Inaccessible Markets: Which Frontier And Emerging Countries May Soon Be Tracked By More ETFs

Of the 24 countries classified as emerging markets by MSCI, there are 13 which have only a single dedicated ETF available to US investors. The list includes major markets like South Africa, which houses the sixth largest stock exchange in emerging markets and has a market cap of over $1 trillion.

The iShares MSCI South Africa ETF (EZA) – the only ETF tracking the South African market that is traded on US exchanges – tracks the MSCI South Africa Index, which is comprised of 53 constituents. There are no sector or theme-based funds tracking the market even though there are 18 indices on the local exchange, according to Bloomberg data.

The MSCI South Africa IMI Index, which has 111 constituents across various market caps could be an interesting option for an ETF with an even broader based exposure to a market which is currently underrepresented.

It’s not to say that ETFs investing in South Africa or other countries with just one dedicated fund like Chile are not attracting investor interest. Aside from the six largest Chinese ETFs out of the 31 funds focused on China (KBA) (PEK), the EZA and iShares MSCI Chile Capped ETF (ECH) are bigger than all others. They are larger than ETFs investing in Argentina (ARGT) (AGT) and Colombia (GXG) (ICOL) as well, both of which have two ETFs each tracking their markets.

In the graph above, single country ETFs like that for Turkey (TUR), Thailand (THD), and a frontier market like Vietnam (VNM) all feature among the largest funds in this segment.

Untouched corners

The MSCI country indices for Hungary and Czech Republic, both emerging markets, have done well in YTD 2017, having returned 35% and 18% respectively. However, there are not currently ETFs listed on US markets that would allow investors to partake in the strong performance of these countries.

The broad-based fund route does not help either. The most exposure one could get for these countries is 4.7% for Hungary and 2.5% for Czech Republic.

As far as frontier markets are concerned, there are only three countries with dedicated ETFs out of the 33 that MSCI classifies in that category – Argentina, Vietnam, and Nigeria.

Time for a relook?

There remains noticeable pockets in the frontier and emerging markets universe that can be turned into investment avenues.

Investor interest should not be a big hurdle, as the lone ETFs tracking some of the larger markets have had good traction and are considerably larger than a majority of funds tracking much bigger and popular markets.

The launch of the AGT in April this year made Argentina the first frontier market to have two ETFs tracking it. Its asset size growth would be of interest to fund companies looking at launching single-country funds for similar or even larger markets except for China, India, and Brazil.

Thus, it may be time to relook at the present offerings and think about deepening the number and scope of offerings for markets which have done well over the medium to long-term and can thus find traction.

Argentina’s Ebullient Stock Market Shrugs Off An Embarrassing Moment, But What Next?

Though there is debate regarding the irreversibility and effectiveness of President Mauricio Macri’s economic reform policies, one aspect of Argentina is beyond dispute: the exuberance of its stock market.

In Argentine peso terms, the Buenos Aires Stock Exchange Merval Index is up 30% in YTD 2017 until July 7. In USD terms, the rise is capped at 22% in the period due to the decline of the peso against the greenback. Meanwhile, the Global X MSCI Argentina ETF (ARGT) is up 27%.

With this performance, it has far outperformed the previously best performing emerging market from Latin America – Mexico – represented in the graph above by the iShares MSCI Mexico Capped ETF (EWW). It has also given tough competition to the best performing emerging markets of this year so far – Poland (PLND) and Greece (GREK).

What lies behind this performance?

The graph below outlines the sectoral composition of the Merval and the ARGT. Apart from Argentine stocks, the latter also invests in American Depository Receipts listed on US exchanges.

The difference between the returns of Merval (in USD terms) and ARGT in YTD 2017 is best displayed by the sectors contributing to their returns. The tech sector has been the biggest sectoral contributor to the ARGT, led by US-incorporated Mercadolibre, Inc. (MELI), although it does not form part of the Merval. The stock is by far the single-largest contributor to the ETF.

Financials follow next, led up by ADRs of Grupo Financiero Galicia S.A. (GGAL) and Banco Macro S.A. (BMA).

