Financial Times - By Naomi Mapstone

Juan Carlos Gonzales has the boyish enthusiasm typical of Colombia’s financial community. The vice-president of foreign investment at Proexport, Colombia’s investment promotion agency, presides over a young, bullish team.

“I had the opportunity to work in investment promotion 10 years ago,” Mr Gonzales says. “Instead of promoting, we were just trying to keep existing investors. Now you have a totally changing moment.”

Thanks chiefly to a big improvement in security, direct foreign investment in Colombia averaged $9.1bn a year between 2005 and 2008.

The global financial crisis, and two recent acquisitions by Ecopetrol, the partially-privatised state oil company, will bring the 2008 high of $10.6bn – close to 5 per cent of GDP – down to about $6bn by the end of 2009, according to the central bank.

“When it comes to mining, oil and agribusiness, things you have to do far from the urban centres, the improvement in security has had an important impact on investment,” says Mr Gonzales.

Among the results are a series of bilateral trade and investment protection agreements and the development of “free trade zones” offering a 15 per cent corporate tax rate to companies that invest about $34m within three years and create about 150 jobs, or $18m and 500 jobs in rural areas.

The development of private equity markets and a pension fund industry – about 25 pension funds manage $40bn in assets – and a growing middle class have also added to Colombia’s appeal.

The government has embarked upon a badly needed $1bn upgrade of ports, roads and railways, partly funded by private investors.

“We believe we have proof that the economical fundamentals of Colombia are strong and we believe in investment and in the private sector,” says Oscar Zuluaga, Colombia’s finance minister, as he takes a sip of strong black coffee in his office opposite the government palace in Bogotá.

“That is part of our economic ideology.”

He predicts GDP growth of 0.5 per cent for 2009. While this contrasts with the more pessimistic market consensus of minus 0.2 per cent, the salient point about the economy, says Joydeep Mukherji, a director in Standard & Poor’s sovereign ratings group, is that it has weathered the crisis remarkably well.

“A lot of focus has been on security … or the free trade agreement, or Plan Colombia,” he says. “Those are important issues, obviously, but people overlook the fact that there really has been a strengthening of the pillars of the economy.”

Inside the hulking edifice of Colombia’s central bank, José Dario Uribe, governor, puts the economy’s performance down to three things: sound macroeconomic policies dating back to President Alvaro Uribe’s predecessor Andrés Pastrana, a dynamic private sector, and a little luck.

The government reduced public debt as a share of GDP, he says, and reversed its composition between 2004 and 2007 to 30 per cent foreign currency and 70 per cent pesos.

A tightening of monetary policy from 2006, the raising of reserve requirements on deposits and the imposition of temporary capital controls then set the stage for a strong counter-cyclical policy response to the global financial crisis.

“We reduced our policy rate from 10 per cent to 4.5 per cent in six months from December to June. We have been able to float the exchange rate,” Mr Uribe says.

“We eliminated capital controls immediately after the Lehman episode, and also reduced the reserve requirement, so we used all our instruments in a countercyclical way because of measures we took before the crisis.”

A strong improvement since 2003 in the terms of trade for leading exports such as oil, coal, coffee and nickel constitutes the “luck” part of the formula, he says.

While oil, mining and financial sector investment remain significant engines of growth, the government, aided by McKinsey, is diversifying the economy by fostering non-traditional sectors. They include software; business outsourcing; electricity; health tourism; automotive parts; cosmetics and personal care; and graphic design, publishing and printing. Four agribusiness sectors will be added to the list this year.

Mr Uribe says diversification will bolster Colombia’s defences against external shocks such as the collapse of exports to the US and fractious relations with neighbouring Venezuela and Ecuador.

Many analysts argue that interdependence is too entrenched to allow Hugo Chávez, Venezuela’s president, to carry out his threat to cut economic ties in retaliation for Colombia’s decision to give US troops access to military bases for anti-narcotics operations.

Alberto Bernal, head of research at Bulltick Capital Markets, the investment bank, says Venezuela’s increasing reliance on food exports, including those from Colombia, acts as a safeguard.

Even in the unlikely event that Venezuela did find a way to cut economic ties with Colombia, Mr Uribe argues the economy could withstand the blow: his chief concern is achieving a medium- to long-term inflation goal of 3 per cent.

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