Regional Focus

Colombia: top of the class

Published: Mar 2015

Economic growth in Colombia has exceeded the world’s average growth rate every year – bar 2010 – this century. Although impressive growth rates have sometimes been attributed to ‘good fortune’ in rich natural resources, this article explores the role that robust economic management has played in helping the nation successfully cope with external shock factors. We also examine what the future holds for the country’s economy and those corporates operating in and out of Colombia.

Key facts

48.32 million (2013)
GDP per capita:
$378.4 billion (2013)
GDP annual growth:
4.7% (2013), 4.7% (2014e)
Ease of doing business rank (2015):
Index of economic freedom (2015):

Colombia shouldn’t suffer from the perceptions of the past; the reality of the last decade has brought extraordinary change to the country. The past five years, in particular, have seen major milestones reached in Colombia’s economic journey. The country gained much-sought-after promotion to investment-grade status in 2011 from Standard & Poor’s, Moody’s and Fitch, where it remains. And, in 2013, the annual level of foreign direct investment (FDI) reached a record high of $16.8 billion.

Juan Pablo Cuevas, Head of GTS Latin America and Caribbean, Bank of America Merrill Lynch, explains that “in recent years, we have seen an incredible flow of FDI into Colombia, there really has been a lot of interest in companies going to work there and the economy is booming today.”

Furthermore, “in 2014, Colombia was the strongest performing economy in Latin America. The country did not experience the same drastic slowdown as other commodity exporters, such as Chile and Peru,” says Marcos Buscaglia, Head of Latin America Economics, Bank of America Merrill Lynch Global Research. Exemplified by a GDP growth estimate for 2014 of 4.7% – compared to regional examples of 0.1% for Brazil, 2.4% for Peru and 1.7% for Chile – Colombia has been outperforming its regional peers.

This impressive growth is indicative of the government’s consistently sound economic policies that have strengthened the country’s ability to weather external shocks. Focusing on fiscal discipline, flexible exchange rate management, inflation targeting and investments in infrastructure (in October 2012, the government pledged a $10 billion spend over ten years), the resulting macroeconomic stability has convinced investors that improvements are here to stay.

Achievements such as these are no small feat for a country overcoming armed conflict. For more than 50 years, the struggle to defeat Revolutionary Armed Forces of Colombia (Fuerzas Aramadas Revolucionarias de Colombia or FARC) guerrillas had sidelined Colombia from international markets.

Developments towards peace

In October 2012, the government started formal peace negotiations with the FARC. Now, three years on, both sides could be close to a final agreement. Peace talks have reached – and signed – vital agreements on land reform and how thousands of acres will be returned to displaced populations.

The crucial objective yet to be reached is how best to balance peace, reconciliation and retribution. If this can be achieved, it could end one of the longest periods of violence experienced in any country throughout the 20th and 21st centuries.

In terms of the impact this will have on the Columbian economy, according to Buscaglia, it must be noted that “most of the peace dividend has already been reaped in recent years. So, although signing a peace agreement will bring additional benefits, they won’t be as high in net terms – considering the costs of implementing the peace process – as they were in past years.”

Trouble spots?

Although violence in Colombia may be reducing, concerns are being raised around the country’s over reliance on the oil and mining industries – which accounted for over 80% of all FDI in 2012. Net energy exports also account for approximately 8.4% of the country’s GDP, meaning that Colombia could be vulnerable to globally declining oil prices.

That said, Scotiabank’s Regional Outlook from November 2014 reports that “the Colombian financial sector is systemically sound and adequately capitalised to withstand financial market shocks caused by a steep oil price decline.” Colombia’s flexible exchange rate (stimulating other sectors of economic activity and partially offsetting lower oil revenues) and countercyclical fiscal policy should act as buffers – broader public deficits cushioning the negative impacts from external shocks.

