Colombia, Latin America's oldest democracy became independent in year 1819 when Gran Colombia disintegrated and evolved into Venezuela, Peru and the country of Colombia. During the 19th century, Colombia was a very peaceful nation where Conservatives and Liberals governed. Unfortunately, the 20th century was a very violent period of time for Colombia including the La Valencia phase that began in 1946 and lasted to the mid 1960's where upwards of 300,000 people was killed. By the late 1970's, the drug lords began to corrupt politicians and many other intermediaries. The violence has heated up again in the late 1990’s with approximately 3,500 Colombians killed annually of which mostly are civilians. From 1992-2002, approximately 40,000 Colombians have been killed and 1 million have been displaced by the civil war
Colombia's civil war during periods of the 20th century have created a challenging environment to sustain positive economic development. The continual threat of armed guerilla terrorist attacks, persistent kidnappings, and difficult social conditions has made Colombia a challenging environment to attract foreign direct investment (FDI). Colombia’s population now stands at 45 million. Today in the 21st century, a wide sense of peace and stability has returned for the most part but violence remains in control and isolated.
POLITICS: President Alvaro Uribe was sworn into office August 7, 2002 on a war platform to end the hostilities and civil war that has disrupted the nation since 1964. Next election is scheduled for May 2010. Uribe’s political mandate is to end the war and bring lasting peace, to reform the political institutions, cleanse the corruption and eliminate the dirty politics. Mr. Uribe, an independent Liberal with a centre-right vision has so far succeeded in his presidency and remains popular with the majority of Colombians with a return of economic prosperity, a significant cessation in domestic violence and a renewed normalcy in the life of Colombia.
BankINTRO.com forecasts President Uribe will win the war with a long drawn out peace accord settlement with government representation from both the left and right wing factions of the terrorist groups. However, should the rebels and paramilitaries return to large scale violence and take control of wide areas of the geography and its natural resources, Colombia could possibly dissolve the way of Gran Colombia two hundred years ago. Colombia may find itself in the same league as Somalia, Afghanistan or several African countries like Sierra Leone where hoods and war lords rule large sections of the nation. At this current time, this is a very unlikely outcome. Colombia today is governed by sound political managers.
ECONOMY: cyclical. economy has performed well in tune with the commodities boom over the last few years (year 2003 to QTR 3 2008) although signs of cooling have taken affect in par with the rest of the global economy. Year 2007 was one of Colombia’s best economic performances. Colombia’s economy has turned a significant corner with positive results compared to 10 years ago when the country was facing its’ worst banking system and economic crisis on memory with unemployment at 17.5 percent peaking at 20 percent in 1999. The economy since 2003 has had an impressive showing with decreasing public debt, strong export growth, increased GDP growth, increased foreign direct investment, lower inflation, etc. Illegal cocaine and heroin production is valued in the billions annually; Colombia is also a major global coffee supplier and oil producer, the world’s number five exporter of coal.
The economy follows that of an inflation targeting framework with an official inflation target at 3.5 to 4.5 percent for 2008. Inflation targets include year 2009 at 4.5 to 5.5 percent range, year 2010 target of 3.5 to 4.5 percent and 2011 at 2 to 4 percent.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 328 billion USD (2007) with corresponding GDP/Capita at 7,400 USD. GDP at market prices stand at 171.6 billion USD (2007). Tax revenues are at only 19 percent of GDP. GDP growth for 2008 estimated at 3.4 percent, year 2009 projected at 2 percent, year 2007 GDP growth at 6.8 percent. Inflation quotes include year 2008 at 7.3 percent, 2009 estimated at 5.5 percent, 2007 inflation at 5.7 percent, year 1999 at 11 percent. Recent inflation peak took place in August 2008 at 7.9 percent, December 2008 inflation running at 7.73 percent. The current account is in deficit at 4 percent of GDP (2007). External debt is declining to 24.9 percent of GDP (2007) equivalent to 41.39 billion USD. Public debt stands at 52.8 percent of GDP (2007). Unemployment rate for year 2007 at 11.2 percent. Major trade partner: United States.
