Extreme
Investing: Inside Colombia
An improbable journey
from crime capital
to
investment hot spot. Can this boom last?
Bogota's
Bolivar's Plaza
By
Roben Farzad
" You going there to get some kilos?" asks the driver as he drops me
off at Newark's international airport for my six-hour flight to Bogotá.
He grins at me in the rear-view mirror as if he has cracked the most original
one-liner in history. "Like Scarface," he continues, shifting to his
Pakistani/Latino gangster accent: "Say hello to my little friend! Pow! Pow!" He
hands me my bags and reminds me to call my mom and make peace with the Almighty
before I embark for certain death. "You are crazy, my friend."
Traveling
to Colombia to chronicle the investment miracle unfolding
there seemed perfectly reasonable a few weeks earlier. The
stats all scream "Go! Go! Go!": Colombia's stock
market has soared fourteenfold since October, 2001. Foreign
direct investment and capital inflows have more than doubled,
while real estate prices have tripled in many areas. Citigroup
CEO Chuck Prince even kicked off his February "world
tour" in Bogotá, where the bank is building branches
and a Latin American call center. But when most Americans
hear the name Colombia they think about the late Medellín
drug lord, Pablo Escobar. And roving paramilitary death squads.
And speedboat-loads of cocaine headed for Miami.
I've been assured by bankers that things are getting much better in this
nation of 42 million. But it isn't until I step onto the packed 737 to Bogotá that
I get my first real sense of the intense interest in Colombian investments.
I spy at least 20 business suits, including the laptop-toting Swede sitting
next to me who's building a boutique hotel in the beautiful 16th century
city of Cartagena on the north coast.
Investors
like these have visited many exotic ports in recent years.
Colombia's surprising rise has been fueled by two larger
trends: the enormous amount of money sluicing through global
markets and investors' increasing risk tolerance. First,
cash poured into the so-called BRIC countries—Brazil,
Russia, India, and China. Next it flooded riskier secondary
destinations such as Turkey and Poland, and last year, with
ferocity, Vietnam. Now money is gushing into third-tier hinterlands
fraught with political and economic problems, where even
the rule of law isn't a given.
THE
CONFIANZA INDEX
Call them extreme emerging markets. The Standard & Poor's/IFCG Frontier
Index of 22 such destinations, which includes investing curiosities like
Lebanon, Côte d'Ivoire, and Bangladesh, has gained nearly 400% in the
past five years. The question is whether these nascent markets have what
it takes to parlay the fickle enthusiasm of hedge-fund traders and other
investors into long-term economic development.
Yet
Colombia is so extreme that it hasn't even made the Frontier
Index. Its stock market has an aggregate capitalization of
just $59 billion. In this parallel investing universe, price-earnings
ratios take a backseat to fuzzy measures such as confianza,
which translates into confidence and trust but is more accurately
described as the general sense that people can safely transact
business and get through everyday life unharmed. The handful
of Wall Street analysts who cover Colombia supply their clients
with charts of murder rates and kidnappings.
President
Alvaro Uribe, who took office in 2002, nearly five decades
into a civil war that has pitted Marxist guerrillas against
right-wing death squads, has made confianza his overarching
goal. Killings and abductions are down sharply in the big
cities, and that has been a boon for all manner of investments,
from stocks to real estate. "I guarantee that if you
graph the decline in kidnappings to investment gains, the
correlation would be one-to-one," says Ben M. Laidler,
head of Andean research for UBS Pactual.
On
a continent whose economic history is the stuff of a blooper
reel, Colombia's strong fundamentals stand out. Its $130
billion economy, a world leader in the production of coffee,
petroleum, textiles, and flowers, is growing at 6.8% a year,
two full points faster than the Latin American average. In
the past 10 years, Colombia has slashed its inflation rate
from 18% to 5%, and since Uribe was elected, unemployment
has dipped from 16% to 13%. The nation has never defaulted
on its debt or experienced hyperinflation. And entrepreneurial
thinking is spreading. Run a Google (GOOG
) geographical-hit query, and you'll see that,
per capita, nowhere in the world are there more searches
for the words "Peter Drucker," the late management
guru, than in Bogotá. No. 2? Medellín.
