Colombia's Turnaround Story

Next week John McCain will be visiting Colombian President Alvaro Uribe, a brave leader surrounded by leftist regimes who deserves much praise for turning the country around.

Ask most anyone what comes to mind when mentioning Colombia, and they will likely respond cocaine trafficking, Pablo Escobar, Guerilla rebels, and rampant violence and kidnappings.  But times have changed.

Last week Moody's investment grading service upgraded the country's debt from "Ba2" to "Ba1", one notch below what is considered "investment grade".  This is a strong vote of confidence for a country even the most steel-nerved investors wouldn't touch five years ago. A senior analyst at Moody's states:

"The dramatic progress with respect to Colombia's once-precarious security situation has spurred a sustainable recovery in domestic demand and generated a virtuous cycle that has significantly improved debt dynamics"

Alvaro, a staunch supporter of free markets, knows that the quelling of rampant violence and economic growth are sequential events:  In order for investors - both local and foreign - to have enough confidence to bet their dollars on Colombia's growth, the nation's security must first be dealt with.  Colombia's investment environment and security situation are intricately linked, as Ben Laidler of UBS Pactual (one of the few investment banks in the country) stated in BusinessWeek:

"I guarantee that if you graph the decline in kidnappings to investment gains, the correlation would be one-to-one."

Kidnappings in the country, once numbering well into the thousands annually, are now down in the 200 annual range, and Alvaro's iron fist (which may be sourced to the fact that his parents were killed by leftist guerillas in 1983) is accomplishing what was once unthinkable:  the destruction of the country's Marxist guerilla group FARC.  Indeed, my dusty 2003 edition of Robert Pelton's The World's Most Dangerous Places, which gives Colombia a five-out-of-five star rating on the danger scale (only the likes of Chechnya and Liberia attained this coveted award), states the following shortly after Uribe took office:

"FARC is the largest, best-trained, best-equipped and most effective insurgent organization in Latin America - it's the one Western terrorist group voted "most likely to succeed" by U.S. intelligence services.

How times have changed under Uribe.  As The Economist reports in this article titled "Peace for Colombia?  Why the FARC's defeat looks to be only a matter of time":

"Colombians turned in despair to Álvaro Uribe, their tough president since 2002. He has expanded the security forces by a third, to 270,000, including a core of 80,000 professional soldiers, some of them in mobile brigades and special forces. They are backed by a large helicopter fleet, Brazilian-made Super Tucano tactical bombers and American advice, especially in intercepting communications.

This build-up transformed the war, driving the FARC away from the towns. Recent changes of government strategy are now bearing fruit. These involve encouraging guerrilla desertions and targeting the leadership. The FARC are now losing more deserters than they are gaining new recruits, according to General Freddy Padilla de León, the armed-forces' commander. ‘They are reduced militarily, isolated politically, have a reduced social base and we are cutting their finance [by acting against their drug business]. It's impossible for them to return to the cities,' he says."

The death of Manual Marulanda, FARC's notorious leader, has also played a major role - though it is debated whether the cause of his death last May was the result of Alvaro's military bombardments (the military's version) or a heart attack (FARC's version). 

With violence subsiding and confidence in the country's stability on the rise, that astute Alvaro knew the time was right to begin privatizing industries, selling stakes in Bogotá's state-owned phone company, and last year, Ecopetrol, the state-owned oil industry.

The privatization of state run oil behemoth deserves special mention.  With production falling under state rule, Ecopetrol's CEO is now hoping that Ecopetrol in ten years will be the great success Brazil's Petrobras is today.  The techniques used to market shares of the company show Uribe's dogged determination to spread the allure of investing in the stock market to all those in the economic ladder.  Not only can shares can be paid for in installments, but they can be purchased at local supermarkets.  With twelve years experience in the finance industry, including three years in emerging markets, I've never seen this technique used for selling shares.  In the three-year Chartered Financial Analyst curriculum, including extensive study in international markets, this method of bringing a company to market is not mentioned once.  I think it is stroke of genius, and as BNET Globale Finance reports, it has played has crucial role in the citizens' confidence in their country:

"‘People who have never invested in the financial markets are investing now through Ecopetrol,' says Juan Antonio Jimenez, a trader with Correval, a Colombian investment bank. Observers believe the new money is predominately from locals who used to send their money abroad because Colombia's troubled security situation made the country a risky investment. Now, they say, economic growth of almost 7% and a vastly improved security environment under President Alvaro Uribe is attracting the money once again."

On a side note, isn't it interesting that we have Democrats in this country like Maxine Waters that would rather go the opposite direction taken by Colombia's leftist neighbors like communist thug Hugo Chavez, and nationalize our oil?  What a surprise.

While things have improved substantially under Uribe's rule, like many emerging market countries, it is beset with problems that will take years to show improvement.  Violence is still high by international standards, the country's infrastructure is outdated and overburdened, cocaine is still trafficked, and wiping out the corruption inherent in many of the country's institutions won't happen overnight.  Opponents of Uribe -- like the American left -- accuse him of being connected with paramilitaries on the right, and this last point is why democrats like Obama and Clinton claim to opposed to free trade with Colombia. But as The Economist points out, Uribe has not been implicated in any wrongdoing.

While the level of McCain's conservatism has been justifiably been under fire for many of his positions - Global Warming, illegal immigration, GTMO, oil profits - McCain's recent actions are encouraging.  He reversed himself on ANWR to support drilling, spoke out against the Supreme Court's child rape verdict, spoke in favor of the upholding of the 2nd amendment, and next week will be solidifying a relationship cultivated by George Bush with the region's prominent conservative leader - a leader that has shown the fruits of diligently applying conservative principles.