Interest in Colombia as Investment Destination Picks Up

On the face of it, Colombia -- where the State Department warns one has a greater risk of being kidnapped than "any other country in the world" -- does not seem a very inviting investing prospect.

Its federal budget now includes money culled from the narcotics trade, and it has stubbornly high inflation and a civil war for which a peace can't be brokered. Not the stuff of civic pride campaigns. Nonetheless, economic progress, the successful floating of the peso and fresh infusions of aid from the U.S. and the International Monetary Fund have some agog over investing in a country best known for its coca leaves and guerrillas.

"We expect that during this calendar year, Colombia will outperform the [Latin American] market," says Mohamed El-Erian, managing director at Pimco. The Pimco Emerging Markets Fund is overweight the J.P. Morgan Emerging Bond Index Plus composition of 1.4% in Colombia. (The fund doesn't give exact percentages because holdings are always changing.)

El-Erian is not alone. International investors have been, uh, high on Colombian bonds lately. This despite the high levels of indebtedness that led Moody's Investors Service to downgrade Colombia's debt rating to a junk Ba2 rating last September -- a sharp change from the past, when Colombia enjoyed investment-grade status while other countries in the region fell into disfavor. The spread between Colombia Global bonds due 2009 and comparable U.S. Treasuries has narrowed to 480 basis points from 730 basis points in September.

Part of the buzz on Colombia has been driven by a three-year International Monetary Fund program aimed at pulling Colombia out of its worst recession since the 1930s and restoring growth to 3% this year and 5% by 2002. The IMF and analysts expect inflation to slow to 10% or under if the fiscal austerity measures are followed.

"We believe Colombia touched bottom in 1999," says Felipe Illanes, sovereign analyst for emerging markets at Merrill Lynch. "With the IMF agreement, the strong turnaround means that they are well-positioned for growth."

The investing community has also been cheered by news that for the first time in over a decade Colombia's main insurgent group, the Fuerzas Armadas Revolucionarias de Colombia, engaged in a three-week cease-fire and stated its commitment to peace-process negotiations.

"There is the thought that if you can solve the violence, you can help the economy. With peace you can get a viable narcotics policy, as well as a viable human rights policy and economy," says Marc Chernick, Colombian expert and professor at Georgetown University. "All things flow from peace."

In what some observers took as a sign of international commitment to fostering that peace, President Clinton last month promised $1.3 billion in emergency military and financial aid to combat drug production and trafficking. (When the package is disbursed, Colombia will become the third-largest recipient of U.S. military aid, after Israel and Egypt.)

Yet for all the good vibes, Colombia's position is still precarious. The banking sector is weak, high unemployment persists, neighboring Ecuador is wracked with chronic economic and political troubles, and President Andre Pastrana's popularity has dropped to an all-time low of 32% on a perception that recent concessions to the rebels have been too deep. Moreover, the U.S. pledge has some concerned that the guerrillas may back out of the fragile peace accords in direct reaction to international involvement in their domestic affairs and the increased militarization of the antinarcotics efforts.

That investors have been able to look past the civil war in Colombia is, perhaps, understandable, as it has been going on for three decades. But complacency can be dangerous. Tuesday, Finance Minister Juan Camilo Restrepo underscored the pitfalls in the peace accord when he announced that guerrilla bombing attacks have delayed the privatization of power generator ISAGEN by a month. The delayed privatization was expected to generate $2 billion, which would have been used for financing needs.

Finally, one questions the wisdom of investing in a country even the adventurous are frightened to visit.

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