Opinion: Easter Potpourri & Why Colombia’s COLCAP Is Struggling To Attract Investors

Colombians are very much ‘on the road’ this week, there may be strict limitations in terms of religious processions and gatherings however in order to compensate themselves, the populace have scattered themselves to the winds.

A week or so ago I made mention of a post-Easter COVID spike, similar to that seen after Christmas, but there was really not need to wait, after deaths dropped below 100, they have already got themselves comfortably about that barrier once again and there are already some restrictions in place for the coming festival – but word is they are about to get tougher.

Not for the last time this morning I will use Chile as a benchmark – a country that has already surpassed the UK with its vaccination level (as a percentage of population) – is already locking down in order to avoid ‘vaccine complacency‘. Colombia has a bad dose itself of that complacency even though its vaccination program is moving very slowly in comparison. This is a high stakes game in terms of both lives and the very economic future of Colombia – at this juncture the Chilean model would be far preferable to follow that other regional peers, namely Brazil and Mexico, who appear to be making it up as they go along.

The Peso is under pressure and yesterday fell to 3680, passing through an important support level, traders do not see much support this side of 3800 – again the COVID situation is highlighted as one, not the only, reason.

The dollar is strong against many EM currencies however given the recovery of oil prices above the $60 level over recent months, it is disappointing to see the Peso still struggling. The Central Bank left rates at 1.75% last week, which should have helped somewhat, however still it slides. The committee also re-iterated their positive outlook for growth in 2021 with a 5.2% estimate – this is above both the FinMin and World Bank (who raised estimates yesterday) who are at 5%. Whilst it is one of the better growth rate estimates from WB with Brazil at 3% & Mexico at 4.5% it is still below Chile (5.5%) & Peru (8.1%) – these are competitive times in Latam and given the global competition for investment especially from Asia, Colombia is going to have to work hard for the money.

Rupert’s opinions & analysis as an independent expert contributor are his own and not necessarily those of Finance Colombia or the BVC.

Colombia’s COLCAP* is also struggling to attract investors despite the combination of weak YTD performance in Peso terms (-8.14%) and the Peso weakness which means for overseas investors that assets are very cheap. We have even been outperformed by Brazil (-3%) and Mexico (+8%) despite their indifferent COVID performance (I am being polite here) and modest growth outlook.

One of the reasons quite clearly is the fiscal situation – Colombia simply doesn’t have the deep pockets that Chile, Brazil and Mexico do, the reasons as to why is for another day, but that is the reality and there is a lot of ‘wait and see’ in terms of the tax reform and the fiscal rule. The ratings agencies are watching the government and investors are watching them. The tax bill is going through its ‘socialization’ process before being officially published – but soon we should have the full details. There has been plenty of leakage of items, VAT, wider tax base, less loopholes etc, but until we see what is presented in black and white, it is all speculation.

*Note yesterday the MSCI formally published their methodology for the new MSCI COLCAP index which will go live in a couple of months *

https://www.msci.com/our-solutions/indexes/index-profiles/market-cap-weighted/msci-colcap-indexes 

Tapping into this are the May 2022 elections. More and more column inches are being taken up with polls, interviews, speculation, and gossip as to who, might, might not, will, should and shouldn’t run next year. Amongst them are those, from both sides, who have criticized the reform, even before seeing it – as being a hammer that will crush the emerging middle class – this remains to be seen but if 60% of the reform gets approved the government will have done well. I am not sure who would play the Underwoods but the Colombian Congress will be a ‘House of Cards’ over the coming months.

But – it has to get done. Colombia’s much admired Fiscal Rule has been jettisoned for the next couple of years, it is an unfortunate casualty of COVID, and that is a shame as overseas investors on realizing it was a RULE not a GUIDELINE, were always impressed by the discipline that accompanied it. Hopefully, it will be back in place sooner rather than later.

Here I will be signing off for a few days, eating chocolate eggs and hoping that Colombians can maintain their discipline over the coming week in order to avoid the kind of lockdowns that are being implemented across much of Europe and the rest of the world. 

That is about it for today – remember these are just themes that jump out at me – please refer to your local analyst, economist, salesperson or soothsayer for more details.

My regards to all,

Roops