Colombia and Peru look like sound bets for investors.
By Paul Vieira, The Financial Post November 12, 2010
Colombian President Juan Manuel Santos is pursuing several new agendas to boost his country's economic prosperity, including fostering better relations with Venezuela.
When it comes to investment prospects in South America, much of the global attention, and understandably so, focuses on Brazil -- one of the BRIC countries that are transforming the face and power structure of the global economy.
Overlooked, though, is the so-called Andean region, led by the economies in Colombia and Peru -- countries Canada happens to have struck free-trade deals with.
Both economies grew in 2009 while others contracted and are reaping the benefits from years of political and economic reform. GDP growth for this year and next are expected to outpace advanced economies, with Peru in particular set to post gains that outpace BRIC giant Brazil, according to the International Monetary Fund.
Peru is benefiting from a renewed advance in commodity prices, especially in base and precious metals, and a free-trade agreement with China. But for the longer term, analysts remain most bullish on Colombia, the most diversified economy in the five-nation Andean zone -- with its commodity and manufacturing base -- whose policymakers have worked much of the past decade to quell narcotics-linked civil unrest and attract foreign investment.
"Colombia has the best prospects for gains in the whole of South America," said Oscar Sanchez, senior economist at Bank of Nova Scotia, whose responsibility includes Latin America.
The Andean zone represents five countries with a market close to 120 million people, rivalling Mexico and Japan. Colombia and Peru are at the forefront, followed by Bolivia, Ecuador and Hugo Chavez-led Venezuela.
Political and economic analysts say Bolivia, Ecuador and Venezuela may represent potentially attractive long-term investment gains but carry elevated political risks.
Colombia and Peru, with a combined population of 75 million, are the best bets for Canadian companies and investors looking for new non-traditional markets, as they share the same characteristics of other fast-growing emerging economies: younger demographics, vibrant workforces, government policies geared to attract offshore investment, and an urgent need for refurbished infrastructure.
"Governments have gotten out of the way of business and are letting business do what business does best -- create new industries and create new opportunities," said Stephen Benoit, chief representative in the Andean region for Export Development Canada, the Crown financier that helps Canadian firms tap new markets abroad.
Canadian businesses are among those making the march to Colombia and Peru, as exports to those two markets have surged since 2005, by 34% and 62%respectively.
Mr. Sanchez, of Scotia bank, is particularly optimistic about Colombia because its new president, Juan Manuel Santos, is taking steps to expand on the reform agenda established by his predecessor, Alvaro Uribe.
First, Mr. Santos is attempting to smooth relations with Venezuela dictator, Mr. Chavez, which deteriorated under Mr. Uribe. Mr. Sanchez said a good chunk of Colombia's manufactured goods, such as automobiles, have been Venezuela-bound but that trend has waned in recent years due to less-than-cordial diplomatic relations.
The attempt to normalize relations is beginning to bear fruit, and Mr. Sanchez said this would prove positive for Colombian economic growth over the next 12 to 18 months.
And second, Mr. Santos is said to be pursuing new laws that would compel the government to put any extraordinary revenue gains from booming commodity prices into a rainy-day fund, much like Chile has established. The fund can be tapped in times when the economy sours.
The IMF has projected 4.7% GDP growth in Colombia this year and 4.6% expansion in 2011.
Peru might be overshadowed but not overlooked among the world's biggest investors. For the first six months of 2010, foreign direct investment increased 23% over the same period a year-ago, to US$3.44-billion, UN figures indicate, led by energy, mining and infrastructure companies.
In a recent forecast for clients, economists at Spanish lender Banco Bilbao Vizcaya Argentaria SA said Peru's robust growth -- of 6.8% this year and 5.7% in 2011 -- would be underpinned by several factors, among them: strong growth in private consumption due to a permanent increase disposable household income; heavy investment in commodity plays and infrastructure projects that are expected to total 26% of GDP in 2012; and robust terms of trade as commodities continue an upward climb.
Mr. Sanchez added that banking penetration -- or loans and deposits as a percentage of GDP -- in both Colombia and Peru are low compared to the Latin American leader, Chile. "So there is additional scope for a more balanced expansion of their economies."