Finance

Keeping it Steady

How Colombian institutions lend stability

Colombian judicial and monetary institutions act as stabilizing forces, making the country a better investment destination.

Foreign investment, in its various forms, has been a major contributor to the Colombian economy since the 2000s, touching an all-time high figure of USD16 billion in the mid-2010s. FDI and foreign portfolio investment (FPI) are the two most popular forms of investment in the Latin American nation.

To receive any significant FDI or FPI, economies need to be future proof to some degree, as foreign investment is often a long-term engagement. Colombian leaders and institutions are aware of the importance of foreign investment, and they are doing their best to encourage it, keeping on the flow of cash which has been like a lifeline to the Colombian economy.

American investors and businesses have a particularly strong presence in Colombia. The Green Coffee, a portfolio company, recently held a series of funding rounds, raising up to USD25 million. It is believed that many of the 220 individual investors who chipped in were either American or somehow connected to the US.
“The US has been the most important trading partner for Colombia, both in FDI and in trade and imports and exports, for a number of years,” says Ricardo Triana of Consejo Empresas Americanas (CEA), pointing out that most American companies in Colombia are in for a long-term presence, with some already having been present in Colombia for a century. However, American investors are famously risk-averse, meaning that they would be very reluctant to direct their equities to Colombia or maintain a physical presence there without the assurance of a healthy return on investment (ROI) as well as the safety of their equity capital. The main reason behind Colombia’s appeal for investors and businesses is stability.

Colombia has been a safe haven of stability in a part of the world that chaos is not unheard of. Over 34 cases of coup d’état have been documented in Latin America since 1950, whereas Colombia has not seen a single coup in its history. Political stability and absence of violence have been constantly improving since the landmark peace deal of 2012 between the Colombian Government of Juan Manuel Santos and FARC-EP.

Even the Colombian protests of 2021, in response to tax and healthcare reforms proposed by Iván Duque’s government, did not throw the country in turmoil, although a number of questionable incidents did occur during the protests. In any case, the presidential elections of 2022 will ensure the peaceful transition of power to the next elected government, prolonging the tradition of political stability.

Certain events in 2021 notwithstanding, Colombia has largely matured into a modern democracy, not least thanks to its judicial independence. An independent judiciary can intervene when things are going terribly wrong, thus restoring political stability. Corte Suprema de Justicia is the highest judicial institution in Colombia, and its magistrates are chosen to do this very thing.

A modern democracy, moreover, is not complete without monetary stability as well as political stability. Having a steady currency is highly valued by investors, as a sudden devaluation of the local currency can translate into huge losses for foreign investors.

A look at exchange rates over the years shows that the Colombian peso has largely maintained its value against the US dollar over the past five years. Various forecasts suggest that there is a good chance that the Colombian currency will continue to gain in value over the next 12 months, which will be a good selling point for fundraisings in the country schedule for 2022.

The nation’s stability is also backed up by a steady economic growth. The Colombian GDP went through a phase of exponential growth between 1990 and 2010 but was more-or-less stabilized afterward. It is expected that with the end of the pandemic and the surge of business activities, we will see another period of mild economic growth starting in 2022.

Banco de la República is the monetary institution regulating the Colombian peso, which also plays a major role in the nation’s economy. Banco de la República, or the central bank of Colombia, continuously makes important adjustments to guarantee the nation’s financial security. In April 2022, for example, the central bank raised the interest rate to 6% to curb the rampant inflation which has been troubling the world economy after the end of the pandemic and the beginning of the Russian invasion of Ukraine. While the former event triggered a growth in demand the latter caused a global failure in supply chains—a situation that usually leads to inflation.

Controlling unpredictable developments such as this requires timely intervention by institutions to ensure stability. Settling on a solution to control inflation was not simple for the central bank, given its huge impact on the national economy. Nevertheless, Banco de la República’s seven-member technical board has ostensibly made a satisfying decision in the end. “The rate decision met the expectations of fifteen analysts surveyed in a recent Reuters poll,” who agreed with the board’s decision to raise the rate to 6%, “its highest level since May 2017,” wrote Reuters.
The year 2022 will put the functionality of institutions stabilizing Colombia to further test. While economic woes continue in much of the world, a new president will be in Casa de Nariño in Bogotá this year. And, this time, he will not be from the same usual political background as previous conservative Colombian presidents. This will be an acid test for the efficacy of Colombian institutions which work toward achieving political stability.

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