Solid as a Rock The Colombian economy proves its resilience - LatAm INVESTOR
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The UK’s only Latin America-focused investment magazine Q3 2016
Solid as a Rock
The Colombian economy proves its resilience
Inside: A detailed report on Colombia’s economic transition
The Lord Mayor of London
explains why UK plc should
look to Latin America
ALSO INSIDE
We analyse Brexit’s impact on Latin America
Control Risks investigates Nicaragua’s economic boom
Canning House and KPMG on the opportunities of ageing populations in Latin America
1 Q3 2016 LatAm INVESTOR
2 Q3 2016 LatAm INVESTOR
EDITOR’S LETTER
Pragmatism on the Up in Latin America
Dear reader, for miners. Finally there are signs of the ‘new
The casual observer of Latin America might economy’ emerging. Financial services are
think that the region is suffering hard times. growing quickly, especially insurance and
Overall economic growth is negative, while reinsurance where Colombia is becoming a
one of its largest countries – Venezuela – is regional hub. A LatAm INVESTOR team spent
on the verge of becoming a failed state. But almost two months travelling the length and
dig a little deeper and it’s been a very positive breadth of Colombia, speaking to the major
quarter for Latin America. The standout story figures from the public and private sector,
of the last three months is the historic peace and you can find their report from page 15.
deal in Colombia, which looks to end more
than half a century of war. Meanwhile in Peru We’re also very proud to include an article
regular LatAm INVESTOR interviewee Pedro from the Lord Mayor of London who debriefs
Pablo Kuczynski, shocked the pollsters by us on his recent trips to Latin America and
winning that country’s presidential election. explains why the region has a lot to offer
Contents UK plc. Elsewhere in the magazine you
Both events show a level of pragmatism will find the usual features, with Control
that was missing from Latin American Risks examining Nicaragua’s foreign direct
Editor’s Letter 3 politics a generation ago. In Colombia the investment miracle, and Canning House
Farc rebel group is reviled by many, yet that combining with KPMG to examine the
Stories Behind the News 4
is outweighed by the practical advantages opportunities in Latin American elderly care.
of ending a conflict that could rumble on Enjoy the issue. And don’t forget that you
Market Analysis 8
interminably. In Peru Kuczynski’s margin can keep up-to-date with breaking stories
Country Analysis 10 of victory against the daughter of a former on latam-investor.com, on Twitter via @
presidential strongman was just 0.1%. Yet the LatAmINVESTOR, or on Facebook or LinkedIn.
City View – Lord Mayor Interview 12 country’s institutions handled the result fairly
and efficiently – showcasing the strength of Until next time,
Market - Moving Events 14 its democracy.
James McKeigue
Colombia Report 15
But the main focus of this issue is on Colombia
Latam Business Opportunies 46 - a country on the verge of a fundamental
transformation. First you have the peace
Briefing 48 deal, which in addition to bringing social
harmony is opening up huge swathes of the
Investment Contacts Directory 50 country to international investors. But you
also have sector-specific shifts. For example
Property 52
in the electricity sector, a recent crisis has LatAm INVESTOR
Latin America in the UK 54
highlighted the need for massive investment Managing Editor - James McKeigue
Latin America Editorial Director - Carla Fierro
in new sources of production and a more Advisor to the Editor - Edward Longhurst-Pierce
resilient grid. Meanwhile Colombia’s huge 4G Senior Writer - Sam Joll
Upcoming Deals 56
Senior Writer - Alisdair Jones
infrastructure programme is literally changing Senior Markets Analyst - Cris Heaton
Central America Correspondent - Louisa Reynolds
LatAm INVESTOR Map 58 the face of the country, with new roads and Peru Correspondent - Darwin Cruz
airports speeding up domestic travel. Production and Commercial
Art Director - Tania Schoeman
Advertising Sales - Terri Haddon
Another change is that Colombia is coming Head of Digital - Ian Gibson
to terms with the fall in commodity prices, Editorial queries: editorial@latam-investor.com
Printed in the UK by Marketing queries: advertising@latam-investor.com
The Magazine Printing Company although peace and the improvements to the Subscriptions: customerservices@latam-investor.com
using only paper from FSC/PEFC suppliers power and transport infrastructure are major Tel: 0207 097 5121
www.magprint.co.uk structural shifts that should help reduce costs www.latam-investor.com
3 Q3 2016 LatAm INVESTOR
STORIES BEHIND THE NEWS
Olympic Boost for severe recession. economy from contracting in annual
Brazil’s Economy? terms in the same quarter.” Anywhere
W
With an estimated cost of $4.6billion, Rio’s between 350,000 to 500,0000 tourists
hat’s happened: Olympics will be far cheaper than London will visit the country for the Olympics
The Olympics arrived in or Beijing, yet it is an unwelcome burden but “assuming that these visitors spend
Brazil, raising hopes that the when the economy is due to contract the same amount on their trip as the
festival of sport can jumpstart Brazil’s by 3% this year and the government average tourist visiting Brazil, this boost
economy out of the worst recession for a is facing a ballooning fiscal deficit – in revenue would be equivalent to just
generation. especially when it is coming in $1.5billion 0.03% of GDP.”
over budget. But one of the constant
How will it impact investors? arguments wheeled out in defence of As for infrastructure, again there will
Long before the first samba dancer the Games is that this investment has a be some positive impact but again
stepped out at the opening ceremony multiplier effect, creating extra growth it will be limited. Prior to the games
Brazil’s Olympic Games had already been through tourist spend and infrastructure there was a surge of investment as
heavily criticised by the international construction. Unfortunately, in Brazil’s Brazil raced to complete key Olympic
media. The Zika virus kept athletes and case, the positive impact looks to be infrastructure commitments, such as
spectators away, shoddy accommodation limited. metro extensions. The improvements
and sporting facilities were a terrible to the transport infrastructure will
advert for the country’s workmanship, When it comes to tourist spend, London- continue delivering benefits after the
while the state of Rio de Janeiro based consultancy, Capital Economics, games, however, Capital Economics
needed to be bailed out by the federal believes that Brazil’s economy is simply notes that “the capital budget for the
government. More generally, there was too big to be significantly moved by a games is small in the bigger scheme of
a sense of bad timing as the Games, one-off event. “The 2014 World Cup led things (0.03% of GDP). This isn’t going
which had been planned in the middle of to a rise in spending in some retail sectors to plug Brazil’s (national) infrastructure
Brazil’s economic boom, arrived amidst a but this wasn’t enough to prevent the deficit, which is needed to raise its
Currency Watch
All of Latin America’s major currencies gained against the pound following the Brexit vote which saw sterling struggle.