Leaving embarrassment behind

Given the plethora of reforms by the Macri government, there was widespread hope that Argentina would be included in MSCI’s Emerging Markets Index from June this year. BlackRock had launched the iShares MSCI Argentina and Global Exposure ETF (AGT) with a view to this inclusion resulting in an appreciable upside for the country’s stocks.

However, MSCI’s 2017 Market Classification Review, though positive for China and Saudi Arabia, caused somewhat of an embarrassment to Argentine equities as the country was left tagged with a frontier status yet again.

It was a case of so close-yet so far for the country as MSCI observed, “Although the Argentinian equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed.”

Moving on

Argentine stocks took the MSCI snub in stride though, rather than a sharp negative reaction. This year’s June review was arguably the closest the country has come to regaining its emerging market status since having lost it in May 2009.

Stocks are undoubtedly expensive at this juncture compared to its Latin American peers and investors who have given Argentine equities a miss so far may need to wait until the political situation steadies next May – a consideration we’ll look closely at in the last article of this series.

But before that, let’s look at a development which continues to attract market intrigue: the 100-year bond sale.

After Weathering the Storm Earlier This Year, What Will Drive Peru’s Stock Market?

In the first article of this series, we explored the stocks which have been holding back the broader stock market and exchange-traded funds investing in Peru. Meanwhile, the second article details issues facing the country and how it’s dealing with them.

So what do these components combined say about the outlook for Peruvian equities?

Short-term pain

Continued short-term pain for stocks from the country is likely, primarily due to reduced overseas investment in light of the ongoing investigations in the Odebrecht scandal involving previous administrations of the nation.

Meanwhile, investors would also like to see tangible signs of implementation of the government’s plan for rebuilding the country after being hit by severe floods earlier this year.

Another aspect which could hurt investment at least in the short-term is the political challenge faced by the country.

The government led by President Pedro Pablo Kuczynski is not yet a year old but has already seen three ministers – Jaime Saavedra (Education), Martin Vizcarra (Transport), and Alfredo Thorne (Finance) – being sacked by the congress. A similar fate probably awaits the Interior Minister Carlos Basombrío.

Thorne is the latest casualty in the $530 million Chinchero International Airport project contract matter which was also responsible for Vizcarra’s ouster. Kuczynski has named Prime Minister Fernando Zavala as Thorne’s replacement.

Political investigations such as this will continue to keep investors at bay for the short-term.

An economy with potential

Though the country is struggling to grow at present, it is considered to be among the most robust in Latin America.

Apart from the efforts the government is making to get the economy back on track and tackle the corruption scandal, it has another component which can help it bounce back — monetary policy.

The central bank reduced rates in May for the first time in over two years by 25 basis points, but held on to the 4% level at the meeting in June. Central bank President Julio Velarde has said that the institution will wait for the “right moment” to further reduce rates, preferably once credit demand is rising.

Outlook on equities

The table above lists the price-to-earnings (P/E) ratios of the ETFs tracking the five major emerging market economies of Latin America. While Brazil (EWZ) is the cheapest, Mexico (EWW) is the most expensive. Peru (EPU) is in the middle, between Chile (ECH) and Colombia (ICOL).

Peruvian equities may continue witnessing some headwinds in the short-term. Moderate risk-taking investors might want to wait for these headwinds to pass before initiating or adding to their stock holdings from the country.

However, more adventurous investors would find current valuations quite attractive and may initiate small buying positions. Those investors not taking the fund route need to steer clear of all firms which have connections to the Odebrecht scandal though.

Last To the Party: Colombia Could Turn A Corner After Its Slowest Quarter Since 2009

Though Late, Colombian Stocks Have Joined the Emerging Markets Rally

Up until very recently, Colombian stocks told an underwhelming story of late. As recently as May 4, the MSCI Colombia Index had risen just 3.6% for the year, garnering limited attention at a time when the Emerging Markets Latin America Index was up 10.7%, and the broader Emerging Markets Index had gained 13.7%.

However, since then, things have changed quite a bit. So much so, that the Colombia Index was up 11.25% as the month of May drew to a close. The country has now bettered the Emerging Markets Latin America Index, which was up 9.6% in the same period.

ETF performance

The recent rise in Colombian equities merits a closer look at the following ETFs:

  • iShares MSCI Colombia Capped ETF (ICOL)
  • Global X MSCI Colombia ETF (GXG)

Financials, utilities, and materials, in that order, have helped these two funds post their double digit gains this year.

