Colombia’s Wafting Wake-Up Scent

Colombian shares lagged regional peers even as lead listing Ecopetrol’s capitalization became the continent’s largest, bumping Brazil’s state oil contender Petrobras, as the central bank which just appointed new board members again lowered interest rates on 2-3 percent GDP growth and inflation. Finance Minister Cardenas vetted the candidates as he resorted to verbal intervention to halt peso momentum to 1750 to the dollar after anti-appreciation operations through the oil reserve fund. Exporters have called for the resumption of capital controls attempted during the previous Uribe government, as President Santos grapples with a coffee growers strike from weaker Arabica sales abroad. Tax reform will reduce the levy on foreign fixed-income inflows, and private pension schemes remain confined to mainly domestic allocation in portfolio guidelines. As guerilla negotiations continue a mining project attack may induce direct investment caution as a new royalty regime for the industry is set. Macro-prudential limits have also been placed on bank open foreign exchange positions, as private sector powerhouse Bancolombia with New York ADRs completes further cross-border expansion, and securities brokers come under their own scrutiny following last year’s Interbolsa failure which froze the payments system. The IMF and World Bank concluded in a recent financial sector assessment that credit institutions “appeared sound” with one-fifth of assets in government paper and customer deposits covering two-thirds the balance sheet. Stricter capital adequacy rules go into effect soon as the average ratio stands at almost 14 percent, and NPLs are just 3 percent. European deleveraging has a negligible impact as Spain’s Santander sold its local network to a Chilean buyer leaving only BBVA with a tiny presence. However consumer borrowing has grown at a double-digit pace and non-mortgage loans now represent one-third of outstanding credit as household income may have plateaued. Corporate concentration is also high according to a stress test which urged tighter exposure ceilings. The unified financial services regulator acted promptly to close the insolvent broker-dealer several months ago, but the staff still lacks independence and legal protections. It has adopted the IOSCO principles, but along with the professional self-regulatory body could strengthen oversight over collective investment, risk management, and shareholder rights the study believes. A brief liquidity squeeze during the recent episode underscored gaps in contingency lines which the central bank could address with repo facilities available to all intermediaries.

In Chile economic overheating concern is in marked contrast as share prices are propelled by 5 percent GDP growth on unemployment at the same level, a 40-year record. Outside of commodity exports domestic consumption continues to jump at a 6-7 percent annual clip, including for imports which could send the current account deficit over 3 percent of GDP. The central bank has refrained from exchange and interest rate changes as pre-election jockeying begins with the immediate previous president the preferred flavor.