Americas > South America > Colombia > Colombia Finance Profile 2011

Colombia: Colombia Finance Profile 2011

2010/12/30

Market-based competition The fundamentals of free market competition are largely in place. Colombia has a codified competition law. The Office of the Superintendent for Industry and Commerce has a limited role in the National Competition Strategy, in which the major government agencies are involved. Specifically, the Office of the Superintendent promotes competition, including the measures that the state implements in order to pursue this strategy. Some persistent phenomena obstruct the implementation of the strategy, however. These include the high level of illegal and war-related economic activities such as drug trade and money laundering; the extensive informal sector; insufficient basic infrastructure; high non-salary costs of employing a worker; informal restraints on competition, and an insufficiently developed competitive culture. Notwithstanding these problems, the World Bank ranked Colombia in 2008 as one of the 10 best reformer countries for business activities, but generally speaking it is still not easy to be economically active in Colombia. In 2006, a Colombian entrepreneur needed 44 days to open a business (as compared to five days in the United States); by 2007 this had fallen to 38 days, which is the world’s average. Obtaining a business license requires less than the world’s average of 18 procedures and 225 days. Closing a business is relatively easy.
 
In the World Economic Forum’s Global Competitiveness Index, Colombia ranks 8th place among Latin American countries and 69th place overall, out of 131 countries. In the Index of Economic Freedom, produced jointly by the Heritage Foundation and the Wall Street Journal, Colombia’s economic freedom score is 62.3, characterized as “moderately free” (“free” would be 80 to 100; Chile, as the freest Latin American country, nearly reaches 80). This gives Colombia’s economy a ranking of 72 in the 2009 Index. Its overall score is 0.2 point higher than the previous year, primarily reflecting improved trade and business freedom scores. Colombia is ranked 15 out of 29 countries in the South and Central America/Caribbean region, and its overall score is higher than the regional
 
Anti-monopoly policy Colombian corporate law is not very flexible. Its antitrust regulations were introduced in 1959 (Law No. 155) and supplemented in 1964 (Decree No. 1302) and 1992 (Decree No. 2153), as well as by Circular 10 of 2001 of the Superintendence of Industry and Commerce, which implements the policy. In Colombia the existence of state monopolies is allowed in sectors with a strategic or national security component. Nonetheless, even these monopolies are subject to competition laws when they lead to abuses of dominant positions or monopolistic practices beyond the scope of the exception provided. Specific sectors and economic activities such as agriculture, professional sports, labor organizations and export activities are also exempted from competition laws. The law contains provisions for controlling economic concentration derived from joint ventures, mergers, acquisitions or the incorporation of companies when the effect is to diminish, harm or impede competition. To this end Colombia has merger control regulations that require an assessment of the degree of concentration and its effects on competition. In Colombia most merger deals are the result of agreement. Hostile takeovers tend to be very rare.
 
The market for mergers and acquisitions in the past two years has been rather busy, leading to a process of market concentration. There have been all sorts of deals, mainly cross-border, mostly in the retail, telecommunications, mining, energy and finance sectors. Most have been prompted by the need to find strategic alliances in various sectors rather than driven by financial concerns. Several deals have been blocked, including the proposed merger between Mexico’s Mexichem and Colombian plastic tube company Pavco, in which regulators cited concerns that the merger would be bad for competition and for consumers. The decision of the Superintendence was appealed by the two companies. In 2008, there have been more strategic acquisitions in the real sector than in investment funds, as well as a trend toward direct acquisitions rather than through the stock exchange as the delisting of important companies continues.
Generally speaking, the Superintendence is not always willing or able to prevent the emergence of monopolies. There is a close relationship between the political and economic elite which makes it difficult to enforce sanctions. In the case of conflict, members of the Superintendence often lose and have to resign.
 
Liberalization of foreign trade Liberalization of foreign trade has increased since the early 1990s. Under pressure from the IMF, the administration of Andrés Pastrana Arango (1998 – 2002) issued a decree in 1999 that standardized customs laws. Pastrana also introduced some export-promotion programs. Regulatory exceptions (differentiated tariff rates) existed for individual enterprises and industries. Colombia’s weighted average tariff rate was 8.8% in 2006. Import bans and restrictions, import price bands for certain goods, service market access limits, some restrictive standards and regulation, some restrictive import licensing, issues involving the enforcement of intellectual property rights, non-transparent customs administration and valuation, and corruption add to the cost of trade. There are some trade barriers for various products, as in the case of information technology. As a result, important non-tariff barriers still hinder Colombia’s trade freedom.
 
Exports of goods amounted to an estimated $24.4 billion in 2006. The trend of increasing exports has reflected higher commodity prices and growing foreign demand, as well as the Uribe government’s export-oriented strategy. The United States has long been Colombia’s most important trading partner (accounting for 40% of trade in 2006). Colombian exports to the Andean countries – including Venezuela, traditionally Colombia’s second-largest trading partner – have accounted for about 20% of total Colombian exports since 2000. Another principal destination for Colombian exports is the European Union. Germany is Colombia’s principal EU trading partner (accounting for 1.4% of trade in 2006). Both the United States and the European Union grant preferential access for some Colombian exports under the Andean Trade Promotion and Drug Eradication Act (ATPPEA) and the Generalized Preferences System. Colombia’s exports are more diversified than those of many other Latin American countries, but are nevertheless highly concentrated on primary goods and centered on few countries. Per capita exports in 2006 were $540 (compared to Chile’s $3,380). The expectation that Colombia could develop a stable export industry remains thus still unrealized.
 