Yes,
Medellín. Once the murder capital of the world, this
city of 2.4 million is regaining its status as a commercial
hub, hosting regional offices for a growing roster of multinationals
including Philip Morris, Toyota, and Renault, as well as
globally minded Colombian companies that make up 70% of the
country's stock market value. More high-rises are under construction
here than in Manhattan and Los Angeles combined.
But
all of it—the stock market gains, the development,
the rising living standards—rests on confianza. Foreigners'
view of Colombia as a lawless, violent, riven land won't
change quickly. As Commerce Minister Luis Guillermo Plata
acknowledges, "Why would I invest in a country if I
can't go there?"
As
I get into the cramped cab that's taking me to my hotel,
I can't help thinking about the fabled "millionaire's
tour of Bogotá," a stretch of road where colluding
cabbies and thieves once drove passengers from ATM to ATM
to drain their bank accounts. And then there's the drugs.
Colombia still produces the majority of the world's cocaine,
an ongoing crisis that draws a steady supply of U.S. military
and financial aid. Even corporate crime here takes on deadly
overtones: Cincinnati-based banana giant Chiquita Brands
International was in the news recently for admitting to having
paid $1.7 million in protection money to a Colombian paramilitary
group on Washington's list of foreign terrorist organizations.
I'm
here to find out whether Colombia's fledgling stock market
can keep surging, whether its financial and physical infrastructures
can accommodate the flood of investment, and whether an equity
culture can take hold.
At
the center of everything is President Uribe. "We need
to rescue international confidence in our country," he
tells me in his heavily guarded compound in Bogotá's
historic center full of Spanish colonial architecture. Access
to Uribe is preceded by an hour of security checks and chilling
looks from guards holding bayonet-tipped machine guns.
The
54-year-old Uribe is a rarity in increasingly leftist Latin
America. A center-right ruler with an approval rating of
more than 60%, he won a landslide second term in 2006 after
having amended the constitution to allow him to run again.
Uribe knows Colombia's history of violence firsthand: A decade
ago he was governor of Medellín's province, and in
1983 his father was murdered by kidnappers. The sometimes
dour leader has driven most of the drug traffickers and leftist
guerrillas out of urban centers, though they still reign
in remote regions.
But
allegations have surfaced in Colombia that the President
himself has links to right-wing paramilitaries who murdered
hundreds, including labor-union activists. On May 14, 20
Colombian lawmakers and businessmen were arrested on charges
in connection with the scandal. Colombia's police chief and
head of police intelligence, meanwhile, were ousted amid
allegations of illegal wiretapping of opposition politicians
and journalists. Uribe vehemently denies any personal connection
to the affair. (See
Alvaro Uribe: The Change Agent).
Despite
his obsession with law and order, the economy is never far
from his mind. "The state is the most important private
enterprise," he says, "and the public is like a
universe of shareholders." Javier Vargas, a Colombian
banker with Credit Suisse, has heard Uribe sound that theme
many times. "He talks like a person who is selling and
marketing his country," he says. "Investor confidence
is key for him." In May, Uribe visited Washington to
meet with supporters in the Bush Administration and lobby
congressional Democrats on a free-trade pact between the
two countries. Democrats have been uneasy with Uribe since
the recent allegations surfaced. But Colombia is a vital
strategic ally in an increasingly hostile continent, bordered
by Hugo Chávez' Venezuela and left-leaning Ecuador.
Washington has sent Colombia $5 billion in aid since 2000,
including $650 million last year; only Iraq, Egypt, Afghanistan,
and Israel receive more.
For
Uribe, a deal is crucial both for the tangible economic benefits
and the perceptual ones. He has invested much political capital
already, visiting the U.S. at least 25 times since taking
office. Winning full free-trade benefits with the U.S. would
do much to bolster the fragile investor confidence he has
been nurturing, while a loss would damage his prestige. Uribe's
challenge is one that everyone, from business leaders to
taxi drivers, acknowledges. "Investing here is rooted
in improving physical safety and lowering the risk of doing
business," says Alexander P. Kazan, a Latin American
strategist at Bear Stearns & Co."You really cannot
overstate the importance."
SLEEPY
EXCHANGE
On a cool April morning, I make my way to Bogotá's bustling financial
district. Amid the roar of motorcycle engines and a haze of bus exhaust,
the district brims with young professionals sipping tintos—tiny cups
of dark coffee—while chatting on newfangled cell phones. At every crosswalk
and on street medians, the less fortunate hawk snacks, cigarettes, and telephone
calling cards from salvaged baby carriages, stark reminders of the gaping
disparities in this poor nation.