Oil Industry
The oil industry is held back from development to its full capacity due to the looming civil war. ELN left- wing terrorist group have been responsible for attacks on oil pipelines in northwest Colombia disrupting national oil production. There has been a large increase in foreign investment into Colombia’s oil & gas sector to help modernize and stabilize the industry. Labor is relatively cheap, thus profits in the oil industry can be substantial. Colombia is well known to host oil resource deposits in the 100 million plus barrel range, it is indeed rich in oil. Oil is the largest legal export product. Colombia is also rich in mineral reserves, vast wealth below the jungles with tremendous opportunities in gold mining and in oil production. In addition, Colombia has great oil wealth offshore; it is here where oil extraction can be forwarded to markets in the United States with great accessibility. authorities have a goal of 1 million bpd output by year 2015; current oil production is at 550,000 bpd, peak oil production occurred in 1999 at 820,000 bpd. Net oil exports stand at 283,000 bpd. As of April 2008, there are estimates upwards of 20 billion barrels of recoverable oil.
POSITIVES: established legal and regulatory framework, public institutions, democracy, well educated nation, electricity surplus and good work ethic. CONCERN: brain drain and mass exodus as many of the intellectuals have emigrated due to the violence with approximately 1 million Colombians having left since the mid 1990's.
BANKING SYSTEM: much improved, satisfactory. Official reserve asset position for Colombia stands at 23 billion USD (October 2008). The central bank, Banco de la Republica at times has implemented capital controls deployed to mitigate exchange movements, however most capital controls have now been removed. Interbank interest rate at 9.64 percent, IBR overnight rate at 8.72 percent (December 2008).
KNOWLEDGE: Oil, Mining, Drug Trade - Legalize Drugs, Civil War
Mining and oil wealth in Colombia are key industries for its future prosperity as it will replace the cocaine and heroin production trafficking industries. Massive untapped natural resource wealth exists in Colombia where tens of thousands of well paid jobs will be created. It is time for President Uribe to stay aggressive offensively against the three main domestic terrorist groups in Colombia and it is also time for countries like the United States to legalize drugs. Much of the domestic terror groups operations are related to the illegal drug trade. A peace dividend for Colombia's will result in less cash outlays for the military and funds re-routed towards wealth creation industries, infrastructure and social development within Colombia. More importantly, FDI will return to Colombia particularly in the area of mine development where large capital costs are required. A higher standard of living and a stronger Colombian peso will result if long term sustained peace arrives.
For further detailed analysis on these themes of the KNOWLEDGE section, please contact us at BankINTRO.com.
REGIONAL ANALYSIS: Latin America
Please contact us at BankINTRO.com for further analysis.
CURRENCY: ISO symbol 'COP' Colombian peso. At time of review on December 12, 2008, the COP had a value of 2278.29 COP to 1 USD and/or 2935.5 COP to 1 Euroland euro (EUR - on December 2, 2008 quote). In year 1999, the peso was devalued with its flotation in the market place, the year the recession started in Colombia. Currency exchange regime follows that of a float. The peso experienced appreciation during 2007 up until June 2008 following the run up in peak oil pricing and strong commodity prices.
CURRENCY HISTORY: the peso has been in circulation since 1837. There have been discussions to redenominate to a new peso, possibly at a rate of 1000 to 1. On September 27, 1999, the decision by Colombia's central bank to let the peso float thus allowing for central bank intervention in the exchange market to be limited to achieving their balance of payments goals (international reserves position) and inflation targets, thus providing a more stable exchange rate environment. Structural reforms were also implemented at this time.
Historical exchange quotes include: November 2008 at 2327.2 COP to 1 USD, August 2006 at 2385.7, October 2005 at 2293.2, August 2004 at 2595.8, March 2003 at 2959.7, January 2002 at 2273, January 2001 at 2242, January 2000 at 1931, January 1999 at 1573, August 1998 at 1389. Previous to the float, the peso was set at 1140 in 1997 and 1036 in year 1996.
CURRENCY FORECAST: sustained peace, the long term is bullish for the peso due to its tremendous natural resource wealth, improved domestic security, functioning legal system and democracy. The short to medium term is bearish for the peso due to lower world crude oil pricing, lower coal. However, Colombia’s mining industry should perform well with rich gold & silver resources complimented by strong gold bullion pricing going forward. BankINTRO.com best guess is for modest depreciation of the peso ahead into 2009-2010. A macro-economic concern remains the country’s fiscal & current account shortfalls projected into 2009-2010.
