Colombia: The Next Hot Emerging Market?

See why Colombian ADRs, including rising star Ecopetrol, deserve a closer look.

Mar 26, 2014 at 6:45PM

Investors with an eye on emerging markets in Latin America tend to focus on Brazil and, more recently, Mexico. However, they may be overlooking a rising star that many still associate with drug wars and instability: Colombia.

Emerging-market alphabet soup
First, a Goldman Sachs analyst coined the acronym BRIC to describe a group of developing countries (Brazil, Russia, India, and China) that were expected to see high economic growth in the 21st century. Later came the MINT acronym, lumping together some emerging-market countries (Mexico, Indonesia, Nigeria, and Turkey) that were rapidly developing.

Most recently, the bank HSBC created the acronym CIVETS to describe yet another group of promising economies (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa). A closer look at the country that puts the "C" in CIVETS is warranted.

The good: steady growth, low debt, a business-friendly environment, and natural resources
The Colombian economy is now the third-largest in Latin America. From 2001 to 2013, it grew at an average annual rate of 4%. According to a Bloomberg survey, the nation's economy is expected to grow 4.5% in 2014. Colombia's budget deficit was only 2.41% of GDP in 2013. The government's bonds have an investment-grade rating from Moody's, and the country paid an interest rate of 5.65% on 30-year bonds in January, which is lower than the rate paid by rating-peer countries Romania and Indonesia. 

Colombia also has business-friendly economic policies. It scored a 70.7 on the 2014 Heritage Foundation's Index of Economic Freedom-- significantly higher than the regional average of 59.7. The index grades countries on a scale of zero to 100 based on four pillars of economic freedom: rule of law, limited government, regulatory efficiency, and open markets. Some factors that contributed to Colombia's high rating were efficient regulatory procedures for starting a business, developed capital markets, and liberal trade policies. 

Further, according to a report from the World Bank in 2013, Colombia was the third-best country for doing business in Latin America. The World Bank looked at factors including complexity of the tax system and level of regulation on business. 

Finally, Colombia has abundant natural resources, including oil, coal, and nickel, along with a strong trading relationship with the United States; the U.S.-Colombia Free Trade Agreement came into force in 2012 and will eliminate tariffs between the two countries. 

The bad: unemployment, inequality, and remaining security concerns
Colombia's relatively high unemployment rate of 10.4%, though much improved since the recession, threatens stability and long-term economic growth.

The security environment in Colombia improved drastically under the presidency of Alvaro Uribe from 2002 to 2010. The current president, Juan Manuel Santos, is similarly committed to a strong security policy. At the same time, the drug trade and the Marxist rebel insurgency are still alive in the country and present risk, though considerably less than in the past. The government is currently engaged in peace talks with the largest insurgent group, the Revolutionary Armed Forces of Colombia, or FARC. 

Recent development: the falling peso
In the past year, the Colombian peso has fallen in value more than 12% against the dollar. Last month, Colombian central bank Governor Jose Dario Uribe described the devaluation as a positive, signaling that the bank would not intervene to stall the peso's decline. Colombia does not face the same high-inflation concerns of other Latin American countries, and a weaker peso could spur growth in the country's export industries and decrease the notoriously high unemployment rate. On the other hand, the devalued peso might be discouraging to foreign investors who could see any gains eaten up by a falling exchange rate.

A Foolish investment option: Ecopetrol 
Those interested in gaining exposure to the Colombian market might look to Ecopetrol (NYSE:EC). The state-run oil company could be an attractive alternative to Brazil's Petrobras (NYSE:PBR), which is heavily indebted and involved in a massive offshore drilling investment plan.

Ecopetrol now has a larger market capitalization than the once-dominant Petrobras. Shares of Ecopetrol fell 42% in 2013, so now may be an opportune time to purchase the company at a discount.

Several factors contributed to Ecopetrol's decline in 2013. First, net income fell 11.3% during the year. According to the company, the decrease was due to pension payments and changing tax regulations in Colombia. The company also saw increased attacks by rebel groups on its oil pipelines. Finally, oil stocks were hit hard in 2013 due to a still-lagging global economy.  

While shares of Ecopetrol fell in 2013, several positive factors suggest things will be getting better. In December, the company announced new oil discoveries in southern Colombia. Success in the ongoing peace talks with the FARC could decrease attacks on Ecopetrol pipelines and open large amounts of Colombian territory to future exploration.

Given this and the coming increase in global energy demand, Ecopetrol -- along with the Colombian market in general -- deserves a new look from investors.

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Jillian Blake has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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