Halfway
up a glassy office building is an ultramodern floor containing
Colombia's stock exchange, the Bolsa de Valores. It's high-tech,
but no one would confuse it with the NASDAQ. Just 12 people
sit around a circular table staring at their flat-panel displays
in a space no bigger than a conference room at a Best Western
hotel. It's so quiet you might think you showed up to take
the GMAT. I jokingly ask if we're at the right place. Our
photographer wonders aloud if he should bother unpacking
his equipment.
"This
is it," says Jaime Sarmiento, the exchange's 34-year-old
communications director, sensing the anticlimax of the moment.
He points up at the ticker, a circular LCD sign. "Does
anyone know how to turn this thing on?" The specialists
on the floor arrange a photo op, choosing a mustachioed elder
to sit on the elevated chair in the center of the ring and
motion as if he is directing order flow. Truth be told, everyone
is just waiting for 1 p.m., when the market closes and the
power lunch scene takes hold. When I ask if the early close
is a vestige of the Spanish siesta, I'm curtly told that
it's purely a result of how little business there is to transact.
Sarmiento takes us downstairs to tour the café, a
swank lounge that was conceived as a high-energy, high-buzz
meeting place for stock junkies. On this day, two or three
guys sit around reading the paper, blissfully unaware of
the handful of digits flickering on the wall-mounted display
above.
Such
sleepiness belies the market's breathtaking volatility. This
is the central paradox of extreme emerging markets: With
so few buyers and sellers, small upticks can quickly turn
into major surges, while the faintest of downticks can lead
to painful routs. After posting a 128% gain for 2005, second
best in the world, the Bolsa nosedived 45% in two months
during last year's late-spring emerging-markets swoon, the
second-worst showing on the globe. It has since jumped 75%;
on June 15, 2006, alone, the index gained 16%. It's down
5% in 2007.
All
the choppiness merely confirms the suspicions of most of
the locals, who eschew stocks for government bonds, even
though they yield just 6% now, a third of what they did eight
years ago. "The general public just isn't all that accustomed
to stocks," says Rodrigo Jaramillo, CEO of Interbolsa,
the country's largest brokerage, and former chairman of the
stock exchange. He notes that fewer than 70,000 Colombians
bought local shares in 2006.
Even
people who invest for a living are reluctant to buy Colombian
stocks with their own money. "I like to invest in young
cows," admits a 26-year-old private investment adviser
in a British-spread collar and Hermès tie between
bites of an empanada in a breakfast joint near the exchange.
His eyes light up as he explains that his uncle has given
him dibs on investing in heifers, an inside opportunity that
has lately scored him 20% to 30% annual returns. Why dabble
in risky stocks, he asks, when he can collect steady returns
on the family ranch? "I sponsor the cows until—how
do you say?—graduation," he says, grinning diabolically,
of the day when they're auctioned off and he reaps his windfall.
But
in fits and starts local investors are coming around. I'm
struck by how many twenty- and thirtysomethings in Bogotá are
at the leading edge of business and civic life: chief executives,
money managers, restaurateurs, even cabinet ministers. Young
and educated, Colombia's new elite could ply their trade
anywhere in the hemisphere. A decade ago there would have
been no question that they would end up abroad. Just four
years ago, Bogotá's Club El Nogal, a hot night spot,
was car-bombed by a leftist rebel group, resulting in 36
deaths. But El Nogal has come back stronger than ever. Even
with all the bomb-sniffing dogs, the place is nearly impossible
to get into on a weeknight. Bogotáns consider it a
metaphor of their resilience.
I
meet some young professionals for dinner at Balzac, a restaurant
modeled after Manhattan's trendy Balthazar. José María
de Valenzuela, a recently minted MBA at INSEAD in France,
lights a cigarette and reflects on his accomplishments. "There
was just a small possibility I'd end up back here," he
says. All of 32, Valenzuela, who did his undergraduate work
at Brown University a decade ago, used to specialize in what
you might call distressed investing. "People were afraid
to leave the city," he recalls of the siege mentality
of seven or eight years back, when terrified families sought
escapism at his miniature golf course in Bogotá. "You
could buy real estate just for the cost of the taxes." Which
is what Valenzuela did, before selling into a property boom
and plowing his winnings into what he and a former finance
professor correctly thought would be the start of a roaring
bull market for stocks. Last summer, Valenzuela rolled those
profits into a partnership with HenCorp Futures, a U.S.-based
trading firm, to offer currency strategies to foreign investors—a
critical building block to outside participation in the Colombian
market. The only way to buy Bolsa-listed stocks directly
is in pesos, and there are no pure-play Colombian mutual
funds available to foreigners.