While the regular and preferred shares of Bancolombia S.A. (CIB) have helped ICOL, the sponsored ADR has powered the GXG.

The utilities sector across both funds has been led by Interconexión Eléctrica S.A. E.S.P. (IESFY). The company’s stock had reached an intraday high of 13,900 pesos on May 26 – a level not seen since January 2011 – due to reduced regulatory risk.

View on Colombian stocks

Colombian ETFs have not yet attracted significant investor interest from the US. Though the Colombia-listed iShares COLCAP Fund, the first and largest local equity ETF available in Colombia to all investors, has attracted inflows worth $150 million in YTD 2017, the two US-listed ETFs have only attracted a combined $1.5 million with GXG attracting $822,500 YTD according to Bloomberg data.

The ICOL is only slightly more expensive than the iShares MSCI Brazil Capped ETF (EWZ) but much cheaper than the iShares MSCI Mexico Capped ETF (EWW). While Brazil is undergoing a political crisis, Colombia has been making progress on its peace deal with rebel group FARC.

Macro economically, the country’s economy rose just 1.1% in Q1 2017 – the slowest pace since 2009 – mostly due to the fact that mining production shrank by 9%. However, many are considering this to be a bottom for the country as construction activity is expected to pick up. If oil prices remain firm, they will also help the economy.

Meanwhile, there are mixed views from analysts regarding Colombia stocks. According to reports by Bloomberg, HSBC analysts have added CIB to their model Latin American portfolio. On the other hand, Citigroup has kept Colombia at ‘underweight’ citing that it is “too hard to find conviction ideas at reasonable prices.”

For investors taking the ETF route, the broad-based ETF basket would help mitigate risks that come along with investing in individual stocks.

These 5 Frontier Markets Are ‘Misunderstood and Undiscovered’

Frontier Markets which remain fairly misunderstood and undiscovered

From what Carlos Hardenberg told Citywire Selector in a recent interview, Africa (EZA) (GAF) is one of the frontier markets (FRN) (FM) where Franklin Templeton sees “a lot of opportunities.” Hardenberg is the director of frontier markets at Templeton Emerging Markets Group. The fund manager also sees similar opportunities in 3 Asian economies and 3 Latin American economies. According to Hardenberg, these markets remain “misunderstood and undiscovered.”

3 Asian markets where Franklin Templeton sees opportunities

In a recent article, we highlighted the key reason why fund managers are looking at Asian emerging markets right now. While Pakistan (PAK) and Vietnam (VNM) seem to be under the spotlight of many fund managers lately, Franklin Templeton’s Carlos Hardenberg identifies economies such as Cambodia, Sri Lanka, and Bangladesh as markets with opportunities presently. What’s particularly attractive about these markets is that they’re relatively undiscovered, which in a way, lends them more favorable valuations. Our articles, Revealed: Cambodia’s Most Promising Tech Startups and 5 Reasons Why Bangladesh Presents an Attractive Investment Opportunity offer more insights on these markets.

2 Latin American markets where Franklin Templeton is focusing 

In Latin America, while the markets are usually abuzz with news and economic developments in the bigger markets such as Mexico (EWW) or Brazil (EWZ), smaller markets such as Peru (EPU) and Columbia (ICOL) are what offer opportunities, according to Franklin Templeton’s Hardenberg. Interestingly, Peru and Colombia have a higher spread of profitability than emerging markets globally. Even JP Morgan sees idiosyncratic opportunities in five markets, which include Peru and Columbia.

The Peruvian equity tracking iShares MSCI All Peru Capped ETF (EPU) is up 5.55% YTD (as of May 27), while the iShares MSCI Colombia Capped ETF (ICOL) has gained 11.5% so far this year.

Why Peru and Colombia Have a Higher Spread of Profitability than Emerging Markets Globally

Higher profitability + idiosyncratic opportunities

Felipe Asenjo, regional head of equities at SURA Asset Management sees valuable investment opportunities in the Pacific Alliance countries of Mexico (EWW), Chile (ECH), Columbia (ICOL) and Peru (EPU). Asenjo expects companies in these regions to grow at 17% CAGR over the next 3 years. “The Pacific alliance has always had a higher spread of profitability than global emerging markets… the second region in the world in the last 15 years with the highest delivery of earnings growth,” said Asenjo.