Currency Last quarter Current rate to GBP* % Change from last quarter
Argentine peso (ARS) 20.64 19.75 4.31
Brazilian real (BRL) 5.12 4.32 15.63
Chilean peso (CLP) 964.55 871.98 9.6
Colombian peso (COP) 4258.61 4093.01 3.89
Peruvian nuevo sol (PEN) 4.81 4.43 7.9
Mexican peso (MXN) 25.75 25.04 2.76
*As of 02/08/2016
LatAm INVESTOR 4 | Q3 2016
perilously low productivity growth.”
But it is not all bad. Brazil’s recession
has shown signs of bottoming out as
the effects of the weaker real are finally
being felt by exports and industry. The
IMF expects the economy to return to
positive territory next year with annual
growth of 0.5%. It’s a long way from the
heady expansion of 5.2% when Rio first
submitted its Olympic bid in 2008, but
nonetheless it is light at the end of the
tunnel for a struggling economy.
Will the Rio Olympics light up
Brazil’s economy?
PPK Takes Office in
Peru
What happened: Nearly two months banks, and served in his country’s margin of just 0.1%, while his Peruanos
after winning Peru’s presidential election Ministry of Economy and Finance and por el Kambio party has just 15% of the
by a hair’s breadth, Pedro Pablo Kuczynski the Central Bank, so there is no doubt seats in Peru’s unicameral legislature.
assumed power on 28th of July. Now the that he has the technical ability for the In contrast the Fuerza Popular party of
hard work really begins. role. His early personnel decisions, such his defeated rival, Keiko Fujimori, holds
as Alfredo Thorne as Minister of Economy 60% of chamber, giving her the power
How will it impact investors? The and Finance, and keeping Julio Velarde as to block new legislation. An easy way
Oxford and Princeton-educated PPK, is Central Bank Governor, will also reassure to appease Keiko Fujimori would be to
probably the ideal candidate for most investors. grant a pardon to her imprisoned father,
international investors. In a distinguished the controversial ex president who splits
career the 77-year-old has held posts at His one weakness would appear to be opinion between those who regard him
the World Bank, several US investment political. He scraped his victory by a as the saviour of Peru and those who
Market Key 120
Brazil
Watch Colombia
Mexico 115
Argentina
Argentina was the
110
standout performer as
investors continued to
105
buy into the economic
reforms of market-friendly
100
new President, Mauricio
Macri. Colombia was the
95
only market in negative
territory, with faltering oil 90
hitting its performance.
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5 Q3 2016 LatAm INVESTOR
STORIES BEHIND THE NEWS
see him as a corrupt autocrat. So far and improved transport infrastructure.
PPK, who owes his election success to That is likely to see the fiscal deficit rise
the Fujimori-hating left, has appeared but, unlike many of its regional peers,
unwilling to grant the pardon, although Peru can afford it.
a compromise may be in the offing.
Speaking exclusively to LatAm INVESTOR
Ironically, the thorny issue of the pardon on his campaign, Kuczynski explained
aside, PPK actually shares many policy why these types of social investments are
views with the centre-right Keiko so important for international investors.
Fujimori, which suggests that legislation “We are very strong in mining indeed
should get passed. Indeed, as a country, we are the most competitive copper
Peru appears to have settled on a producer in the world. But of course
market-friendly, pro-growth approach there are still lots of improvements that
that means in reality Kuczynski’s policies could be made. We need to change
will follow on from his predecessor, the the distribution of royalties. Under the
supposedly leftist Ollanta Humala. PPK did well to win the election but
present scheme the areas surrounding
now the hard work really begins
the mine get a cannon, which is like a
PPK has inherited one of the best- severance tax, but they must wait a long
performing economies in Latin America, time to receive the money. First the mine roads in those areas. We should make
which has shown its resilience in the face must be built and then it must make the social investment before we start
of the commodity price fall. So far he has a profit before the local areas start to a project so that the people who live
indicated that the country will borrow benefit. However, we know where the big there are interested in what the mine can
more money to boost investment in social mines will be over the next ten to 20 years bring.” Some of Peru’s largest mining and
infrastructure, with four key themes: safe so we should make the social investment infrastructure projects have been held
drinking water for all homes; high-quality in those areas now. We should improve up by community protests and investors
public education; universal health care; electrification, schools, hospitals and will be hoping that PPK has found the
solution.
Ecuador Goes to Market
What happened? Ecuador
tapped international debt markets with a
$1billion bond issue. The money comes
at a vital time for the earthquake-hit
economy that is trapped between low oil
prices and the high dollar.
How will it impact investors?
The 10.75% coupon on the five-year
bonds is the highest that Ecuador has
had to offer in what is now its fourth
issue since its post-default return to the
markets in 2014. But despite that, the
bond was another canny piece of financial
engineering from President Rafael
US-trained economist, Rafael Correa, who has had previous successes
Correa has had success in with a selective default and subsequent
international debt markets well-timed return to the market. Cash-
strapped Ecuador has been looking to
LatAm INVESTOR 6 | Q3 2016
raise money for several months but, been observed around Latin America worth of damage.
with yields hovering at 17.5% in March, but Ecuador’s added problem is that it
decided to hold off. A further hiccup is a dollarized economy. This means it The $1billion will help but constitutional
came with the surprise Brexit vote in has no floating exchange rate to absorb restrictions mean that loans raised on
June, which sent markets into a tailspin. the shock of the falling oil price. Indeed the international debt markets can
Yet an uptick in international appetite the dollar has strengthened, making only be used for infrastructure works.
