In 1997, the U.S. trade surplus with Colombia was $474 million, an increase of $39 million from the prior year. U.S. merchandise exports to Colombia were $5.2 billion, an increase of $490 million (10.4 percent) over 1996. Colombia was the United States' 26th largest export market in 1997, and the United States is Colombia's largest trading partner, with commerce worth $4.7 billion going to Colombia from the United States in 1997. The stock of U.S. foreign direct investment (FDI) in Colombia in 1996 was about $3.5 billion, an increase of 3.5 percent from the level of U.S. FDI in 1995. U.S. FDI in Colombia is concentrated largely in the manufacturing and petroleum sectors.
For a detailed discussion of financial matters in Colombia, refer to the Country Commercial Guide for Colombia and other documents mentioned in this section.
Foreign Investment Climate
In March 1997, the Colombian Central Bank created a reserve requirement on all foreign loans over six months designed to reduce the amount of foreign private debt. It was slightly modified in May 1997. Thirty percent of all proceeds from foreign loans must be left on deposit with the central bank in a noninterest-bearing account for 18 months. Certain loans - for certain raw materials and capital goods - are exempted from this requirement.
Investment screening has been largely eliminated under apertura, and what mechanisms still exist are generally routine and nondiscriminatory. Legislation grants equal treatment to national and foreign direct investors and permits complete foreign ownership in virtually all sectors of the Colombian economy.
(Since 1994, in an effort to curb money laundering, the Colombian Government has prohibited foreign direct investors from obtaining ownership in real estate not connected with other investment activities.)
All foreign investment in petroleum exploration and development in Colombia must be carried out under an association contract between the foreign investor and Ecopetrol, the state oil company. The terms of the association contracts were modified in 1994, 1995, and again in 1997 in an effort to continue to attract the necessary foreign investment. However, security conditions continue to be worrisome, and notwithstanding the improvements in the terms of the contracts, foreign investors will probably continue to remain cautious.
Balance of Payments
Colombian Government statistics show a balance of trade (merchandise) deficit of $2.2 billion in 1996, slightly better than the $2.5 billion deficit in 1995. Imports of goods in 1996 were $12.8 billion (compared with $12.9 billion in 1995), and exports of goods were $10.6 billion (compared with $10.2 billion in 1995). Colombia's major exports are petroleum, coffee, coal, nickel, gold, and nontraditional exports (for example, cut flowers, semiprecious stones, and tropical fruits).
The overall current account deficit was $4.8 billion, up from $4.3 billion in 1995. However, FDI, combined with foreign borrowing, more than made up for the deficit, and Colombia's capital account has a surplus of $6.3 billion. Foreign investment showed strong growth in 1996, although much of it was through the purchase of existing institutions, primarily banks, and not really new investment in production.
According to the Office of the U.S. Trade Representative (USTR), in 1996 the U.S. trade surplus with Colombia was $435 million, a decrease of $438 million from the $873 million surplus in 1995. U.S. exports to Colombia totaled approximately $4.7 billion. Principal exports to Colombia were vehicles, boilers, agricultural products, electrical power generation and other machinery, organic chemicals, plastics, and cereals. U.S. agricultural exports to Colombia reached $616 million in 1996, a 44 percent increase over 1995. Imports of silk and intermediate agricultural products rose to record values while market demand for consumer-oriented products remained strong. Colombia was the United States’ 25th largest export market in 1996, and the 4th largest in Latin America, after Mexico, Brazil, and Venezuela.
Foreign Investment Law
Colombia is quite liberal in terms of foreign investment. Foreign and domestic investments are treated equally under the law, and virtually all sectors are open to foreign investment.
Law 9 of 1991; Resolutions 51, 52, and 53 of the Council for Economic and Social Policy (CONPES); and Resolution 21 of the Board of Directors of the Central Bank (Banco de la Republica) are the principal regulations governing foreign investment. They grant national treatment for foreign investors and permit 100 percent foreign ownership in virtually all sectors of the Colombian economy. Exceptions include national security, the disposal of (imported) hazardous waste products, and ownership of real estate not connected with other investment activities. In July 1996, CONPES eliminated the requirement of prior authorization for investment in public services, mining, and hydrocarbons; however, direct investment in these specific sectors is still subject to concession agreements with the appropriate Colombian Government entity.
