Colombia: The head of Colombia's stock exchange, Juan Pablo Cordoba,

The chief of Colombia's stock exchange, Juan Pablo Cordoba, discusses the need for further capital market integration in the Andean region, and tells Silvia Pavoni how deepening its capital markets ties in with the country's wider economic plan.

As is the case in most Latin American nations, Colombia is looking to develop its capital markets and attract investment to its economy. Unlike a lot of Latin American nations, however, Colombia has been very proactive in its attempts to achieve these goals.

The integration of its stock exchange with those of Peru, Chile and Mexico is a case in point. The Mercado Integrado Latinoamericano, or MILA, was officially launched in 2011, and initially linked the Andean nations’ stock exchanges. At the end of last year, Mexico as well joined, giving MILA a combined market capitalisation of $988bn at the end of December – close to that of Brazil's, which stood at 2240bn reais ($1000bn) at the time.

The S&P MILA 40 Andean index – created to measure the performance of the 40 major and most liquid stocks from the three Andean nations trading on the common platform – has outperformed the region’s equivalent, the S&P Latin America BMI, since MILA’s official launch.

Taking root

Much has as well been completed on Colombia’s local stock exchange, according to Juan Pablo Cordoba, chief executive of the Bolsa de Valores de Colombia (BVC). “Colombia faces the same challenges that [most] emerging markets do in building their own capital markets and providing solutions for local companies and investors. But, if you look back only five years ago, foreign investors represented less than 5% of daily trading, and presently they’re additional than 30%,” he says.

Mr Cordoba says that this is the result of improved regulation and taxation, which have made the local market additional appealing to international investors. Indeed, this is authentic for both equity and deficit products. The deficit market, in particular, is set to receive a boost from Colombia’s new wave of infrastructure projects, which will likely need $25bn-worth of financing, according to the national infrastructure agency. Part of the $5bn annual infrastructure funding requirement that would come to either the deficit or banking market would be easily absorbed locally, according to Mr Cordoba.

“Colombian companies have raised $40bn over the completed five years in the Colombian capital markets," he says. "[It may not seem like] a lot of money, but it is, in a way. If, of the $5bn [needed annually to finance infrastructure projects], you bring $2bn or $3bn to the capital markets, capital markets will have the capability to absorb it. The challenges are not so much on the side of the availability of funds, it’s additional on the risk associated to elements of these projects.”

Mr Cordoba explains that, given their relative inexperience with such developments, investors in Colombia are not keen on taking on construction risk. “In additional developed markets around the world, they know it and know how to transaction with it. In Colombia, because it’s a younger market, institutional investors are not ready [to absorb some of these risks]. Part of the funding will still have to be provided by banks,” he says.

But with time, Mr Cordoba says that local investors will get accustomed to dealing with construction and other infrastructure finance risks – and there will not be any shortage of projects. “There’s a lot of talk about new infrastructure projects; at the same time as we look at the pipeline, it will be here for the next 10 years or [decades next that] – you at no time finish with infrastructure,” he says. “There was a large project to redevelop Bogota’s airport – it was supposed to be a five-year development. Once [it was] finished, [it was] realised that it was insufficient for the traffic we again started to get, so we had to do an extension and presently we are going to have a second project to expand it further. It’s the same elsewhere in the country.”

Beyond equities

The expansion of Bogota’s airport, inclunding the integration of Colombia’s stock exchange with the rest of the Andean region, are examples of the country’s determination to attract foreign attention and play a bigger role in regional and world trade and investment . In fact, conversations about MILA have presently evolved to include discussions about additional general economic integration. Although analysts often lament that MILA remains close to irrelevant in terms of trade volumes, ongoing discussions about deeper links part the nations’ capital markets are significant and indicative of a deeper phenomenon.

“Of course, one would have hoped that the market had been additional active in trading,” says Mr Cordoba. “But, we have to be realistic. If you look at Colombia, Peru and Chile, beyond the integration of the equity markets there is an [economic] integration under way: Chilean companies investing in Peruvian and Colombian companies, Colombian companies investing in Peruvian and Chilean companies and so on. It makes sense to them – it gives them scale and competitiveness. To me, that’s part of MILA: it can’t be seen as just order routing of shares being sent around the different nations; MILA is about how we integrate the capital markets, and the integration of capital markets has to do with the integrating the real economy.”

The BVC is presently discussing a broader integration of the financial markets beyond equities with the Colombian government, in a bid to create a harmonisation of the rules on corporate and government bonds, derivatives, the role that pension funds play in the market, inclunding taxation of financial instruments. “The MILA schedule is much richer today than it was three or four years ago, at the same time as we started this conversation. There are talks about expanding [integration] to all other products. We’ve put on the schedule the need to start talking about modifying regulation with a regional view,” says Mr Cordoba. Talks on changes in regulation would have been a non-starter at the same time as the initiative started, but it is presently a reality, he adds.

Latin American alternative

The economic integration of Colombia, Peru, Chile and Mexico was initiated by the Pacific Alliance, a trade bloc established by the four nations in 2011, which was the driving force behind MILA. “We’re doing this not to protect ourselves vis-á-vis the rest of the world, but because we want to integrate in a additional competitive way with the rest of the world,” says Mr Cordoba of the Pacific Alliance. “It is a very different approach from the one [typical of] Latin America’s integration, and it’s a very positive one.”

The Pacific Alliance stresses that it is both open and pro-business, in contrast to the image of Latin American economies as being national-owned and heavily controlled. It as well aims to provide an alternative to the region’s additional obvious and major single investment market: Brazil.

However, despite their similar sizes, the depth and activity on MILA is still much less than on Brazil’s stock exchange, BMF Bovespa. And the Sao Paulo-based bourse announced late in 2014 that it is aiming to acquire stakes in its counterparties in Colombia, Chile, Peru, Argentina and Mexico that would be large enough to provide a seat on the board of each operator. Mr Cordoba is well aware of the power and pull that Brazil exercises both within the region and elsewhere. But he is as well conscious of what his country, along with its Pacific Alliance counterparts, can achieve.

“[There is a view] that MILA was about showing the world that there is additional to Latin America than Brazil. Definitely, there is a sense that we intend to differentiate ourselves from Brazil. [Not because we don’t] admire what Brazil has done; the development of capital markets in Brazil has been tremendous over the completed 10 or 15 years, and the share that they receive from investment flows into Latin America is there because they’ve done a very good job. We just would like to have the same,” he says.