for emerging market debt helped to Ecuadorian exports less competitive However, that could stretch to repaying
drive LatAm sovereign yields down (see than that of its peers. The other role of debts to government contractors, who
page 10) and Correa was quick to take a depreciating currency is to help make are owed around $2bilion. Paying those
advantage of the 50% drop in Ecuador’s imports more expensive and thus close contractors would help provide liquidity
yields. the current account deficit. Correa has and give a much-needed boost to an
tried to simulate the same effect through economy that is expected to contract
There’s no doubt that this bond issue a series of import taxes, though it is an by 3.3% this year. Either way, Ecuador
relieves some pressure on the Ecuadorian inherently less flexible and nuanced will still be left with a shortfall. It has
economy but the fact is the remaining measure than having a currency traded other financing options and over the
challenges are severe. The largest on global FX markets against those of years it has raised significant sums from
structural pressure on Ecuador is that multiple trading partners. As if things China, natural resource companies and
the price of its main export, oil, has more weren’t serious enough, on April the 16th multilateral lenders. However, with its
than halved in the last two years. This has Ecuador was rocked by its most severe official debt-to-GDP ratio standing at
caused the fiscal and current account earthquake in a generation, which killed just 35% Ecuador could well become a
deficits to rocket. Similar pressures have hundreds of people and caused $3billion familiar face at the market.
LatAm’s Oil Giants
It was a real rollercoaster of a 140
Last Price
quarter for Brazilian oil giant YPF 101.62
Petrobras. At the end of May, it’s Petrobras 117.17 130
Ecopetrol 97.31
announcement that it had posted
120
a record loss, sent shares tumbling
yet it soon recovered. That was
110
partly driven by good news, such
as successful asset sales, but also
100
part of a broader bull market in
the Brazilian stockmarket. The 95
other listed regional oil giants –
Argentina’s YPF and Colombia’s 90
Ecopetrol – had a more relaxed
quarter, more or less tracking
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price of oil.
The Big Number
$23 billion
The value of annual trade between Brazil and Argentina, with Brazil having a trade surplus of $2.5billion. A new trade deal, which
is expected to lower the logistics costs of sending goods between the countries by 35%, was signed this quarter.
7 Q3 2016 LatAm INVESTOR
MARKET ANALYSIS
It’s been a great quarter
for Latin American markets
Markit Senior Research Analyst,
Simon Colvin, CFA, explains, how it
affects investors...
T
he controversial run-up to this month’s Rio Olympics, the five other readily traded contracts have outpaced that seen
which included accusations of unprepared venues and in Brazilian spreads on a relative basis. This rally saw a setback
unclean water have not put off investors as Brazilian in the wake of the UK European referendum, but the trend
bonds are continuing to rally in the lead up to the ceremony. was relatively short lived as every Latin American CDS spreads
The improving mood seen in Brazilian credit, as gauged by its 5 tightened below their pre Brexit level in the subsequent week.
year CDS spread, now means that Brazilian credit is viewed with
the least amount of risk in over a year. Venezuela has tightened the most in recent months as it made
an unexpected bond coupon payment which drove its spreads
The Brazilian rally is not an isolated phenomenon in the region to a new recent low. The country still leads the region’s credit
as all other Latin American countries have seen their CDS risk by an over an order of magnitude however given that its
spreads tighten in the last month. In fact the tightening seen in latest CDS spread is over 15 times the region’s average.
Markit LatAm Sovereign 5-Year CDS
MEXICO BRAZIL CHILE PERU COLOMBIA VENZEZUELA
7000
6000
5000
4000
3000
500
5Y Conventional Spread
400
300
200
100
0
6
6
‘16
6
6
15
‘16
‘16
‘16
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12
LatAm INVESTOR 8 | Q3 2016
in association with
Brazil and Mexico Manufacturing PMI
The improving mood felt across Brazilian credit still runs against the Mexico’s PMI activity also slowed down at the end of the second
facts on the ground, however, as the country is still gripped by a quarter as the June reading was indicated that the country’s
severe economic downturn according to Markit’s PMI survey. June’s manufacturing activity grew at its slowest pace in over 18 months.
survey indicated that the country’s manufacturing activity shrank This could indicate jitters leading up to the US election in November
for the 17th month in a row. Although the pace of contraction has where country’s free trade agreement with the US has been a central
rebounded from the lows seen in May, the second quarter showed issue. Mexico’s manufacturing has shown constant expansion for
that the slowdown has picked up pace from the level seen in the more than two years - could a Trump presidency be the factor that
first three months of the year. finally forces a contraction?
BRAZIL MARKIT PMI MEXICO MARKIT PMI
58
57
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54
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46
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40
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Markit iBoxx USD Emerging Markets Sovereigns
Latin America Index
Much like their CDS peers, bond
138
137 investors seem to be shrugging off
136
these downbeat economic numbers as
135
134
yield required by investors to hold dollar
133 denominated bonds issued by Latin
132
American countries has shrunk to new
131
130 recent lows. The yield of the Markit iBoxx
129
USD Emerging Markets Sovereigns Latin
128
127
America Index which tracks the asset
126 class was 50bp tighter over the second
125
quarter. This has translated into strong
124
123 returns for investors as the index was up
122 by over 7.5% over the period of time.
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9 Q3 2016 LatAm INVESTOR
COUNTRY ANALYSIS
Nicaragua’s Investment Boom
Continues
President Daniel Ortega may be a former socialist guerrilla but he has
created a welcoming environment for foreign investors, writes Gavin Strong,
Associate Director, Control Risks.
S
ince returning to power in 2007 by the government and government-
President Daniel Ortega has controlled institutions, such as the
overseen an economic boom in Supreme Court (CSJ), which on the 8th
Nicaragua. The growth has been fuelled of June stripped Eduardo Montealegre of
by dramatic increases in foreign direct the leadership of the Independent Liberal
investment (FDI). Between 2006 and Party (PLI), replacing him with Pedro
2014, levels of FDI into the country Reyes.