The
next afternoon, on Valenzuela's recommendation, I head to
Harry's Bar, in a tony Bogotá neighborhood that resembles
San Francisco's Russian Hill. Amid the din of clinking wine
glasses, blond-streaked women and sharply dressed men pick
at plates of seared tuna and Argentinian steak. In the evenings
the place is often overrun by actors, soccer stars, and diplomats.
The owner, spotting my reporter's notebook, stops by. "Please
tell America we're not a bunch of drug dealers shooting at
each other from trees," he says.
COFFEE
BUZZ
In walks my lunch guest, Felipe Gaviria, the boyish money manager whose name
is on the lips of everyone in the smart-money set. In 1997, at 23, Gaviria
was promoted to head of currency trading at a small bank in Cali. Two years
later he left for business school in Barcelona. He returned to Colombia when
Uribe was elected in 2002, sensing the moment was right to buy Colombian
property and bet that the peso would strengthen against the dollar. Now he
oversees $3 billion in pension assets for Spain's Grupo Santander. It's common
knowledge that Gaviria is being wooed by bulge-bracket investment banks and
hedge funds. "I receive everybody," he says coyly.
With
more money pouring in as the economy grows, Gaviria says
he's impatient for more local investment options. Fortunately
for him, some big ones are just around the corner. In an
audacious move, Procafecol, of the fast-growing Juan Valdez
coffee shop fame, is floating its shares on the Bolsa. The
unlikely beneficiaries: thousands of rural caficultores,
or coffee growers, who make up Colombia's national coffee
alliance. They've recently been swarmed by an army of financial
advisers dispatched to the countryside. "Your preferred
shares give you dividend priority over ordinary investors," reads
the glossy offering letter, as if to poke fun at the more
cosmopolitan Class B shareholders.
The
real game changer could be the $4 billion initial public
offering of state oil concern Ecopetrol, one of South America's
four largest. In short order, it could become the most widely
held stock on the exchange. And with U.S. bankers circling,
a New York Stock Exchange listing could be in the offing.
The only other Colombian stock listed in the U.S. is Medellín-based
Bancolombia , whose shares have jumped twentyfold in the
past five years.
Indeed,
Wall Street is doing its best to ride the Colombia wave.
In 2005, SABMiller PLC took over Colombia's biggest brewery,
Bavaria, for a record $7.8 billion, with Merrill Lynch ,
JPMorgan Chase , Lehman Brothers , Morgan Stanley , and Citigroup
advising on the acquisition. Last year ABN Amro advised on
the sale of a controlling $657 million stake in a key oil
refinery to Switzerland's Glencore International. "You're
having more and more investment banks going into Colombia," says
Eric Newman, a Bogotá native who was recently poached
from Lehman Brothers by Morgan Stanley to cover the country
for its Miami-based Latin American private banking arm. He
shuttles to Colombia 20 times a year.
Not
only are Colombia's top companies doing better at home, they're
also branching out to the rest of Latin America and beyond.
A company called Chocolates, essentially Colombia's Kraft
Foods, now ships to Los Angeles and the Southwest, while
Argos, the country's foremost cement producer, has been buying
operations in Arkansas, Georgia, North Carolina, and Texas.
Bancolombia recently acquired El Salvador's largest bank.
One
sign of the rising fortunes in Colombia is the sudden misfortune
of the self-proclaimed Bulletproof Tailor. Miguel Caballero
makes suits and other apparel tough enough to withstand gunshots.
His garment factory, located in a seedy neighborhood of Bogotá,
features a picture gallery of famous customers, including
action film star Steven Seagal and President Uribe, as well
as glossies of Caballero discharging his handgun into the
bulletproofed torsos of employees. Ten years ago, he says,
his company sold 70% of its wares in Colombia. Now, thanks
to the ebbing violence, that figure is just 20%. Caballero
is dispatching salesmen to Russia, Venezuela, even Iraq. "The
idea is to save the business," he says. "You can
say we're globalizing."
