IFR LatAm Investor Series: Colombia Roundtable 2021: Part 1

IFR LatAm Investor Series: Colombia Roundtable 2021
11 min read

Cesar Arias, from the Ministry of Finance & Public Credit, kicked off the roundtable with an overview of the impact of Covid-19 on the Colombian economy and the government’s response to those issues.

The impact was most acute in three areas, according to Arias: poverty increased by 10 percentage points, which brought with it all the social tensions associated with an increase in impoverishment; unemployment, already a well-established double-digit feature in Colombia’s economy before the onset of the pandemic, went up from 15% to 20% at the height of the pandemic – the economy losing somewhere around 5 million jobs; and companies, especially small and medium-sized enterprises, all suffered from the downturn in the global trading environment.

“We designed our policy strategies based on those three main indicators,” said Arias.

The first programme launched in 2020, comprising non-conditional cash transfers, a programme that went out to nearly 2 million households, the equivalent of around 8 million people below the poverty line. The second programme comprised government guarantees on lending to small and medium-sized companies.

“This was very important,” said Arias. “During the pandemic we discovered that there wasn’t necessarily a shortage of liquidity in the market, but there was a shortage of appetite to deploy that liquidity into companies that were hit by the pandemic.”

The third part of the strategy was more aligned with central bank activity, in that it concerned providing enough liquidity to the system through repos, and the purchase of corporate debt and government debt in the secondary market.

“All in all, the implementation of these programmes accounted for 11% of GDP,” said Arias. “Part of it was on-budget; part of it was off-budget – through the central bank – and the results were encouraging. Colombia outperformed many countries in the region, contracting by just 6.8% last year and rebounding the quickest this year.”

Through the government’s efforts, the country was able to transform its health system, doubling intensive care units and developing the capacity to vaccinate half-a-million people per day.

As well as the social benefits from its programmes, the corporate sector found some encouragement in the government’s efforts.

“The government response has been sufficient throughout the pandemic,” said Antonio Gutierrez of Scotiabank Colpatria. “The feedback I’ve been getting from our clients has been excellent. They have really appreciated the implementation of these measures in helping them through the tough times.”

He outlined programmes that supported companies in maintaining employment levels, even in the face of a reduction in earnings, and programmes of credit from government banks and agencies. Most of these programmes remain in place today.

Representatives on the panel from the corporate world contributed their experiences of operating through Covid-19 and navigating through the challenges faced by their companies.

Colombian conglomerate Grupo Argos was not immune to the impact of the pandemic, experiencing particularly high levels of volatility and uncertainty in its airport holdings and road operations, and in levels of demand for its energy and cement businesses.

“We structured a plan for our group of companies with three things in mind,” said Alejando Piedrahita of Grupo Argos. “The most important was to keep our workmates safe; the second was to keep our employees safe in terms of job security; and the third was to support not only our shareholders, but our stakeholders.”

Argos adopted plans to speed up payment for the small and medium-sized companies it works with as it recognised the need for greater flexibility and liquidity within its supply chain.

It also looked at increasing financial flexibility internally, reducing capex and increasing liquidity to support it through the crisis but also to protect its credit ratings. “For Grupo Argos and our companies, access to capital markets is vital,” said Piedrahita.

For energy company Grupo Energia Bogota, the impact of Covid was relatively benign, with the firm managing to increase its Ebitda in 2020, thanks to the organic growth and acqusitions strategy of the previous 18 months.

“We are in a privileged sector in terms of resilience to the impact of Covid,” said Jorge Tabares of Grupo Energia Bogota. “We were able to maintain our operations throughout the pandemic and grow the business. Even though there was a drop in consumption to begin with, demand has returned this year to pre-Covid levels.”

In the face of uncertainty for capital markets, Grupo Energia Bogota, along with many of its peers, focused on building a cash cushion. It has been paying back debt and reducing its cash position as it returns to a more normal operating level.

For Promigas, the natural gas transport company with investments in Colombia and Peru, the main impact of Covid came from the lockdown itself.