jumped by 208%, reaching $884million
in 2014, up from $286million in 2006. Pro-market guerrilla
And with Ortega all but certain to win the The overt politicisation of both the Gavin Strong, Associate Director,
November 2016 presidential election that CSE and CSJ reflect broader concerns Control Risks
trend looks likely to continue. Indeed his over the considerable concentration of
ruling Sandinista Liberation Front (FSLN/ power in the executive and the erosion stability and promoting economic growth
Sandinistas) also look likely to retain a of democracy in Nicaragua. Yet these – underpinned by increasing levels of
supermajority in the National Assembly concerns have not had significant foreign investment – and therefore its
(unicameral legislature), with a recent implications for Nicaragua’s burgeoning ability to create employment and invest
opinion survey conducted by local reputation as an extremely investor- in public expenditure programmes is
pollster M&R Consultores, giving the FSLN friendly destination. Last year FDI fell by integral to preserving the government’s
65% of the intended vote. 5% to $835million but that was down to popularity. The president, his family and
temporary factors, with manufacturing his inner circle have their own substantial
Despite periodic outbreaks of civil unrest being hit by the expiration of a ten- business portfolios, which gives them
and anti-government resistance, Ortega year trade preference arrangement, a vested interest in maintaining an
retains significant support among the and mining taking a knock from low investor-friendly business environment.
electorate. According to M&R Consultores, global commodity prices. FDI levels are
he has an 81.7% approval rating. Coupled set to rebound in 2016 driven by rising Nicaragua’s new friends
with his control over electoral processes, investment in telecommunications, The championing of key industries and
through the president of the Supreme services and a recovery in manufacturing. the fostering of positive relations with
Electoral Court (CSE) Roberto Rivas, his Despite his reliance on radical leftist non-traditional trade partners – most
position looks strong. The continued rhetoric to placate his core support notably China and Russia – underpin this
weakness of the opposition parties group – the poor – Ortega continues policy. Chinese companies, including
further guarantees a comfortable Ortega/ to pursue a predominantly pro-market the Hong Kong Nicaragua Canal
FSLN victory. The opposition remains agenda, largely avoiding conflict with Development Investment Company
fractured, with attempts to present a the powerful business elite and labour (HKND), are becoming the pre-eminent
single unity candidate to stand against unions, and maintaining constructive foreign investors in Nicaragua. In addition
Ortega foundering. Fractures within the relations with international creditors, such to the canal and related developments,
opposition have also been fomented as the IMF. Maintaining macroeconomic Chinese companies are making significant
LatAm INVESTOR 10 | Q3 2016in association with
investments in the telecommunication
and tourism sectors. Although bilateral
Foreign direct investment flows to Nicaragua
relations with Russia focus primarily on
military co-operation, Russian companies
are beginning to establish a toehold in a 1,000
variety of commercial sectors.
800
However, the increasing presence of
Millions of dollars
companies from China and Russia
600
has caused disquiet in some quarters,
including in the ICT sector. This is
particularly the case following the 400
launching of mobile phone and landline
services by Beijing-headquartered
200
Xinwei Telecom Technology (Xinwei) in
06
07
08
09
10
11
12
13
14
15
April. Xinwei CEO Wang Jing is also the
20
20
20
20
20
20
20
20
20
20
president of HKND. Xinwei’s market entry Year
will likely limit investment opportunities
for other ICT firms operating, or seeking by a number of multinationals, including developing projects and market entrants
to invest, in Nicaragua. Xinwei is set to those already operating in the country. – are eligible for the exemptions.
receivable favourable treatment in the
context of the growing importance of This policy is part of a wider effort – which These are likely to be complemented by
Chinese investment to the Nicaraguan includes developing the renewable targeted tax breaks in sub-sectors – such
economy in general and the government’s energy sector and the country’s nascent as wind, geothermal and photovoltaic
development of flagship infrastructure oil and gas industry – to diversify the (solar) – as well as efforts to streamline
projects in particular. economy and reduce dependence on the bureaucratic processes. One important
largesse of the Venezuelan government. step would be to expedite the awarding
Opening up new sectors In June 2015 the National Assembly of project licenses and passage of goods
The government remains particularly approved an amendment to the Law for through customs.
keen to develop the mining sector, the Promotion of Electricity Generation
which is reflected in Ortega’s periodic with Renewable Sources (Law 532), which Despite the government’s pro-market
pronouncements of its importance to extended tax benefits for investors until stance, challenges to doing business
the economy. British firm, Condor Gold, January 2018. The extension is part of a persist. These include pervasive
is already active in Nicaragua’s mining government effort develop the renewable corruption, an inefficient and heavily
sector. According to Ortega, foreign energy sector. It aims to attract $4billion politicised judiciary and land issues,
investment in the mining sector is vital of investment to the sector over the next such as inconsistency in land titling,
as the country lacks the expertise and 15 years to achieve its goal of ensuring inadequate protection of property rights
financial wherewithal to develop and that 91% of the country’s electricity is and land invasions.
operate large-scale mining concessions. produced from renewable sources by
Ortega’s championing of mining has 2027. As a result of the extension, investors However, such obstacles are offset by the
been underpinned by concerted efforts in Nicaragua’s renewable energy sector government’s business-friendly agenda;
by the government investment agency will continue to receive exemptions from: the relatively low-cost and young
ProNicaragua to raise the industry’s import duties, income tax and value- labour force; and the benign security
profile among prospective investors. added tax (VAT ); municipal-level taxes environment, particularly in comparison
This has included the deployment of relating to real estate, sales, registration of to the Northern Triangle countries, El
trade delegations to various countries, property during the construction phase; Salvador, Guatemala and Honduras.
including Canada, as well as the taxes pertaining to the exploitation of With Ortega’s rule set to be extended by
organization of the country’s inaugural resources; and so-called ‘tax stamps’. All the election later this year, Nicaragua’s
international mining congress—attended companies – including those already economic boom looks set to continue.
11 Q3 2016 LatAm INVESTORCITY VIEW
London and Latin America
Lord Mayor, Jeffrey Mountevans, tells LatAm INVESTOR about his recent
trips to Latin America and the business opportunities he sees in the
region…
I
have recently returned from extensive services sector. This access permitted
visits to Latin America, taking in high-level discussion of the economic
Panama, Costa Rica, Chile, Brazil and and regulatory challenges facing Costa
Cuba. What struck me most about the Rica as it progresses through the formal
visits was the commonality I found accession process for membership of the
between the UK and these thriving, OECD.