Aided by currency appreciation, imports have soared since 1991, when the government cut tariffs and eliminated non-tariff barriers on imports. Imports of goods amounted to $26.2 billion in 2006 and $32.1 in 2007. The major suppliers of imported goods in 2007 were the United States with 26.04%; Mexico with 9.3%; Brazil with 7.2%; and Venezuela with 4.1%. Colombia’s principal imports include machinery, textiles, oil and gas industry equipment, grains, chemicals, transportation equipment, mineral products, consumer products, metal and metal products, plastic and rubber, paper products, and aircraft supplies. In 2008, the balance of trade was still positive, but the current account balance has been negative for the last several years. The current-account deficit during 2006 – 2010 is expected to widen as a result of rising import bills and higher debt interest payments.
Colombia has signed free-trade agreements with the United States, Canada, Chile, Mexico, Venezuela, the EFTA countries, the so-called North Triangle (Honduras, Guatemala and El Salvador) and the Caribbean Community and Common Market (Caricom). The Uribe administration strongly favors extending these bilateral trade agreements across the hemisphere. In May 2004, the United States, Peru, Ecuador and Colombia initiated negotiations to sign a free trade agreement. There was also an attempt to reduce trade barriers between the Andean region and the United States. The ATPDEA is part of the U.S. Trade Act of 1992, and provides the four Andean countries with duty-free access to U.S. markets for approximately 5,600 products. Since the Uribe administration follows the United States’ drug policy, it has received all the agreement’s stated benefits. It was set to expire on 31 December 2006, but has been extended several times, most recently (as of this writing) at the end of February 2008, when the U.S. Congress expanded it for an additional 10 months to the end of 2008. In the meantime, the Colombian and U.S. governments hoped to receive U.S. congressional approval of the bilateral free trade agreement successfully concluded in November 2006. However, this agreement has faced ratification challenges in the U.S. Congress. The Democratic majority in the Senate and the House of Representatives has demanded several significant changes to the treaty before approving it, especially in the areas of labor relations, intellectual property rights, union rights, medical trade, and environmental protection. Based on the bipartisan “New Trade Policy Template” agreement, the two countries also negotiated a protocol of amendment that was signed on 28 June 2007. In addition to commercial issues, it incorporates economic, institutional, intellectual property, labor and environmental policies, among others. With the agreement in place the Colombian government expects a 1% growth in GNP, but will lose approximately $1.2 billion in tariff revenues per year.
Colombia must prepare itself for the challenges involved in signing a free trade agreement with the United States. Although the Colombian economy is quite solid, there are certain sectors, such as agriculture, where small producers will likely disappear if they cannot make a few crucial adjustments. Colombian farmers fear the competition of the U.S. agricultural market. President Uribe has promised them subsidies of COP 220 million annually.
 
In the middle of 2007, the Andean Community and the European Union opened negotiations on an agreement of association. This should have included a chapter on trade, but the Andean Community initially couldn’t agree on a common position, and then later signed it. Colombia still hopes to strike a free trade agreement with the European Community, but this has not yet been concluded. After several rounds of discussions, the European Union, Colombia and Peru started negotiations at the beginning of 2009 with the aim of concluding an agreement by the end of that year.
 
Banking system Colombia’s relatively large financial sector has become more stable and modern. It has made significant progress since the crisis of the late 1990s, supported by strong economic growth, increased consumer and business confidence and improvements in the regulatory framework. During the first eight months of 2008, the financial system recorded COP 8.6 billion in profits, 60% more than during the same period in 2007.
Banking has undergone significant privatization since the 1998/1999 financial crisis. In 2000, the Colombian financial system included 29 commercial banks (four of them state-owned), the Colombian Export Promotion Bank (BANCOLDEX), 107 foreign bank offices, six savings and loans corporations (CAV’s), 10 development banks, 32 commercial finance companies, 37 trust companies, 33 insurance companies, and a state-owned mortgage bank. After 2000, Colombia’s banking regulator Superbancaria has approved some mergers, such as the merger of local banks Banco Colmena and Caja Social in 2006. BCCS is Colombia’s 12th largest bank and focuses on microcredit and mortgage loans, where it respectively commands market shares of 25% and 8%. The government has strengthened regulations and closed some banks for falling below solvency requirements. All financial institutions nationalized during the crisis in 1999 were privatized or liquidated by mid-2006. As of early 2008, the government retained 15% of total banking assets. The IMF urged President Uribe to sell two other big state-owned banks (Granbanco-Bancafé and Granahorrar), both of which were considered distressed banks. At the end of January 2007, the Financial Superintendence allowed Banco Davivienda to acquire Granbanco-Bancafé, which was the biggest privatization in Colombian history.
 
Two private financial groups account for about 45% of bank assets. In comparison with other countries in the region, Colombia’s foreign banking presence is relatively small, accounting for less than 20% of total banking assets in 2008. Credit is allocated on market terms. Foreign companies are prominent in the insurance sector and competition has intensified since 2003. Colombia’s small capital market has constrained broader access to long-term credit.
 
Colombian financial markets have been affected by the recent global turbulence, although debt and interbank markets have continued to function normally. Nevertheless, measures must be taken to increase financial depth and to improve efficiency in the use of savings. Among these (some of which have been included in the government’s financial reform project) should be a strengthening of creditor’s rights. Additional financial reform is expected and several measures to boost the capital market have also been discussed.
The crash of several illegal financial enterprises (known as the pyramid scandals) shocked the country in November 2008. These enterprises proved to be very attractive for poor people who had no access to official bank credits. Many people lost their savings due to the collapse of these companies. President Uribe subsequently declared a “social state of emergency,” but the government was not able to prevent the rise of such semi-legal financial activities following the “Ponzi scheme” model.