Colombia, where investment from billionaires Carlos Slim and Sam Zell has kept economic growth accelerating, is the only country in Latin America where traders are predicting more interest rate increases to slow inflation.
While policy makers in Brazil are cutting borrowing costs to guard against a global slowdown and investors are abandoning calls for increases in Mexico and Chile, traders predict Colombia will lift its key rate this year. Banco de la Republica will boost the rate for a seventh time in 2011, bringing borrowing costs to 4.75 percent by December from 4.5 percent today, according to swaps data compiled by Citigroup Inc.
Colombia is benefiting from a decade of military victories over guerrillas that have opened up swathes of countryside for companies to explore for crude, coal and gold. Zell’s investments in real estate and Slim’s push into oil are helping fuel $9.6 billion in foreign investment this year, the most in at least 12 years, spurring economic growth above 5 percent and pushing inflation to a two-year high.
“Colombia’s economy is still accelerating,” said Alejandro Arreaza, a Latin America analyst at Barclays Capital Inc. in New York. “Other countries in the region are at a stage of moderating growth and so you see them shifting to a less restrictive monetary policy.”
Gross domestic product expanded 5.1 percent in the first quarter, the fastest pace since the three months ended June 2008. The government statistics agency will report today that the economy grew 5.2 percent in the second quarter, according to the median estimate of 28 economists surveyed by Bloomberg.
Traders in developing nations including South Africa, Mexico and Chile are expecting policy makers to cut rates within the next three months, according to Morgan Stanley. Turkey’s central bank unexpectedly lowered its key rate to a record on Aug. 4, followed by a 50 basis point, or 0.50 percentage point, reduction by Brazil on Aug. 31 as policy makers shifted to safeguarding their economies against a global slowdown. In China, like Colombia, investors predict more rate increases to curb inflation, swaps trading shows.
Colombian three-month interest-rate swaps rose 21 basis points in the past three months to 4.53 percent, signaling the expectations for rate increases.
A majority of Colombian analysts forecast policy makers will raise their key rate 50 basis points to 5 percent by year- end, according to a central bank survey published Sept. 13. None of the 38 economists surveyed expect a rate cut this year.
The central bank increased its overnight lending rate six times this year to stem inflation as the surge in investment, retail sales and bank lending fuel growth. Annual inflation quickened to 3.42 percent in July, the fastest since June 2009, before slowing to 3.27 percent last month. The central bank targets inflation of 2 percent to 4 percent this year.
As banks from UBS AG to Citigroup cut their forecasts for global growth, Colombian policy makers raised their 2011 forecast in July to as high as 6.5 percent this year. That would be up from 4.3 percent in 2010 and the fastest pace since 2007.
Mexico’s central bank cut its growth forecast last month to as low as 3.8 percent while economists surveyed by Brazil’s central bank predict the expansion in Latin America’s biggest country will slow to 3.5 percent from 7.5 percent in 2010.
Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York, predicts Colombia will hold off on raising rates to avoid triggering further gains in the peso. The peso has declined 0.7 percent against the dollar this year, and 6.7 percent over the past three years, the best performance among the six most-traded Latin American currencies tracked by Bloomberg, cutting into exporters’ profit margins.
“I don’t think they would chance entertaining an interest rate hike when everyone else is going in the other direction,” Alvarez said. “That would only accelerate gains in the peso.”
Foreign direct investment in Colombia jumped 49 percent to $9.6 billion in the first eight months of the year, according to the central bank. Foreign companies put 84 percent of that money in oil and mining after President Juan Manuel Santos and his predecessor, Alvaro Uribe, retook parts of the country’s jungle, mountains and plains that had been under guerrilla control.
The Revolutionary Armed Forces of Colombia, the nation’s biggest guerrilla group, has about 8,000 fighters, less than half the number it had at its peak in 2002, when the government estimated the group’s ranks at 17,000.
Colombia is taking advantage of those military victories to attract new investment as it seeks to boost oil output to 1.7 million barrels a day by 2020, from 929,226 barrels in July.
Slim said in a February interview that he is investing in Colombia through holding company Grupo Carso SAB because the country is “actively” seeking to draw businesses into the market and bolster development of its mineral assets.
Slim’s firms have no concrete plans for further investments in Colombia, Arturo Elias, a spokesman for the billionaire, said in an e-mailed response to questions.
OGX Petroleo & Gas Participacoes SA, controlled by Brazilian billionaire Eike Batista, is also seeking to enter Colombia’s oil industry, and Batista is investing in coal through MPX Energia SA. (MPXE3)
“Colombia is very, very rich — it’s been rediscovered,” Batista said in an interview in March, referring to land opened up for development after the retreat of guerrillas. “For 30 years these areas had been kept untouched.”
EBX Group Ltd., which controls Batista’s publicly traded companies, is planning on investing about $4 billion in coal, oil and gold production in Colombia, press officials for Batista said in response to questions. Batista wasn’t immediately available to give additional comment.
Zell, chairman of Chicago-based Equity International, said last month that he plans to invest in commercial real estate in Colombia and eventually move on to residential projects.
“Colombia is the next star of Latin America,” Zell said in an Aug. 30 interview on Bloomberg Television.
Equity International entered Colombia two weeks ago with a $75 million investment in Bogota-based Terranum Development, a closely held real estate company, Thomas McDonald, chief strategic officer, said in a phone interview Sept. 20. He said Colombia was an attractive opportunity for investment because of its stable currency, fast growth and muted inflation.
While Banco de la Republica left rates unchanged last month for the first time in seven months, citing turmoil in international markets, minutes of the meeting noted the Colombian economy continues to expand. Growth in household demand and bank lending are being fueled by inflation-adjusted, or real, interest rates at record low levels, policy makers said.
“Colombia is just catching up in its business cycle,” said Munir Jalil, the chief economist at Citigroup’s Colombia unit and a former central bank official who helped forecast inflation. “It’s not that Colombia is an island, isolated from the rest of the world. You just have to consider the domestic factors and they are still coming too strong.”
To contact the reporters on this story: Andrea Jaramillo in Bogota at firstname.lastname@example.org
Slim Lured to Colombia as Rebel Retreat Fuels Rate-Increase Bets on Growth (ingles)