Additionally, ending rebel attacks should eliminate lost output caused by destroyed pipelines, costing $500m in 2014. So, although the global decline in oil prices could result in wider twin fiscal and current account deficits, the government predicts economic growth of 4.2% (lowered from 4.8%) for 2015 – more than twice the 1.3% forecast for the Latin America and Caribbean region. Bank of America Merrill Lynch Global Research, however, predicts the Colombian economy to slow down to 2% in 2015 and Scotiabank to 3.5%.

Banking sector

Colombia’s banking system comprises 22 privately owned banks, of which 11 are domestic, nine are foreign and one is state-owned (Banco Agrario). The two largest banking groups – Grupo Sarmiento Angulo (Banco de Bogotá) and Grupo Empresarial Antiogueño (Bancolombia) – are domestically owned and accounted for approximately 53% of the private banking sector’s total assets in May 2014.

“The local banks have considerable market share and sufficient financial muscle to endeavour in new markets, accompanying some local corporates to expand into Central America, for instance,” explains BBVA’s Carlos Galindo, Head of Global Transaction Banking in Colombia. The financial crisis of 1998-99 meant that whilst many of the larger Latin American banks took advantage of the turbulent financial conditions and bought up other banks, numerous foreign banks opted to sell operations in Colombia.

Recent acquisitions demonstrate that Latin American banks are still dominant in Colombia, these include: Chilean CorpBanca’s entrance into the Colombian banking sector through the acquisition of Spain’s Santander’s local subsidiary renaming the entity CorpBanca Colombia (2011), CorpBanca’s further expansion of operations in Colombia through its purchase of Helm Bank (2012) and Bancolombia’s purchase of HSBC’s Panama operations (2014).

Foreign banks – including BBVA, Bank of America Merrill Lynch, Citibank, GNB Sudameris and ProCredit – however do remain active in the banking sector. Their presence is without doubt intensifying competition and the amount of investment directed towards advanced technologies.

But what does all this mean for treasurers operating in the region? “The financial sector is suitable and prepared to attend to corporate clients’ needs,” says Galindo. Furthermore, according to Cuevas, “corporates can trust the institutions in Colombia. Many years ago, it was much more complicated but these days the country has a very strong financial system which is regulated by the Financial Superintendency of Colombia (SFC). The financial sector of Colombia exhibits good corporate governance, SFC are always on top of the companies and are doing a phenomenal job.”


  • Cash.

    The amount of paper and coin has dramatically reduced but cash remains an important payment instrument, particularly for low-value transactions. Transactions completed using cash are exempt from the financial transactions tax.

  • Cheques.

    These have been increasingly replaced by electronic payment products since the 2000s – the number of cheques processed peaked at 212 million in 1996.

  • Payment cards.

    During the past decade the use of payment cards has steadily increased. Between 2011 and 2012, transactions completed using debit cards increased by 16.9% and, for credit cards, by 3.7%. In 2013, there were 18,417,238 debit cards and 11,226,733 credit cards in circulation.

  • Credit transfers.

    Electronic credit transfers are used by companies for salary, supplier and benefit payments. High-value, urgent credit transfers are cleared and settled via CUD on a real-time basis. Low-value, non-urgent credit transfers are batched and processed through ACH Colombia (for company and individual payments) or ACH CENIT (for government collections or payments).

  • Direct debits.

    These are relatively uncommon in the region but their use has slowly grown in the last five years in Colombia. When they are used, it tends to be for utility bills. Direct debits are also processed via ACH Colombia or ACH CENIT.

Table 1: Physical access of financial services

2008 2012
Commercial bank branches
Per 1,000 km2 4.0 4.6
Per 100,000 adults 14.0 14.9
Per 1,000km2 7.7 11.1
Per 100,000 adults 27.0 35.8

Source: IMF

Payments of high value tend to be made electronically whilst lower value transactions seem resistant to follow suit. The Better Than Cash Alliance notes an accelerated shift away from cash in recent years, 69% of the value of money was paid electronically each month in 2012. However, this value only represents 9.7% of the volume of the 828 million payments paid monthly in 2012. The government hopes to lead the way in electronic-payment progression (where they provide a preferable payment option to cash), its own payments are largely electronic – 94% by value and 76% by volume.