diverse nations and the desire for us to
work more closely together. I also had a wide-ranging conversation
with the regulators for the pensions,
Central American hubs
Visiting Panama and Costa Rica in
the immediate outcome of the EU
Referendum naturally meant that many
of my conversations with Government
and business focussed on the impact of
Lord Mayor
a Brexit on the financial services sector
Jeffrey Mountevans
in London and on the UK’s international
relationships. It proved to be an excellent
opportunity to reassure everyone that the regularly feature on the Mayoral overseas
UK is still very much “open for business.” itineraries, the visit to Cuba was the
insurance and financial services sectors first by a Lord Mayor. Despite their
The visit to Panama was timed to coincide in Costa Rica, and considered the differences, the primary purpose of
with the opening of the enlarged potential for collaboration with the UK visiting each country was to familiarise
Panama Canal. This major infrastructure on reforming supervisory structures, government and businesses with the
upgrade was completed in May 2016, as well as the challenges caused by capital and international advisory
with wider locks to accommodate the segmentation in the banking sector expertise available in London which we
larger New Panamax ships. With my and by inequalities between the public did very successfully. We also explored
background in ship broking the visit had and private pension providers. We also ways in which the City of London can
a strong maritime theme; focussing on looked at the interaction of all of these support infrastructure growth and the
the potential of London as a source of sectors with infrastructure projects, and development and professionalisation of
finance for future infrastructure projects, how best to access global capital. the financial services sector. The potential
as well as the development of Panama role of alternative sources of London-
as a logistics hub and financial services Finding finance based capital, such as green finance,
centre for the region. Earlier in the year, in April and May, I in supporting ambitious infrastructure
visited Chile, Brazil and Cuba. These projects was widely discussed in
In Costa Rica I met with President Solis, three countries are markets at different meetings in all three countries.
along with the Finance Minister, the stages of development and accessibility,
Central Bank and the regulators of each with its own opportunities and The visit to Chile was timed to coincide
the insurance, pensions and financial challenges. And while Chile and Brazil with Expomin 2016, the country’s
LatAm INVESTOR 12 | Q3 2016Panama is a financial centre and
logistics hub
promotional trade fair for its globally regulators, particularly on the issue of looks forward to supporting Cuba in this
important mining sector, and ahead of reform in the insurance and reinsurance pivotal phase of its development and
the visit to London of the President of sectors. The UK’s offering in green finance growth.
Chile, Michelle Bachelet, a few weeks and FinTech also incited interest, and
later. Although Chile is a very open there are significant opportunities for My visits to the Latin American countries
economy, the fall in the price of copper further collaboration with Brazil’s asset generated much food for thought and
and other commodities, together with managers and the family offices of ultra- for action. They afforded an excellent
a slow-down in economic growth and high net worth individuals. opportunity to raise awareness of what
a decline in investor confidence, is London has to offer, and I am confident
provoking business and government to Cuba is a country quite unlike any we have the expertise, depth of capital
consider ways to build more efficient other. My visit followed in the wake of and liquidity to help support the next
models into previously high-performing the Foreign Secretary who had signed century of Latin American growth.
sectors to compensate for the declining a Memorandum of Understanding
prices. Here the UK’s burgeoning FinTech with Cuba on financial services sector
industry well-positioned to help. Green collaboration. Building on this, my What does a Lord Mayor do?
finance was particularly relevant to many discussions with the Cuban authorities The Lord Mayor is head of the Square
of the challenges facing the mining centred on capacity-building and the Mile’s City of London authority for one
industry, where energy use and water possible support to be found in London year and the position is unpaid and
management are key considerations. The as Cuba considers economic reforms. The apolitical. The Lord Mayor represents
visit underlined Chile’s potential as the merging of the two Cuban pesos – one City businesses and helps the City
sophisticated access point for the Latin used by Cuban nationals and one by Corporation advise the Government of
American markets and the increasingly foreign visitors – and the multitude of the day on what is needed to help the
economically integrated countries of the exchange rates associated with them, will financial services sector to function well.
Pacific Alliance - Chile, Peru, Colombia, be a significant hurdle to progress and a
Mexico. financial services sector will need to be The Lord Mayor frequently travels to
built more or less from scratch. However, represent the City; and travels overseas
My visit to Brazil came at an economically this poses exciting opportunities for with the status of a Cabinet Minister. The
challenging time for the country. I was Cuba and the UK to work together. Our Lord Mayor meets several international
keen to stress that the UK is not a fair- financial services sector is obviously well Heads of Government and business each
weather friend but that I see a strong established, and we have the global month to discuss financial services, often
bilateral relationship between our services and skills to help Cuba realise in conjunction with senior City business
two countries. I was also able to have its ambitions. The visit came at a very representatives.
useful conversations with business and interesting time, and the City of London
13 Q3 2016 LatAm INVESTORMARKET-MOVING EVENTS CALENDAR
JULY AUGUST SEPTEMBER
Friday 1st Tuesday 2nd Friday 2nd
1:00 PM - Brazil - Industrial Production YoY 8:00 PM - Colombia - ISE Economic Activity YoY 10:00 PM - Colombia - Exports YoY
7:00 PM - Brazil - Balance of Trade
8:00 PM - Colombia - Exports YoY
Thursday 4th Monday 5th
2:00 PM - Mexico - Business Confidence 2:00 PM - Mexico - Business Confidence
