Peace Negotiations Key to Continued Investment Strength in Colombia

The Colombian government has made significant headway in peace negotiations with the guerilla group Fuerzas Armadas Revolucionarias de Colombia (FARC), and last week, discussions in Havana, Cuba—which have been underway for nine months—reached a new high with a partial agreement that could eventually allow FARC to participate in Colombian politics. 
 
The move has met with some criticism from nay-sayers who claim that President Carlos Santos’ government has made too many concessions to a group that continues to exercise violent acts, many of which have been targeted at Colombia’s thriving energy sector. Although the bombing of oil pipelines and other energy-related projects do make the news, they do not represent a major threat to Colombia’s energy sector, which in the past years, has become the important investment destination for foreign capital, according to Joseph Tulchin, senior fellow in the Mexico and Central America Program at Harvard University’s David Rockefeller Center for Latin American Studies.
 
Colombia’s production of hydrocarbons has significantly increased in recent years and since 2008, exploration and production of oil has been extremely important. According to data from the U.S. Energy Information Administration (EIA), Colombia produces around a billion barrels of oil a day. 
 
The country’s oil exports have also increased significantly, Tulchin said, and are close to $28 billion today. Concurrently, foreign investment in the energy sector has also risen a great deal, from $1 billion in 2002 to $8 billion. 
 
“It is important to underline that the interruptions of [oil] supply through violent attacks on pipelines are of very minor significance to Colombia’s energy sector, and they don’t represent a significant risk factor to foreign investment into the country,” Tulchin said. 
 
Over the past five years, the Colombian government has placed a high priority on making the country a safe and secure destination for foreign investment by increasing transparency in the regulatory framework and making it much more robust.
 
“The key point here is to contrast Colombia with the rest of hemisphere,” said James Barrineau, co-head of emerging market debt relative and co-head of Latin America at Schroders in New York. “In countries like Venezuela and Argentina, for example, there’s so much chaos, whereas in Colombia, the leadership has been consistently market-friendly and consistently predictable, and this has led to increased inflows of foreign direct investment and portfolio investment,” he said. 
The “friendly” opening of Colombia’s oil sector is particularly significant, according to Barrineau, not just because it happened at a time when it seemed like oil production from the region was structurally declining, but also because it has been instrumental in increasing investment into Colombia on the whole, and has had the “synergistic effect of stabilizing the currency and stabilizing economic activity in Colombia, and this is key,” he said, adding that today, Colombia represents a very stable place to invest, particularly for fixed income investors.
 
“The consumer sector is growing, the banking sector is stable, and there are other opportunities,” Barrineau said. “To me, the most remarkable thing is the steadiness of economic growth in Colombia. It’s been right around 4% and we expect that to continue into next year.”
 
To that end, the negotiations with the FARC are key and they continue to be important for Colombia’s future, Tulchin said, since their success should ensure Santos’ chances of winning in the 2014 election, thereby giving him the opportunity to continue enacting meaningful, long-term reform for Colombia.
 
“The FARC represents a 50-year struggle for social justice in the Colombian countryside, and when President Santos announced that the peace talks had reached an agreement for land reform in September, it was a critical milestone, since the whole point of the guerilla rebellion was to create social justice in the countryside,” Tulchin said. “The Colombian Congress is now drafting [land reform] legislation with the Ministry of Agriculture and that will be the biggest step in the past 50 years.”
 
Although the FARC may no longer represent a threat to Colombia and to its future, Tulchin does underscore a concern that some economists have with respect to the windfall from oil export revenues the country has benefited from and continues to reap. 
If these are not properly managed, Colombia may fall prey to the infamous “Dutch Disease,” where large increases in income associated with the discovery of a natural resource can hamper macroeconomic stability and negatively impact the currency and the domestic economy, Tulchin said.  “The challenge for Colombia is to keep a balanced economy in the short-term,” he said.
 
In the current global economic environment, though, currency appreciation is not a concern for Colombia, according to Barrineau,  since the emerging markets in general are under tremendous pressure. 
 
“Even if Colombia is different from other countries and is seen as more attractive, the risk of a stronger currency as a result of oil revenues is off the table because of what’s going on globally, and in general, investors think that Colombia will manage its oil revenues well,” he said.