But progression could face a tough reality: only 18% of the 1.6 million small businesses in Colombia have a formal relationship with the financial system – the informal cash economy gives an indication of just how prevalent informal employment is in some areas of Colombia. Furthermore, improvements to physical access of financial services are proving rather slow (Table 1).

Drivers of change

Nevertheless, there is a wide recognition of the need for change – and large local corporates are emerging as the champions of this change. “It is the larger Colombian companies that have been expanding through Central and Latin America, described as ‘multilatinas’, which are driving the migration towards enhanced technologies and host to host systems. Going forward, it will be these expanding firms that will be looking for more centralisation of treasury and demanding more electronic types of payment cross-regional to increase their efficiency,” says Cuevas.

This is a visible trend also noted by Galindo, “regionalisation is happening between Colombia and the Pacific Alliance countries. This is reflected in the current demands from our corporate clients, which, being either subsidiaries or regional corporates (not headquartered in Colombia), are landing in Colombia to establish regional treasuries. This evolution is demanding banks to deliver better products regarding regional platforms, multi-currency platforms and multi-country support.

Chart 1: Colombia’s GDP growth rate

Chart 1: Colombia’s GDP growth rate

Source: Central Bank/World Bank

“What we are seeing right now is the growing need of any corporate, no matter whether local, regional or subsidiary, to expand across the region. Thus, both regional and global banks must deliver the best solutions to integrate clusters of countries and create efficient schemes of vertical integration which can be used in several different countries, depending on the client’s needs.”

Corporate attraction

Colombia has certainly been doing all it can to improve the business environment for corporates in recent years, being ranked 34th globally in the World Bank Group’s ease of doing business 2015 – up 19 places since 2014 and outperforming the regional Latin American and Caribbean average. The country also received its highest ever rank of economic freedom, placed 28th in the world by the Heritage Foundation.

Increased innovation within the local population has also seen Colombia being recognised as an international leader in entrepreneurship by the World Economic Forum (WEF). WEF citied Colombia, along with Chile, as the current global benchmark – largely as a result of its aggressive entrepreneurship policymaking programmes. The report also emphasised that peace would only further productivity and competitiveness in Colombia.

Such achievements recognise that Colombian legal and regulatory systems are, for the most part, transparent and consistent with international standards. The Organisation for Economic Co-operation and Development (OECD), which Colombia is in the formal accession process with, found that legal frameworks in the country are compatible with OECD standards of corporate governance. This investigation was completed at Colombia’s request – yet another indication of the government’s proactive attitude.

Furthermore, Colombia has shed its association with corruption. Cuevas explains that “the country has the strong institutions and legal frameworks necessary for corporates to do business and continues to replicate good practices from around the world.”

Despite the positive developments, one of the major headaches corporates still face in the country is the existence of a financial transaction tax, currently levied at 4% per 1,000 pesos or 0.4%. In 2013, the International Monetary Fund (IMF) recommended that phasing out the financial transaction tax faster than currently planned should be a priority, but the 2014 tax reform incorporates the extension of the financial transaction tax until 2018.

It is likely however that, as the economy further expands over the years leading up to the 2018 deadline, the financial transaction tax could be reduced.

Country outlook

So where next for the country? “Sentiment is positive in Colombia and the country remains very attractive to international investors – but the drivers of growth will change in coming years,” says Buscaglia. “Previously, the high prices of oil have attracted an important flow of investment and capital inflows helped domestic demand – hence there was strong investment into the service sector, shopping malls, for instance. This is likely to change. The weakened exchange rate means export sectors (other than oil) and import-competing sectors will benefit the most in coming years. There will be a change, and slowdown, in the engines of growth but certainly not into reverse gear,” he explains.

In addition, the rise of ‘multilatinas’ will pave the way for further FDI and encourage technology, markets, and legislation across Latin America to become more homogenised. Whilst a decline in oil prices beyond 2015 could present challenges, with multiple market opportunities, expanding trade links (exports and imports rose to an estimated 31% of GDP in 2013) and confidence in ending armed violence, Colombia should continue to keep pace with its already high standards.

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