My first trip to Colombia pretty much lived up to all of my expectations. I got robbed just after I crossed the border from Ecuador and then my bus was repeatedly stopped at military checkpoints and checked for weapons. When I finally got to Cali, a city in the south, my first night’s sleep was shattered when guerrillas blew up a police station.
As a freelance journalist looking for good stories it was perfect. Many of the locals were happy to talk to me in Cali that night (turns out they didn’t like the local police all that much). But the longer I stayed in the country, the more I realised what had happened to me was beginner’s luck. I travelled the rest of Colombia extensively, but try as I might, nothing that exciting happened again.
The fact is Colombia is becoming a boring country. One that’s less fruitful for aspiring journalists, but safer and more prosperous for its people.
But it seems that in the West, not everyone has got the memo.
For example, in my last piece for The New World, I really got under one reader’s skin with my praise for the country. I said: "Countries such as Colombia and Peru are in far better macroeconomic nick than the UK".
That, said reader ‘Freddye Mays’, is “utter garbage”.
It wasn’t exactly the most constructive criticism I’ve ever received. But Freddye’s comment got me thinking.
On almost any macroeconomic measure you choose to look at, Colombia and Peru outscore the UK. But a lot of people in this country still see them as inherently risky or unstable countries.
A quick chat with a pal of mine who works for Spanish bank BBVA confirmed this. I mailed him my original statement about the good Latin America being safer than the UK and asked what he thought.
“I agree... though I think people far less contrarian than me would contest it.”
It had never even occurred to me that I was being contrarian – I thought it was just common sense. So today I’m going to explain why I think the ‘good’ Andean economies – Peru, Colombia and Chile – are in far better macroeconomic shape than the UK.
And don’t forget. The fact that readers like ‘Freddye Mays’ disagree, or that bankers think this is contrarian, is good for us. It means the investment isn’t a crowded trade.
Why do I think the Andeans look good?
The most obvious thing to look at first is a country’s debt. After all, you can hardly claim to be in a healthy macroeconomic position if you’re up to your eyes in IOUs.
Britain’s debt pile currently stands at 68% of GDP. That’s better than European basket cases like Greece, whose debt is around 170% of GDP. And it’s better than Japan, which owes about 200%. But it’s still an awful lot of debt.
Moreover, Britain’s ‘real’ debt burden is much higher. Over the years, our politicians have made a lot of expensive commitments – such as generous public sector pensions or expensive private finance initiatives – without ever bothering to put aside the money to pay for it. Broker Tullett Prebon reckons that once you add in these “unfunded off-balance-sheet liabilities”, the UK government’s true debt is 167% of GDP.
But over by the Andes, things look much better.
Colombia’s total debt level is 46% of GDPs, while Peru’s is 22% of GDP. As for Chile, its debt stands at around 11% but it’s also used the copper boom to build up a $15bn sovereign wealth fund.
What’s more, debt in these countries has been trending downwards over the last decade, unlike in the UK, where even supposedly extreme ‘austerity’ measures haven’t been able to stop the debt pile growing bigger.
Another advantage is that, because these countries are coming from poorer beginnings, their politicians haven’t made a load of expensive, unpaid-for, ‘First World’ commitments.
Where central bankers still have power
The next thing to look at is monetary policy. When the Bank of England decided to keep the base interest rate at 0.5% last week, no one paid much attention. After all, the rate has been like that for so long that it almost seems normal now.
Except of course it isn’t. It’s the lowest rate in the Bank’s 300-year history – an extraordinary measure that shows the true weakness of the UK economy.
It also means that one of a central bank’s key monetary policy weapons – cutting interest rates – has no more bullets left. That’s why the Bank’s resorting to quantitative easing – an even more extreme measure. And that’s why George Osborne is resorting to desperate measures to improve the country’s debt profile.
The good Andean countries were also affected by the financial crisis. And they too took extraordinary measures, cutting rates to record lows. The difference is that their problems were temporary. As their economies picked up speed, their central banks jacked rates back up.
That means those countries now have a useful buffer. If the economy starts to hit the skids, the central banks have more tools at their disposal to remedy it.
Of course, the Andean economies aren’t the only emerging-market countries to have high interest rates. For example, Brazil’s benchmark rate of 7.25% is higher than the rates in any of theirs. But it’s also a historical low for Brazil, where high rates have always been needed to battle inflation. So, even though the base rate is so high, Brazilan policymakers probably don’t feel that they’ve got that much room to cut it further.