Foreign entities are allowed to participate in privatization programs, including those for financial institutions, ports, railways, and several smaller enterprises managed by the Institute for Industrial Development. Foreign contractors may bid on public highway concessions.
Despite fears of political instability and the current economic crisis, Colombia has had good credit ratings and easy access to international funds. The public and private sectors enjoy a good reputation for debt management and repayment; Colombia's credit ratings are among the best in Latin America and are rated investment grade.
According to Coinvertir, as of July 1998, the critical state of the country's finances had not interrupted the increase of foreign investment. New FDI in Colombia, excluding oil and portfolios, rose 155 percent in the first quarter of 1998, compared with the same period the prior year. Investors favored the financial sector, followed by manufacturing; electricity, gas, and water projects; mining and quarrying; and transport, storage, and communications. Figures released by Colombia's Central Bank indicate that the total amount of FDI in the first quarter totaled $1.066 billion, compared with $418.9 million in the same period in 1997.
Colombia's Financial System
At the end of 1996, deposits in financial entities were equivalent to 64 percent of Colombia's gross domestic product. In early 1997 Colombia had 34 commercial banks, 33 representative offices of foreign banks, 10 savings and loan corporations, 25 development banks (corporaciones financieras), 31 commercial finance companies, 44 trust companies (fiduciarias), 29 insurance companies, and a state-owned mortgage bank. There are stock exchanges in Bogotá, Medellín, and Cali.
For the most part, credit is allocated by the private financial market, and foreign entities are treated the same as national ones. Credit subsidies are available in certain circumstances such as agriculture and technology investment and infrastructure in free-trade zones.
Colombia modernized the legal and regulatory framework governing its banking and financial entities as a result of the financial crisis of 1982. The crisis was brought on by, among other things, inadequate capitalization, high-risk currency operations abroad, poor administration, and low productivity. The Colombian Government responded by nationalizing or intervening in certain banks that together controlled about 85 percent of the financial system. Laws relating to such interventions and nationalizations were updated in 1993.
The Colombian Banking Superintendency and the Board of Directors of the Central Bank are charged with implementing financial-sector regulatory policies. The Central Bank is the independent regulatory authority for the monetary, currency exchange, and credit policies of the central government. It also acts as the fiscal agent for the Colombian Government by printing money and controlling currency circulation and international reserves. Furthermore, it has the authority to set maximum limits on the interest rates that commercial banks and other financial institutions charge on loans, and acts as their lender or last resort.
The Banking Superintendency supervises and regulates all financial institutions that must obtain authorization from the Superintendency before opening their doors for business. The Superintendency imposes administrative sanctions on violators of the established regulations or financial institutions’ bylaws. The Superintendency, with the approval of the Ministry of Finance, may intervene in the operation and management of a bank. Sanctions include liquidation of assets if the bank suspends payment of its debts, refuses to allow the Superintendency to audit its books, repeatedly fails to follow Superintendency instructions, repeatedly violates laws or its own bylaws, or repeatedly mismanages its operations, or if accumulated losses exceed 50 percent of the original capitalization of the bank.
Three other entities also regulate the Colombian financial system: the Ministry of Finance, CONPES, and the Financial Institution Guarantee Fund (Fogafin).
Financing Environmental Projects
A number of funding options have been mentioned in the course of this report. Firms from the United States can bid on projects financed by Colombia's national, departmental, and municipal projects, preferably in conjunction with a Colombian partner. Environmental studies and water and sanitation projects are particularly promising areas. A second option is private-sector projects, such as those undertaken at BP, Colombian General Motors, HOCOL, and Ecopetrol. ISO 14000 compliance is expected to become increasingly important in Colombia and will provide another avenue for U.S. participation.