Monday 4th 2:00 PM - Mexico - Consumer Confidence
9:30 PM - Argentina - Tax Revenue
Tuesday 6th
Saturday 6th 2:00 PM - Mexico - Consumer Confidence
Tuesday 5th 1:00 AM - Colombia - Inflation Rate YoY 3:45 PM - Mexico - Auto Exports YoY
1:30 PM - Chile - IMACEC Economic Activity YoY
8:08 PM - Colombia - PPI YoY
Monday 8th Friday 9th
12:00 PM - Chile - Core Inflation Rate MoM 4:20 PM - Colombia - GDP Growth Rate QoQ Q2
Wednesday 6th 12:00 PM - Chile - Inflation Rate YoY
1:00 AM - Colombia - Inflation Rate YoY 12:30 PM - Chile - Exports
2:00 PM - Mexico - Business Confidence 12:30 PM - Chile - Imports
Tuesday 13th
2:00 PM - Mexico - Core Inflation Rate MoM 3:00 PM - Mexico - Foreign Reserves Exchange
Thursday 7th
1:30 PM - Chile - Balance of Trade Thursday 11th Thursday 15th
2:00 PM - Mexico - Industrial Production YoY 10:00 PM - Chile - Interest Rate Decision
2:00 PM - Mexico - Inflation Rate YoY
4:10 PM - Mexico - Auto Production YoY 7:00 PM - Mexico - Interest Rate Decision
Friday 16th
Friday 8th Friday 12th 3:00 PM - Brazil - Business Confidence
3:00 PM - Brazil - Business Confidence 4:00 PM - Colombia - Consumer Confidence
1:00 PM - Brazil - Inflation Rate YoY
1:00 PM - Chile - Inflation Rate YoY 8:00 PM - Argentina - Inflation Rate MoM
10:00 PM - Chile - Interest Rate Decision Monday 19th
Tuesday 12th 8:00 PM - Argentina - GDP Growth Rate QoQ Q2
1:00 PM - Brazil - Retail Sales YoY Tuesday 16th
2:00 PM - Mexico - Industrial Production YoY 3:00 PM - Mexico - Foreign Exchange Reserves Wednesday 21st
3:00 PM - Mexico - Foreign Exchange Reserves 2:00 PM - Mexico - Private Spending QoQ Q2
9:00 PM - Argentina - Retail Sales YoY
Wednesday 17th
Thursday 14 th 3:00 PM - Colombia - Consumer Confidence
11:00 PM - Chile - Interest Rate Decision 8:00 PM - Argentina - Unemployment Rate Q2 Thursday 22nd
4:00 PM - Argentina - Consumer Confidence
Friday 15 th
Thursday 18 th
9:45 PM - Colombia - Industrial Production YoY 12:30 PM - Chile - GDP Growth Rate QoQ Friday 23rd
9:45 PM - Colombia - Retail Sales YoY 6:30 PM - Brazil - Federal Tax Revenues 8:00 PM - Argentina - Industrial Production YoY
Monday 18th Friday 19th Monday 26th
10:00 PM - Colombia - Balance of Trade 3:00 PM - Mexico - Current Account Q2 2:00 PM - Mexico - Economic Activity YoY
7:00 PM - Brazil - Net Payrolls
8:00 PM - Argentina - Current Account Q2
Tuesday 19th Monday 22nd
8:00 PM - Argentina - Economic Activity YoY
3:30 PM - Brazil - Federal Tax Revenues 2:00 PM - Mexico - GDP Growth Rate QoQ Final
10:15 PM - Colombia - Interest Rate Decision
9:00 PM - Argentina - Retail Sales YoY 8:00 PM - Argentina - Economic Activity YoY
Wednesday 28th
Wednesday 20th Tuesday 23rd
2:00 PM - Mexico - Unemployment Rate
11:30 PM - Brazil - Interest Rate Decision 2:30 PM - Brazil - Current Account
2:30 PM - Brazil - Foreign Direct Investment
Thursday 29th
Tuesday 26th
8:00 PM - Mexico - Interest Rate Decision
2:00 PM - Mexico - Balance of Trade Wednesday 31st
8:00 PM - Balance of Trade 9:00 PM - Colombia - Interest Rate Decision
11:30 PM - Brazil - Interest Rate Decision Friday 30th
1:00 PM - Chile - Copper Production YoY
Friday 29th
1:00 PM - Chile - Industrial Production YoY
8:30 PM - Colombia - Interest Rate Decision
LatAm INVESTOR 14 | Q3 2016THE COLOMBIA REPORT
This Way Investors
Colombia welcomes international capital
Face-to-Face: We interview Colombia’s Ambassador to the UK
The Big Interview: Governor of the Colombian Central Bank, José Dario Uribe
In-depth Sector Analysis: Electricity – Mining – Infrastructure – Insurance
15 Q3 2016 LatAm INVESTORCOUNTRY REPORT | COLOMBIA
PANAMA
Colombia
Population GDP Inflation
49 m $667 bn 8.6%
CAPITAL
GDP per capita GDP growth Bogotá
(current US$)
2.5% CURRENCY
Colombian Peso
$13,800 2015
CONTINENT
South America
OFFICIAL LANGUAGE
Spanish
National GDP Composition
Tax Rates Politics
CORPORATE SERVICES
PRESIDENT
25% 56.7% Juan Manuel
PERSONAL
Santos
INCOME
AGRICULTURE EXECUTIVE BRANCH
33% 6.4%
The current Head of Government is
President Juan Manuel Santos.
SALES LEGISLATIVE BRANCH
16% INDUSTRY A bicameral Congress consists of a
102-member Senate of Colombia
36.9% and a 161-member Chamber of
Representatives of Colombia – both
elected every four years by
proportional representation.
JUDICIARY BRANCH
Global Rankings It is composed of lower courts that
are supervised by four higher
Corruption Rank 83 courts: the Constitutional Court,
the Supreme Court, the Council
of State and the Superior Council
Competitiveness Rank
61 of Judicature.
The last elections were held on
Ease of Doing Business 54 May and June 2015 and the next
are due in 2018.
LatAm INVESTOR 16 | Q3 2016Main Trading Partners
Exports Imports US
Petroleum, coal, Industrial equipment,
emeralds, coffee, US PANAMA transportation equipment, 28.9%
nickel, cut flowers,
bananas, apparel
27.5% 7.2% consumer goods, chemicals,
paper products CHINA
CHINA
18.6%
5.2% MEXICO
SPAIN
4.4% 7.1%
OTHER ECUADOR OTHER GERMANY
51.8% 4% 41.2% 4.2%
GDP per Capita Growth (Annual %)
10
8 8.3
8
7.3 6.9 7.3
6
4
2 1.8
2
0
-2 -1 -0.3 -0.6
-4 -1.9
-6 -3.8 -5.5
1990 2000 2001 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Foreign Direct Investment, Net Flows (% of GDP)
6
3.7
4
2.4 2.1 2 2.4 1.9 2.5
1.3 1.1 1.7 1.5 1.1
2 0.8
0
1990 2000 2001 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
17 Q3 2016 LatAm INVESTORCOUNTRY REPORT | COLOMBIA
PANAMA
Colombia – The Start of
a New Era
Colombia’s modern history was marked by major turning points in 1886, 1956 and
1991. One day 2016 will also be judged a seminal year…
T
he ceremony was delayed, the Colombia put a final nail in the coffin government ups social spending to
photo-op handshakes were of the stereotype that it is a dangerous reintegrate ex combatants. But over the
awkward and the heat was country. Bernardo Vargas, President longer term the economy should benefit
stifling – but nonetheless the meeting of ISA, a Medellin-based, electricity, as foreign direct investment grows.
in Havanna was a huge success. Pictures telecoms and transport infrastructure Colombia’s Central Bank Governor, José
of Colombian President, Juan Manuel company with operations across the Darío Uribe, told LatAm INVESTOR that
Santos, and Farc leader, ‘Timochenko’, region, told LatAm INVESTOR that the peace “will have a favourable impact
were beamed around the world as PR win would have tangible results for on investment, both from international
the prospect of a peaceful end to the the country’s firms. “The peace deal will and local players, and we will see more
52-year-old conflict hit the headlines. have a huge psychological impact on growth in rural areas.”