But in Chile, Peru and Colombia, current rates are well above historical lows. And that gives them a big advantage if the going gets tough.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
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What could go wrong?
The biggest risk of investing in these countries is a collapse in commodity prices.
Chile has the world’s largest copper reserves, while Peru and Colombia have a mixture of minerals, oil and gas. In all three countries, sales of minerals, fuels and metals account for more than half of all exports.
Without doubt, growth in all three countries will start to slow as commodity prices slip. Indeed, in Colombia it already has. Colombia's economy has grown at an average yearly rate of 4.5% over the last ten years, and last month it overtook Argentina to become the third biggest economy in Latin America after Brazil and Mexico. But even if growth slows to 3% or 4%, that’s still far better than anything the UK’s likely to see over the next few years.
Secondly, there are several reasons to think a slowdown wouldn’t be as severe as that.
In Colombia, growth is likely to be driven by rising oil production. Improved security means the oil-rich country is able to drill more wells. In 2004, Colombia’s overall production was 550,000 barrels of oil equivalent per day (boe/d) and falling. Now it’s one million boe/d and by 2015 the government expects firms to be pumping 1.5 million boe/d.
The price of oil might drop but the volume of global demand for it won’t. And given that Colombia’s onshore oil has some of the world’s cheapest extraction costs, its producers – and therefore the country – will still be able to make a profit at lower prices.
In Chile, policymakers have long been trying to diversify the country’s exports. Since 2008, exports of both high technology and industrial goods have grown more quickly than commodities. This has been helped by the fact that Chile has the largest number of free trade agreements in the world. It can export to 62% of the world economy without encountering any type of tariff. So far at least, increased sales of non-traditional exports have helped to mitigate falling copper prices.
As for Peru, it’s a mix of the two. Like Colombia, it’s bringing more low-cost oil and gas projects online. And, like Chile, exports of high technology are growing far more quickly than exports of commodities. Traditionally the poorest of the three, Peru’s growth is also being driven by strong domestic demand, with the population keen to enjoy its new-found wealth.
A slowdown will bring opportunities
I think it’s also worth remembering that a commodity slowdown will create investment opportunities in these countries as governments launch various types of stimulus programmes. Having paid down debt in the good times, they’re ready to use their macroeconomic strength to help them through the bad.
As I mentioned in my last edition of The New World, in all three countries governments have unveiled weighty infrastructure programmes.
The opportunities vary from country to country. In Chile, the richest of the three, the plans are more in keeping with a European state. It’s planning a new subway system for its capital, Santiago. And, after a wave of student protests, it’s also going to increase spending on higher education.
In Colombia and Peru, the more basic infrastructure works – roads, railways and airports – will open up the hinterlands. That will lower costs for local manufacturers and producers, making them more competitive. It will also make it easier for consumer brands to access millions of rural customers.
The final set of beneficiaries will be non-commodity exporters. If commodity prices take a strong hit, it’s likely that local currencies would fall in value. That would be a boon for firms whose costs are in pesos but sales are in dollars.
One firm that would help is Chilean wine producer Viña Concha y Toro (NYSE: VCO). It’s a well-run company that’s grown to become the world’s second-largest wine producer in terms of vineyards planted. Its main markets are America and Europe.
Given the problems in Europe, you might think that Concha y Toro’s sales are under threat, but actually they look quite safe. That’s because the firm sells to the richer countries in the north, rather than Spain or Greece.
Another boon is that most of its wine – 77% - sells for £6 and under, while the next 20% goes for under £11. Those lower price brackets should be at the least risk if the continent’s woes continue.
Of course there is always the chance that the euro plummets against the Chilean peso. But so far the firm has a pretty good track record of pushing through price rises to customers. Since 2005, the firm has increased the average export price per case by 4.8% per year.
If copper prices were to collapse, it’s almost certain they’d drag the Chilean peso down with them. And if that happened, profit margins at Viña Concha y Toro would rocket.
Right, that’s it from me.
But just so you know, I’ll be continuing to make the case that well-run Andean economies are a good place to grow your money this year. And I’ve a string of interesting opportunities that I’d like to tell you about.
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