Smaller firms should review their client lists and seek entrees into the international divisions of firms they have successfully worked with in the past.
As discussed several times in this report, the United States reviews Colombia's antidrug efforts yearly. In years when the United States is not satisfied - most recently in 1997 - financing options to which the United States is a party are severely constrained.
The U.S. Export-Import Bank does not initiate new projects in Colombia in years when the country is "decertified." This decertification occurred in 1996 and 1997, but prior commitments continued to be serviced.
The Overseas Private Investment Corporation (OPIC) and the Trade and Development Agency were also precluded from entering into new commitments for Colombian projects during those years. However, alternative means of trade and project financing remained open, including those from private financial institutions.
Several multilateral agencies such as the World Bank, the Inter-American Development Bank (IDB), the Andean Development Corporation (ADC), the Export-Import Bank of Japan, the Agency for International Development of the United States (and also those of Japan and Canada), and the U.S. OPIC actively provide financing for projects in Latin America and the Caribbean. There is no record of providing major direct financing for greenfield projects in Colombia, except by the significant participation of the ADC.
IDB loans to Colombia totaled an estimated $538.4 million, $289.9 million, and $225 million for 1995, 1996, and 1997 respectively. During 1995 and 1996, the Inter-American Development Corporation (IADC) approved a $3.33 million equity investment in Corfisura Fondo de Desarrollo de Empresas (Colombia's first development capital fund) to provide development capital to export-oriented companies in agribusiness, manufacturing, mining, and emerging technology sectors. The expected capitalization for the fund is $10 million (of which one-third will be contributed by Corfisura). The fund will seek long-term capital gains by investing in equity and quasi-equity securities issued by small and medium-size businesses that need capital for growth and will assist entrepreneurs in the areas of management, technology, and market development. By investing in the fund, the IADC will help support a larger number of beneficiaries than it could reach directly.
The ADC has provided direct financing to the private sector for the development of greenfield projects in various infrastructure sectors, including a $19 million loan to Occidente y Caribe Celular S.A. (OCCEL) to finance the acquisition of a cellular phone operation license, a $20 million loan for the Buga-Tulua-La Paila road project, and partial financing of an independent electric power project in Mamonal.
Major multilateral agencies, such as the World Bank, cannot lend directly to the private sector, although they represent a very important source for financing government projects. The IDB established a private-sector department only recently. These new sources, along with the debt, equity, and quasi-equity financing provided by the Inter-American Investment Corporation, may become an important financing source for infrastructure projects developed by the private sector.
Recent infrastructure projects have been financed mostly by syndicated loans with participation of foreign commercial banks and multilateral agencies, and to a lesser degree by accessing foreign capital markets. The access to foreign commercial banks has been necessary not only to obtain the financial closing of projects on time, but also to obtain bridge-loans before the projects can access the capital market.
Major limitations faced by the sponsors in obtaining nonresource financing through multilateral agencies or by accessing the capital markets are related to deficiencies in the legal documentation and financing structure of the projects. The access to nonresource financing is based on the correct allocation of external and internal project risks among the sponsors, developers, and users of the project. In most cases, projects have been developed through contracts awarded by the public sector to a private consortium in which the allocation of risks (costs overruns; commercial and regulation risk) is not acceptable to institutional investors or multilateral agencies. To obtain this type of financing, the central government has provided guarantees of payments, as was the case for most of the power projects developed in the past four years.
Given the current budgetary deficit, the central government has adopted a much more restrictive policy toward national guarantees to back project debt. In many cases, restrictions have determined the access to commercial banking loans, which are an easily accessible “alternate” financing source of short duration. Commercial banking loans do not constitute an optimal source of financing because of the financial conditions (terms and interest rates) offered by the banks, including shorter terms and higher rates than those obtained with multilateral agencies or in the capital markets.
Four recent infrastructure projects (the construction of two gas pipelines, the second Eldorado airport runway, and a 350-megawatt hydroelectric project) demonstrate how through different allocations of risk each of these projects was able to successfully gain access to capital markets before beginning its operation phase.