Since that September 2015 meeting the international investors and encourage
peace process has picked up pace. The them to come to Colombia.” The The new economy
government will now put the deal it increased investor interest in Colombia is But Colombia’s transformation isn’t just
has made before the Colombian people likely to be particularly strong in the UK, connected to the peace process. Other
in a referendum and, if approved, will where a Sate Visit of President Santos is structural factors are also changing
implement a pre-agreed schedule that planned for November this year. the country. Colombia’s immense
should see the Farc disarmed in six infrastructure programme, which is
months. It’s a remarkable achievement But the peace agreement will also have seeing tens of billions of dollars being
that heralds a historic turning point in a big impact on the ground. Daniel invested in upgrading and extending
the country’s future. Linsker, from the Colombia office of UK the country’s road and rail networks
consultancy Control Risks, notes that and seaports and airports, is finally
Of course there are plenty of bumps even if some ex-guerrillas turn to crime showing real progress. The scale of the
in the road ahead. As Alejandro Eder, the profile of their targets will change. programme meant it suffered delays as
former Executive Director of the National “Acts of sabotaging pipelines or power the National Infrastructure Agency, the
Reintegration Agency, told us, “the infrastructure are politically motivated government and local and international
post-conflict period will come with its and it’s unlikely that ex guerrillas would investors, looked for ways to make
own set of challenges”. Indeed some ex maintain these activities in their new the unprecedented amount of mega
guerrillas are likely to move into other groups.” He also highlights that any new works get off the ground. But a clutch
armed groups, such as the ELN, or form splinter groups would lose the Farc’s of financially-closed deals this year has
criminal gangs. But while the challenges considerable scale, which it uses for given the infrastructure story impetus.
are substantial they are far outweighed logistics or weapons purchases.
by the benefits of the peace deal. The economic benefits of improving
At its peak the Farc controlled 40% of transport links in one of the Latin
The first gain comes in the form of the Colombia, an area of land roughly the America’s largest countries are obvious.
huge international public relations size of Spain. The peace deal means that For starters, the investment comes at a
victory. The symbolism of ending the those huge swathes of the country are time when GDP growth is slowing, thus
conflict with one of the world’s most opened up to investors. In the short- helping to provide a timely counter-
notorious guerrilla organisations helps term peace may prove costly as the cyclical economic driver. But it will also
LatAm INVESTOR 18 | Q3 2016have a more long-lasting impact on Colombia’s industrial base can use the Contents
Colombia’s productivity. By reducing cheap peso. Indeed on page 32 we look
the time that goods get to market and at how Cali is looking to become a hub Colombia at a Glance 16
employees get to work it will boost for non-oil exports.
A New Era 18
Colombia’s competitiveness. As a side
effect, it should help to cement peace, A lot of the factors behind this era- Electric Shock 20
by establishing the state’s presence in changing moment can be traced back to
former guerrilla areas. the last one. In 1991 Colombia created a Mining - A Glittering Future 24
new constitution that cemented peace
Of course Colombia’s industry has already with rebel group M-19, decentralised Natural Resource Talk - Minister Arce 26
received a large competitiveness boost. power to the regions, ended the old
Cali Calling 28
Over the last two years the Colombian convention of power-sharing between
peso has fallen around 40% against the liberals and conservatives and opened
Face-to-Face: Ambassador 30
dollar. The fall largely mirrors the drop in up the economy to international Osorio
the price of oil, Colombia’s main export. investors. Britain played a significant
Insuring Success 34
The reduction in the value of oil exports role in that last transformation, from
has pushed up the current account the help of UK security advisors to the The Big Interview: Governor Uribe 38
deficit, which puts pressure on Colombia huge investments made in the extractive
Rebuilding Colombia 40
to boost non-oil exports. There are some sectors that made the Britain the second-
signs that this is happening already. largest foreign investor in Colombia.
For example Governor Uribe, notes Now Colombia is undergoing another Useful Contacts
that tourism has responded quickly epoch defining point in its history with
Colombian British Chamber of Commerce
to the depreciating peso, with more a peace deal, infrastructure programme Patricia Tovar (Tel) +571 2562833
international visitors taking advantage and economic rebalancing that will all
UK Colombia Trade
of Colombia’s beautiful landscapes and reshape the country. Hopefully British Alejandro McAllister (Tel) +57 1 3268237
great value. But there is also hope that investors are part of the story once again.
19 Q3 2016 LatAm INVESTORCOUNTRY REPORT | COLOMBIA
PANAMA
Electric Shock
International capital is needed to fund the Colombian power sector’s transformation
and expansion...
T
his spring the El Niño weather It created serious challenges but we
phenomenon made itself felt did not have blackouts or power cuts.
in Colombia. It caused severe Indeed it showed the resilience and
droughts across vast swathes of the management of the system because our
country. The first to be hit were the energy saving plan helped to avert worse
farmers, as many lack irrigation. But consequences.”
