Capital Markets in Colombia
Colombia’s capital markets have evolved rapidly over the last decade. The Colombian stock exchange, known by its Spanish acronym BVC, is currently the fourth largest stock market in Latin America by market capitalization, behind Brazil, Mexico, and Chile.
The BVC has seen substantial growth and development in recent years. Total market capitalization has risen from $14bn in 2003 to $209bn in 2011, representing a compound annual growth rate of 40%.
Colombia has a tremendous track record. It’s one of the best performing exchanges over the last ten years around the world. Not just in Latin America, but around the world in terms of equity valuations. We’ve had also new listings, new companies. We now have more than twenty two, twenty three companies that are actively traded. Which ten years ago, seven years ago we had very few. So the market is growing, valuations have been there. If you look at Colombia ten years down the line, moving forward, the prospects are tremendous.
Trading activity and volume have grown in tandem with the market cap. The BVC posted a 6-fold increase in traded volume between 2003 and 2011. Traded volume reached $1.22tr in 2011, representing a compound annual growth rate of 26%. In 2011, fixed income accounted for $917bn, or 75%, of the total traded volume; followed by currencies, derivatives, and equity.
Derivatives have been quickly gaining pace in Colombia’s cap markets in terms of both volume and sophistication, and now account for just under 4% of total traded volume. The derivatives market grew to a traded volume of $47bn in 2011, representing a compound annual growth rate of 57% between 2003 and 2011, and making derivatives the fastest growing segment of Colombia’s capital markets. The standardized derivatives market in Colombia has futures on government bonds, foreign exchange, single stocks, and indices.
One factor that has led to the growth of the markets in Colombia is the BVC’s international orientation. The market has been opened up to foreign listings and integration with other markets in the region has been successful.
We opened the avenue for the listing of foreign companies into the exchange in 2009. The first case was Pacific Rubiales with tremendous success. We now have four companies that have been listed in Toronto for a while and that have listed in Colombia as well. But there are more than 60 companies, foreign companies that have been doing business both in the oil and gas sector or the mining sector, that are either small caps or mid caps, that eventually could come to market.
The listing of Pacific Rubiales has indeed been a great success for Colombia’s exchange. Pacific Rubiales and Ecopetrol, the largest oil and gas plays in the country, are the twin pillars of the BVC’s Overall Stock Market Index, or IGBC. The two companies account for over 50% of the IGBC basket.
Nothing shows that the policies we’re trying to pursue are the correct ones like the results some companies are having, and companies have been doing very well, both in the hydrocarbon sector and in the electricity and mining sectors. We have many examples. Just to name a couple, Ecopetrol, since the reforms that were undertaken to have it function more with the private sector standards, has been creating value, has been increasing the quality of its projects, and has been increasing its participation overseas. The financial results of Ecopetrol show it’s been doing quite well. There are other private companies as well. Probably one of the biggest success stories is Pacific Rubiales. Pacific Rubiales, proudly it’s a company that was made in Colombia. Success for them has been very, very, very strong. You just have to look at the overall performance of companies here. That’s why we get so much interest, because success brings interest.
Integrated Latin American Market (MILA)
In addition to opening the market to foreign listings, the BVC is part of the Integrated Market of Latin America, or MILA, the integration of the exchanges of Colombia, Peru, and Chile. Together, MILA is the largest market in Latin America by number of issuers and the second largest by market cap.
MILA today, with Colombia, Peru and Chile has a market capitalization of $650bn and more than 500 listed companies. With the addition of Mexico, we will exceed $1tn in market capitalization and 600 and some companies. This would make it one of the most attractive emerging markets around the world in terms of market capitalization, and in volumes traded and number of companies listed. So, for sure, the incorporation of Mexico into MILA would be a great success and you would have for international investors a clear destination for investment in the region, ex-Brazil. So if you want to be in Latin America, you’re already in Brazil but you want to explore alternatives, we would have the alternative right there with MILA. With the three countries today, we have it. But of course with Mexico joining in we would be a second place to go, no doubt.
While MILA is already a regional cap markets powerhouse, the proposed addition of Mexico would be a significant game changer. Viability studies are already under way to pave the way for the addition of the Mexican exchange to MILA.
Outlook for Capital Markets in Colombia
The outlook for Colombia’s cap markets, and in turn, for the economy as a whole, looks promising. However, the country does still face some challenges in maintaining sustained growth in the future.
Colombia still faces some challenges for sustained growth in the future. The main one, in my opinion, is the reduction of the informal sector in Colombia, which is key for greater productivity in the future. The second one is improved allocation, and the third one is continued financial deepening and the expansion of capital markets.
One issue particular to the deepening and expansion of the capital markets, is the involvement of foreign institutional investors, who have not played a significant role in Colombia’s cap markets to date.
All the growth that we’ve seen in the market in Colombia has unfortunately been led by domestic investors. Foreign investors, foreign portfolio investors in Colombia, are still very small. They represent just 8% of transactions in our exchange. Although they have doubled over the last two years from 4% to 8%, 8% is still very small, and we’re aiming for that number to become 15% by 2015. So we’re working very hard in aiming all of our strategies to attract more foreign investments into the Colombian marketplace.