A rare combination of strong economic growth and falling inflation has helped Colombia to outperform its Latin American peers in the latest results of the Euromoney Country Risk survey, despite its borrowing costs remaining higher than those of other Latin American sovereigns.
The country, which has seen a marked decline in drug-related violence over the past decade, has seen its political risk rating improve by 5 points since September 2010, to 64 (out of 100). As a result, Colombia's political risk rating is now equal to Brazil's and over 8 points higher than either Mexico or Colombia.
“The improved security situation in Colombia has resulted in foreign direct investment increasing markedly in recent years,” say Bret Rosen, an analyst at Standard Chartered. “The central bank has done a good job keeping inflation under control during the country’s higher than expected economic growth, while the Ministry of Finance is highly regarded by investors.”
Driven by strong domestic demand, the economy is forecast to grow by 4.6% in 2011, with car sales growing by 58% year-on-year in the first quarter. Unemployment is falling steadily, and household consumption is rising, helped by low interest rates.Consistently low inflation, forecast to register a monthly increase of just 0.15% in July by economists polled on Bloomberg, has also pushed down yields on Colombia's peso denominated bonds to nine-month lows.
On the fiscal side, Colombia ran a budget deficit of 3% in 2010, a figure which is anticipated to fall slightly by the end of the year, according to research by BBVA. Colombian banks have taken advantage of Colombia’s new found investment grade rating, and domestic corporate issuance has already reached record highs of over $3 billion year to date.
Colombia, which has now been awarded an investment grade rating by all three agencies, trails Chile, the number 1 ranked Latin American sovereign, in terms of GDP per capita, but its policy makers are similarly well respected. "Colombia is one of the very few countries that can replicate Chile's success in the coming years," says Arthur Budaghyan, an economist at BCA Research.
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A version of this article first appeared in Euromoney Country Risk.
Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.