“The lockdown affected a big percentage of our 4 million customers,” said Fiorella Frieri of Promigas. Businesses were forced to close or stop offering their services and demand for gas decreased.

“During the months of March through June 2020 demand fell by around 30% from our corporate customers,” said Frieri.

The lockdown also affected its residential users, 80% of which belong to the lowest income bracket.

“These people usually generate their income on a daily basis in informal jobs. Not being able to go out to work means that they don’t have money to pay bills or buy food. That put a lot of pressure on our receivables,” she said.

Promigas navigated its way through its difficulties with a combination of internal measures and government support. It implemented a responsible austerity programme to control costs, and postponed planned capex lying outside of investment mandated by the regulator, from 2020 until 2021. It also found assistance in government packages, including the employment support programme (PAEF) that was available from April 2020 to March 2021, and the zero-interest loans available for utility companies and natural gas and electricity distribution companies. This was used to help finance user invoices of customers in the lowest income bracket.

The impact of Covid was not just limited to costs and revenues.

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“We needed to raise around US$350m–$400m in working capital and capex,” said Frieri. “And we faced a cautious financial sector experiencing tight liquidity, and that resulted in borrowing at higher rates and shorter terms.”

Nevertheless, Promigas raised the US$350m it needed in 2020 between March and May, paying back or amortising debt through the year if planned expenditure was not realised.

“The situation turned out better than what we expected, so at the end of the year, we were able to pre-pay around US$100m–$150m of debt,” said Frieri.

Promigas’ experience was reflected throughout the economy with demand for credit from the banking sector rising rapidly in the early stages of the pandemic as corporates built up their liquidity buffers. As the economy began to recover in the second half of 2020, however, those same corporates began to return liquidity to lenders. Since the start of the year, demand for credit has been rising again as the situation continues to normalise.

“Overall, we saw a greater demand for liquidity throughout the banking system, throughout the whole economy,” said Gustavo Ale of Scotiabank Colpatria. “We have been through unprecedented times, but I think the banking system proved receptive to the situation it faced and performed well.”

Covid-19 also made for a challenging market in the investment community. Pension fund AFP Proteccion, addressed the risks it faced by managing liquidity positions strategically. It then took advantage of the sell-off in markets at the beginning of 2020 to gradually increase exposure.

“Since our portfolios are long-term oriented, we were able to use the short-term sell-off as an opportunity to increase our risk position,” said Felipe Herrera of AFP Proteccion. It increased the global equity allocation of its largest portfolio from 40% to 45%. It also increased allocations to alternative investment, increasing exposure to that sector from 14% at the beginning of 2020 to close to 20% some 18 months later.

“Basically, we’ve changed our allocations to more public equity and private equity and decreased the duration contributions in our portfolio because real rates of interest in fixed income are so low,” said Herrera.

Low interest rates
Low real rates of interest in fixed income markets could be here to stay for a while longer, however, thanks to the action of the US Federal Reserve when the pandemic first appeared.

“The Fed started injecting huge amounts of liquidity into the markets and this changed the perception of investors,” said Juan Fullaondo of Scotiabank. “Rates are going to be lower for longer.”

“Lower rates for longer” proved to be good news for borrowers, not only in the US, but for all emerging markets and, specifically, Latin America. Demand for fixed income products returned in force after a short hiatus and bond issuance volumes have ballooned in the last 18 months as a consequence. It is a dynamic that is still in play.

“Every time we go to market for an issuer, books are probably 2.5–3.5 times oversubscribed and pricing is compressed by 5bp–10bp from initial price talk,” said Fullaondo.

Action by the Fed in supporting global liquidity, has had a positive knock-on for sovereigns needing to borrow heavily when they need to finance domestic pandemic mitigation programmes.

“LatAm has faced incredible challenges in respect of budgetary pressure through the pandemic,” said Fullaondo. “But thanks to the liquidity in the market, regional sovereigns have sailed through this crisis relatively smoothly. I hope that dynamic prevails for the next couple of years. I think it will.”

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