Publish in Perspectives - Monday, March 4, 2013
The Larcomar shopping mall in Peruvian capital Lima. (Photo: Federico)
The Andino Mall in Colombian capital Bogota. (Photo: Momentcaptured1)
Evolution of FDI/GDP in Peru and Colombia compared to that in Brazil and Mexico (2007-2013) 2012 and 2013 figures are based on forecasts. Source: AMI based on data from Economist Intelligence Unit. CLICK TO ENLARGE
Colombia and Peru: The Rising Stars of Latin America.
BY GUILLAUME CORPART
While markets are feeling the impact of the Eurozone crisis and Chinese slowdown, Latin America is thriving. International investors have been keen to capitalize on the region’s growth, which has outperformed the global economy in the past five years. Yet while the focus has long been on Brazil, Mexico, and Chile, with their trade-driven industries and strong capital markets, the region’s leading economies have lost some of the “niche market” characteristics so attractive to foreign investors. Not so for Colombia and Peru, which have increasingly garnered attention as high-growth markets that still remain largely undervalued and overlooked. In recent years, both countries have evolved from being small market opportunities to becoming the region’s rising stars.
Why should investors pay attention to Colombia and Peru?
Both countries are amongst the region’s and the world’s fastest-growing economies. Peru recorded GDP growth of 7 percent in 2011 and has outperformed Latin America’s growth each of the past five years. Colombia had a GDP growth rate of 6 percent in 2011, which also stood above the region’s figure, just as it did in three of the past five years. And while the global economy contracted during the 2009 recession, both countries not only avoided economic shrinkage, but posted modest growth in an otherwise challenging global context. With the exception of Chile, which is in a league of its own as an investment destination, Mexico and Brazil are usually considered Latin American countries with the highest levels of foreign direct investment (FDI). However, when FDI is indexed against gross domestic product, Peru and Colombia in fact attract more FDI relative to the size of their economies than Brazil or Mexico (see graph).
Considering their high growth rates, surging FDI levels, young demographics, and growing middle class, it is no surprise that Colombia and Peru are the new stars of Latin America. What accounts for their emergence as top investment destinations?
On the one hand, both Colombia and Peru are determined to secure their economic progress and attract foreign investment by continuing to pursue market-oriented macroeconomic and trade policies, and improving the business environment. In both countries, recently elected presidents are intent on consolidating the gains made by previous administrations and a decade’s worth of improving economic and business prospects. Peru’s Ollanta Humala and Colombia’s Juan Manuel Santos have both focused on fiscal discipline, inflation targeting, exchange rate management, as well as infrastructure investments since taking office in July 2011 and August 2010, respectively.
The resulting macroeconomic stability has earned both countries a much-sought-after upgrade to investment-grade status in 2011 from Fitch, Moody’s and Standard & Poor’s, putting them on par with Mexico and Brazil. Peru and Colombia are also among a group of six countries in South America to be rated “low risk” by Euler Hermes, a subsidiary of Allianz. This is no small feat for countries that had long been shunned by investors as they struggled to contain decades-long domestic armed conflict.
In addition to sound government policy, another critical economic force driving growth in both Colombia and Peru is the dramatic expansion of the middle class. Although the oil and mining industries still account for the lion’s share of economic activity, each country’s fast-expanding middle class is boosting other sectors, including construction, telecommunications, financial services, and retail, diversifying the economy and creating attractive opportunities for foreign investors. What other characteristics make each country stand out as attractive investment destinations?
Improved security and exemplary economic management unleash Colombia’s potential
Colombia is blessed with abundant natural resources, a well-educated and industrious workforce, and one of the region’s most talented and respected governments. While the country’s potential has perhaps never been in doubt, the decades-old conflict pitting government forces against armed guerillas certainly sidelined Colombia from international markets for many years. Yet after making significant headway in fighting the guerillas as well as drug cartels over the past decade and bringing safety and security to citizens and investors alike, Colombia has regained credibility in international markets. Indeed, today’s prevailing climate of improved security has won the Colombian government praise and trust from foreign investors, convincing them that the county’s hard-won changes in recent years are here to stay.
In addition to a favorable climate of growing stability and security, the government’s commitment to sound economic policy has helped spur significant investment in the economy. President Santos has committed to balancing the budget by 2014, reforming the labor market, tackling corruption, and investing more in education. The government also presented a long-awaited tax reform in October 2012, which seeks to cut Colombia’s unemployment rate and pledges to spend US$ 100 billion over the next ten years on rebuilding infrastructure.
