed to building up a more expensive structure that may sacrifice the efficiency of the sector and consequently the country’s economic growth,” she said. Others see an ideal opportunity for the sector to raise its efficiency due to the arrival of new competitors. “Increased competition in retail banking will contribute to more flexible regulation, which should lead to greater efficiencies,” Ramiro González Prandi, general manager for Colombia at the investment branch of Brazilian bank Itaú, told OBG. In the short term, the sector’s lack of efficiency can act as an additional barrier to financial inclusion.

Despite the higher demands, the results of the banking sector remain positive. The loan portfolio grew by 15.6% in 2012 and by 13.8% in 2013, according to local bank Bancolombia. For 2014, Bancolombia expects 14% growth, which would be a remarkable performance considering the increased liquidity requirements.

Retail 

In contrast to the challenging times that manufacturing industries are experiencing, retail has proved “one of the most important sectors of the economy”, José Guillermo Botero, president of the National Federation of Traders, told El Colombiano newspaper in 2014. The federation calculates that domestic retail has been responsible for 44% of job creation in the past four years. The emergence of the middle class is stimulating the sector, which saw sales increase by 4% in 2013, according to DANE. Excluding sales of motor vehicles and motorcycles – the worst-performing segment in 2013 – the rise was 4.7%. Technology showed the highest growth rate (14.8%), followed by footwear and leather clothing (7.9%), hardware (5.9%), appliances and home furniture (5.4%), and clothing (5.3%). The rise in consumption has attracted the attention of many retail businesses, with the entry of foreign mall developers being followed by that of international clothing and technology brands. It is estimated that 50 new shopping centres will be built in 2014-15.

Construction 

The construction sector has become a foundation for development. Growth of 12% in 2013 responded to a housing deficit and the imminent housing need of the emerging middle class. Colombia has a gap of 1.6m units, according to 2012 figures from DANE. The government of former president Álvaro Uribe Vélez began the construction of an average of 144,000 homes a year from 2006-08. Its successor, the Santos administration, also understood that housing was vital for development and promised to build 1m new homes in 2010-14. A tenth of the total were to be given for free to citizens with fewer resources in the context of the Houses of Priority Interest programme (Viviendas de Interés Prioritario, VIP), while 140,000 more were offered with financial support from the state under the Social Interest Housing Programme (Viviendas de Interés Social, VIS).

A few months before the 2014 elections, the housing minister Luis Felipe Henao Cardona told OBG, “Out of our goal to start building a million homes, ranging from those of primary interest to those for medium and high strata, we will reach 920,000.” Of the 100,000 free houses in the VIP programme, Henao said that the government would be able to provide 80,000, putting the deficit down to the uncertainty generated by the Territorial Plan of Bogotá, which has limited the development of construction projects in the capital in recent months (see Construction chapter). Despite delays in government plans, the real estate sector maintained impressive growth rates in 2014. Building construction, which includes residential and non-residential work, grew by 7.9% in the first quarter, contributing to growth of 17.2% in the overall construction sector.

Infrastructure 

The enactment of numerous free trade agreements (FTAs) in recent years highlighted Colombia’s infrastructure backlog, with the pace of infrastructure upgrades not meeting the country’s economic requirements. This led to the creation of the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), which assumed the task of structuring and awarding projects. ANI subsequently designed the fourth generation (4G) programme of concessions, which estimated investments of over $25bn for the coming years. However, after two years of structuring, discussions, prequalification and planning, the projects being granted are receiving fewer proposals than expected. The 4G programmes face profitability issues, as well as the controversial “balance of risks” between the state and the project developers. Some developers do not trust the technical skills of the public sector and the capacity of local banks to finance the most ambitious projects in the country’s history. This school of thought favours greater participation of capital markets. However, others defend the viability of the projects. Emmanuel Cáceres, general manager at Bonus Investment Bank, told OBG, “The bidding for the first projects in the fourth generation of concessions proved they have financial viability. Discussions on the lack of budget and resources are irrelevant due to the proven interest of developers and local banks.”

The modernisation of the railway system is an essential part of the infrastructure upgrade needed to make Colombia logistically competitive. Felipe de la Vega, president at commodity trader Trenaco, told OBG, “Rail transport is key to the development of Colombia. The rehabilitation of old railways is possible using oil and gas as anchor products, and this would open the door to transporting other products at lower cost.” Enhancement works on the Magdalena River are equally important, according to Juan Miguel Durán Prieto, superintendent of ports and energy. “President Santos has invested COP2.2trn ($1.1bn) to enhance the navigability of the river, which would facilitate freight transport between the north and the south,” Durán told OBG.

Agriculture 

Agriculture is likely the sector with the greatest long-term potential. The government forecast public investment of $2.8bn in agriculture in 2014, while the sector grew by 5.5% in 2013, higher than the average for the country and driven primarily by the recovery of coffee, which grew by 26.9%. The Colombian Society of Farmers recently projected 3-3.5% growth for 2014. The rationale for predicting rates that are lower than the more typical 4.5-5% forecasts for the overall economy is the current low price levels in the international market for some products. The sector awaits the formulation of a national agricultural policy, which should determine priorities and create investment incentives (see Agriculture chapter).

Manufacturing Industry 

The manufacturing industry is perhaps the biggest victim of Colombia’s economic internationalisation, but the survivors and innovators are equally among the biggest of the potential beneficiaries. Industrial companies need to ensure their survival through the implementation of advanced management practices and modern technology, in addition to having better access to credit. The private sector continues to implement limited strategies that include the development of clusters and production chains. Yet the number of manufacturing industries is likely to be reduced in the long term as the country continues to discover which industries will have the capacity, strength and adaptability to compete internationally.

Higher Education 

To ensure sustained economic growth, Colombia is seeking to improve the coverage and quality of education from basic schooling to tertiary levels. The Ministry of Education set a coverage target for 2014 of 96.9 % in average education and 50% for higher education. To achieve the latter, the public sector is broadening its technical studies on offer and increasing the number of places in colleges and universities. It has also raised the amount of funding being given for tertiary education. The government plans to approve nearly 73,000 new higher education loans for 2014 through the Colombian Institute of Educational Credit to encourage the enrolment of new students who do not have sufficient financial resources to pay for higher education studies by themselves.

Outlook 

The economy has regained dynamism and Colombia was able to keep a 4.7% growth rate in 2013. The recovery of coffee production and rise in export levels suggest strong growth again for 2014. Increased energy consumption, huge investments in infrastructure, and ICT development are also contributing to the positive expectations. The re-election of President Santos represents continuity in public investments in construction and confidence in an improvement of the pension, health and education systems. Weak manufacturing competitiveness and a poor trade balance remain challenges. From a macroeconomic viewpoint, the controlled levels of inflation and public debt, along with the record FDI levels and proven resilience of the currency, helped Colombia maintain economic stability. With these instruments, the central bank expects 5% GDP growth for 2014, and though this is subject to change, it will likely remain between 4.2% and 5.8%.