as the dry spell wore on it took the
country’s reservoir levels to dangerously The view is shared by Jorge Pineda, the
low levels and that was bad news for CEO of TermoemCali, one of the standby
the country’s electricity sector, which thermal power plants that had to step
relies on hydroelectric plants for around up and provide the extra electricity. “In
70% of production. The situation was 1992 we had a severe El Niño and the
exacerbated by a fault at Colombia’s impact was much worse, with power Astrid Álvarez, President of EEB,
biggest dam, Guatapé which produces cuts and blackouts. Our power plant, and believes peace will bring
10% of the country’s electricity. expansion
By March the political strain was vulnerability in the system. At present
beginning to show. The Minister for the transmission lines in the country run
Mines and Energy was forced to resign, down the mountain ranges in the centre
while the government exhorted citizens and the west of the country. But we need
to cut energy use. The energy problems to improve the connections between
also had a significant impact on the them so that if one facility has a problem,
economy. With hydro plants producing it doesn’t impact the whole system. We
less, the country’s fleet of standby also need to extend the reach of the
thermal power plants were called into transmission network as there are huge
action, which meant a switch to much swathes of the east of Colombia that are
higher electricity costs. In May the rains untouched. We have a lot to do, which
returned, bringing much-needed relief to is why we are keen to work with new
the sector. As the water returned and the strategic partners.”
standby thermal power stations could be
wound down, the post-mortem began. Impact of peace
others like it, was established in the wake Of course there is a very simple reason why
Astrid Álvarez, President of Empresa of that El Niño and I would say that our large parts of Colombia are untouched
de Energía de Bogotá (EEB), a major performance during this one, showed by electricity transmission lines. For the
player in Colombia’s gas and electricity that it was the correct policy decision.” last half a century guerrillas, the largest
distribution and transmission markets, being the Revolutionary Armed Forces
believes that there were a lot of positives That’s not to say that there are no lessons of Colombia (FARC), have controlled
to take from the situation. “It is an that can be learned from the episode, huge sections of the country, making
exaggeration to say that the sector is in says Álvarez. “I do feel that the situation it impossible for companies like EEB to
crisis. It was an unusual event that hit shows how much work we still have build the infrastructure that Colombia
the production of hydroelectric dams. to do. We need to work hard to reduce so badly needs. Now, there are signs
LatAm INVESTOR 20 | Q3 2016that this will change. The historic peace The benefits of the peace accord will
agreement with the Farc, will not solve all not just be measured in new territory
of Colombia’s problems overnight, yet it and safer facilities, says Bernardo
will open up new sections of the country Vargas, President of ISA, an electricity
to development. transmission company that also has
interests in telecommunications and road
“Peace will create lots of potential for infrastructure in Colombia and various
development throughout the east and countries of the region. “The peace deal
south of the country”, explains Álvarez. “In will have a huge psychological impact
fact many of the areas that were off limits on international investors and encourage
because of the conflict actually contain them to come to Colombia. Back in
the best potential for the electricity the 1990s I was in charge of attracting
sector. You have strong river systems and investments to Colombia, and one of my
excellent topography, which could create biggest challenges was counteracting
new power plants that can be connected the narrative that we were a narco-
to the transmission network.” state. In fact, successive Colombian
governments have already improved the
“We have already started work on security situation but the international
projects in the newly reclaimed areas. It’s impact of this peace deal will be an
not easy as there are large minefields, so important public relations victory for
we have been working with the army to Colombia.”
demine these zones. One of the unique
characteristics of the transmission Attracting investors
business is that we pass through areas Peace may help drive interest in
that other large companies don’t enter. Colombia’s energy sector but there
That gives us a chance to improve those is already considerable international
areas as with each line we are bringing involvement. Earlier this year Canadian
peace and development to these investor, Brookfield Asset Management,
communities. We leave infrastructure, paid $2billion for a majority stake in
such as roads, and safety in our wake so Isagen, a large hydro generator that’s
it’s an important move for the country – responsible for around 20% of Colombia’s
not just EEB.” power output. The deal was criticised by
some locals, who felt a national jewel
Of course there are considerable was being sold too cheaply, yet the
challenges associated with the post- huge investment was a tangible sign of
conflict era that Colombia is entering, international confidence in Colombia’s
not least the issue of integrating ex- energy sector.
combatants into peaceful roles in
society. But the electricity sector in For Álvarez alliances between local players
particular looks like it should benefit, like EEB and “strategic international
explains Daniel Linsker at Control Risks. investors” is key for the development
“There is a danger that some ex guerrillas of Colombia’s power sector. “Obviously
will still carry out criminal practices such these are large investments, but it’s not
as extortion or the narco trade, albeit for just about money. We also want partners
new organisations. However, the current with experience and know-how that, in
acts of sabotaging pipelines or power some cases, are keen to work as operators
infrastructure are politically motivated too. We have had a good experience with
and it’s unlikely that ex guerrillas would international players, for example the
maintain these activities in their new Italian firm Enel is investing $1.3billion
groups.” in a hydroelectric project with us. One
21 Q3 2016 LatAm INVESTORCOUNTRY REPORT | COLOMBIA
By focusing on smaller hydro projects
Gen+ avoids some of the protests
associated with larger ones
advantage we have is that Colombia has public companies are now more open Working with large established local
well-established institutions and fair to working with international investors. partners on defined projects may be a
regulations. A number of global investors Cristina Arango, President of Emcali, a successful route, yet things are more
have made long-term investments in multi-utility owned by the municipality complicated for greenfield projects.
Colombia’s regulated sectors and have of Cali, says the entity is now considering HPI LLC is a US-based thermal power
seen their contracts respected, so that partnering with the private-sector. “We plant specialist that has experience in
makes our risk profile attractive to future have a lot of investments that we need various Latin American countries and
partners.” to make, so it makes sense to bring other is looking to develop a $725million
power station in Colombia. So far it has
Of course international investors want found the business environment for
to make sure that they know who they greenfield projects challenging, explains
are entering into deals with. One of HPI President Hal Pontez. “There is a
the interesting elements of Colombia’s problem with the market design here.
power sector is the combination of It doesn’t provide the incentives that
ownership structures, from wholly private developers need to get a thermal power
enterprises, mixed public and private
and then wholly public. Firms like Isa and
EEB have a mixed ownership structure,
something Álvarez believes gives them
an advantage. “It helps that we are a mix
of public and private capital. When you
partner with EEB, you are partnering the
people of Bogotá, who benefit from our
successful investments, and our minority
shareholders. That mixed ownership
means that there is a lot of support for
the company.” In a strategic, and often
political, sector such as energy, there
are clear benefits to having millions of investors on board. Also we want to take
citizens as fellow shareholders. advantage of the latest technology so if a
Gen+ President,
partner can bring that to the table, then
Luis Cardenas
There are also signs that the fully- even better.”
LatAm INVESTOR 22 | Q3 2016You can also read