These measures are part of longstanding efforts on the part of the government to open up the economy, stimulate private sector investment, and encourage retail consumption. Two successive administrations have worked hard to simplify the complex regulatory environment and attract foreign investment. The resulting regulatory clarity for foreign investors has made Colombia one of the top investment destinations in the world. In 2012, it was ranked 42 globally in World Bank indicators on ease of doing business, an improvement over the previous five years. The country is also in the process of joining the OECD, and is already part of the OECD’s Investment Group. All these measures look set to sustain Colombia’s growth amid an uncertain outlook for the global economy in the next few years: the country’s economy is forecast to grow by 4.9 percent in 2012 and 4.6 percent in 2013.
As a result, foreign investment has been pouring in and is expected to keep growing. Overall, FDI grew 26 percent in the first six months of 2012 compared to the same period in 2011. FDI represented 4.1 percent of GDP in 2011; it is on track to top 4.5 percent in 2012 and is expected to surpass 5 percent of GDP in 2013. With foreign investment expected to reach US$ 16 billion by year’s end, Colombia is set to meet the Santos administration’s stated goal of attracting US$ 14 billion in foreign investment by 2014 two years early.
The primary beneficiaries of foreign capital inflows are the country’s oil and mining industries—the main engines of Colombia’s growth—which together account for over 80 percent of all FDI. Colombia is experiencing an oil boom, which is expected to continue unabated through 2015-2018. As a result, the energy sector will continue to be the primary recipient of FDI and a source of considerable economic growth in coming years.
Meanwhile, foreign investment in other sectors such as retail, banking and manufacturing is also registering substantial growth as companies target the country’s growing middle class. Indeed, another factor that makes Colombia attractive to foreign businesses is its fast-expanding middle class, which has doubled since 2002 from 15 percent to 30 percent of the population. Consequently, the country has experienced strong growth in private consumption, which now accounts for 28 percent of GDP (up from 14 percent in 2000). With such a robust outlook, foreign investment is set to continue at a brisk pace in Colombia in the foreseeable future.
Exceptional growth and diversification in Peru
Peru’s economy has achieved exceptional growth over the past decade, reaching 7 percent in 2011, and has benefited from sound economic management under the administration of President Alan García (2006-2011) and the current government of President Ollanta Humala, who took office just over a year ago in July 2011. Despite fears that President Humala’s socialist leanings would undermine the course of Peru’s economic policy, his administration has moved boldly to reassure markets and sustain the achievements of his predecessor, notably by announcing plans to increase public investments in 2012 by 120 percent. Moreover, the country has benefited from being recognized as the second freest economy in the region after Chile—well ahead of all other Latin American countries.
Forecasts for the country’s economic growth and foreign capital inflows remain robust. The economy is expected to grow by 5 percent in 2012 and 6 percent the following year, with strong growth in the manufacturing sector (6 percent) and agriculture (5 percent). The country attracted US$ 7.6 billion in FDI in 2011, up 4 percent from 2010; and while FDI in 2012 is expected to decrease to 2010 levels, estimates show it is expected to rebound to over US$ 8.7 billion in 2013. The country’s growth and capital inflows led to a doubling of its international reserves since 2009, to a record of nearly US$ 60 billion (close to a third of total GDP).
Perhaps the most interesting feature of Peru’s economic growth has been its geographical reach and the importance of growing consumer demand. Along with mining (one of the traditional motors of Peru’s economy), activity in the construction and retail sectors, which expanded by 7 percent and 15 percent in the first half of 2012, respectively, has been the principal driver of the country’s economic growth, providing a clear indicator of the emergence of a strong middle class. Interestingly, most of the growth has come from several Peruvian provinces, which have outperformed Lima, the country’s traditional center of economic activity. The growth in the construction industry has been noteworthy in 15 of Peru's 24 provinces, where it outpaced the capital region’s already impressive growth rate of 15 percent in 2010. Three regions also had retail sales growth that outperformed Lima’s growth rate of 10 percent. As a result, long-ignored provinces have experienced a boom and companies have eagerly sought to target an emerging class of consumers all across the country.
What does this mean for the future?
Peru and Colombia are committed to supporting market-friendly economic polices and both countries are regarded as relatively easy places to do business and have a well-trained, young workforce. Their high growth rates are indicative of their positive economic climate, while high levels of FDI are indicative of a growing trend and interest. Presidents Humala and Santos are keen to consolidate recent progress, making their countries ripe for further investments.
While both Colombia and Peru still rely heavily on oil and mining, their expanding middle classes are boosting other industries, diversifying the economy and opening up opportunities for foreign investors. The expanding consumer base offers attractive investment targets in the construction, telecommunications, financial service, and retail sectors. While early movers have already snapped up many promising targets, there is still much room for lucrative investments as these countries move from their niche market status to become full-fledged rising stars.
Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.