The
growing confidence in Colombia brings a new set of challenges.
The streets are safer, and citizens are road tripping again.
Export-import activity is steadily growing. Tourism has nearly
tripled in five years, and beach-lined, historic Cartagena
is among South America's most expensive real estate markets.
But with all of that happening, Colombia's highways, roads,
ports, and other industrial backbones are becoming increasingly
overburdened. "We're really behind on infrastructure," says
Juliana Ocampo, a recent MBA from Massachusetts Institute
of Technology who returned to Bogotá to work for Mexican
cement giant Cemex. "If you ask everyone here, that's
where the investment needs to flow next." Says Gaviria,
the young money manager: "Our north port is terrible.
If we had a world-class port project, I would invest right
then and there." Bear Stearns warned in a recent report
that growth could halt if tens of billions worth of infrastructure
isn't soon built, noting that Colombian pension funds are
clamoring to invest. If the buildout stalls, it will undermine
Uribe's reforms.
STOCK
OPTION
I take up the issue with Vice-President Francisco Santos. Schooled in Texas
and Kansas and formerly the editor of Colombia's largest daily newspaper,
Santos was once kidnapped by Pablo Escobar's men and surely draws satisfaction
from the fact that the cartel's late-'80s vehicles sit rusting in a pound
adjacent to his office. "The roads are getting so clogged," he
concedes. "But who will pay for all the infrastructure?"
Financiers
argue that the money is there for the taking, if only the
government would change its thinking. Historically, Bogotá has
issued bonds to fund such projects, but investors were hungrier
for them when they yielded 20%. It also takes time to rouse
all the layers of bureaucracy in the way. Bankers want the
government to sell equity in the projects instead, following
the privatization trend sweeping Europe and the U.S. "We
can build roads without a penny of government money," insists
Pedro Nel Ospina, the head of Corficolombiana, one of the
country's top investment and merchant banks. "Let us
do it already. Give us equity."
The
government isn't ready to make that leap just yet. But the
fact that a vigorous debate about how best to become an ownership
society is heating up—complete with business page editorials
and regional free-trade zones—shows how far this rugged
stretch of the Andes Mountains has come.
Medellín,
in particular, is undergoing one of the most extraordinary
urban makeovers in modern times. "Our trucks, drivers,
and distributors were attacked at least once a day," recalls
Carlos Enrique Piedrahita, president of Chocolates, of the
scene seven years ago. "Now it just doesn't happen."
The
45-minute ride to town from Medellín's main airport
winds through lush forests and fragrant flower farms. The
city is shaped like a bowl, with commerce and wealth concentrated
at the center as poverty stares down from the rim. It all
descended into chaos with the decline of Medellín's
textile industry in the 1970s and the simultaneous rise of
the drug trade. In 1991, two years before Escobar met his
end in a rooftop gunfight with police, he was recruiting
cocaine-addicted teens in the hillside slums, paying them
$750 for every police officer they murdered. Gang shootouts
continued into emergency rooms. "One can have the impression
that Medellín is about to drown in its own blood," The
New Yorker magazine's Alma Guillermoprieto wrote in 1991,
when the city's homicide rate was 381 per 100,000, the highest
in the world.
But
exploding revenue from Medellín's resurgent corporate
tax base is funding a rapid metamorphosis. Now those very
same shanties are connected to the city center by a sky-lift
gondola of the sort you might find at EPCOT Center. New libraries
and schools court students from other parts of Colombia. "Imagination
Park" stands where murdered bodies were once dumped.
The business assistance office in the heart of the slum is
helping tiny food stores and Internet cafés flourish
where there used to be only crumbling cinder block and exposed
sewer pipes. Today, Medellín's murder rate is 28 per
100,000, lower than those of Baltimore and Washington, D.C.
Statistics
alone don't capture the sense of rebirth here. Atop the slum,
in the shadow of ascending gondolas and a new computer lab,
the city's poorest children think they're kings of the hill.
They chase after me, tugging at my jacket, 30 or 40 at once.
It's not my money that they want, it's pictures of themselves
and their friends. As I sit down to catch my breath, a runty
seven-year-old boy with a precocious understanding of digital
photography suddenly climbs out from under the bench. "I
don't have e-mail yet," he says. "So print it for
me for when you come back, O.K.?"
See
Alvaro Uribe: The Change Agent