Meanwhile, Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JP Morgan (JPM) Asset Management sees idiosyncratic investment opportunities in Peru and Colombia.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”EPU” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-05-16″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

Peru

Private investment in Peru (EPU) is expected to bounce back and grow 0.5% in 2017 and gradually reach 6.5% growth by 2021, according to the Economy and Finance Ministry. The Ministry expects greater infrastructure investment due to the resumption of projects linked to Brazilian enterprises, to be the primary driver of such growth. The agency also expects increased mining activity to boost private investment. The Finance Ministry also forecasts public investment to rise by 15% in 2017 and in 2018.

The Peruvian economy has already shown its resilience towards the El Niño phenomenon (causing heavy rains and flooding), by slowing less than expected. Prudent actions taken by the central bank such as cutting interest rates should “boost activity” and put Peru on track towards an expected 3% overall economic growth, claims Prime Minister Fernando Zavala.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”ICOL” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-05-16″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

Colombia

According to Santiago Angel, head of the Colombian Mining Association, enormous potential lies on offer in the mining industry (XME) in Colombia (ICOL), which serves as a major growth engine for the economy. Angel sees the industry bringing in a whopping $1.5 billion in 2017 and $1.7 billion in 2018, with a five-year investment of $7.5 billion; provided the government guarantees legal certainty to businesses. Coal (KOL), gold (GLD), and copper (COPX) remain the three main mining sectors in Colombia.

AngloGold (AU) and Eco Oro Minerals (GYSLF) are the larger players in Colombia’s gold sector. The biggest coal companies are Drummond, Glencore (GLNCY) (GLNCF), Murray Energy, Colombia Natural Resources, and Cerrejon, which is jointly owned by BHP Billiton (BHP), Anglo American Plc (AAUKF) and Glencore.

JP Morgan Sees Idiosyncratic Investment Opportunities in These 5 Frontier Markets

5 idiosyncratic investment opportunities

Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JPMorgan Asset Management sees idiosyncratic investment opportunities in five frontier markets (FRN) (FM). These include Ghana (EZA), Dominican Republic, Egypt (EGPT), Peru (EPU), and Colombia (ICOL). Let’s take a quick look at how these markets are placed currently.

Ghana

Inflation in Ghana cooled to 13.1% for 1Q17. It stood at 18.9% in 1Q16.

In the near-term, agribusinesses in Ghana should benefit on the back of the following three factors:

  1. Farmers are expected to receive subsidized fertilizers in the coming weeks
  2. Rainfall is seen normal to above normal levels across forest area, according to the Ghana Meteorological Agency.
  3. The United States Agency for International Development (USAID), was seen promoting investments in the Ghanaian agriculture sector during the recent 4th Annual Ghana Agribusiness Investment Summit hosted on May 4th. The event themed “mobilizing strategic investment for agriculture” primarily stressed the importance of leveraging financial opportunities for Ghanaian agribusinesses.

“When you look at the demographics of the country, you look at the microeconomic factors in the country, you can see that there is clearly an opportunity to actually position Ghana as one of the leading countries in West Africa,” said Yolanda Zoleka Cuba, CEO Vodafone Ghana.

Dominican Republic

The Dominican Republic announced an impressive 6.4% increase in 2016 for overall tourism to the country, a 10% increase from 2015. Tourism is one of the key elements driving growth in the economy. The US accounted for about 35% of all tourists in the country in 2016. Consequently, the economy’s Dominican hotel occupancy rate also rose to 78%, up 18% from last year.

Egypt

Egypt is set to announce a ‘social package’ soon according to Deputy Finance Minister Ahmed Kouchouk. Inflation in the economy is expected to average 22.8% in the fiscal year starting July 1 and will ease to 9.7% the following year, according to Kouchouk. The government plans to pay arrears to foreign oil and gas companies operating in the country by the end of June. The government also has a Eurobond sale in late May 2017 and another international bond sale by early 2018 on the cards currently.

Rising inflation is one of the key challenges facing the economy since the removal of currency controls and fuel subsidies in November 2016; all in an attempt to secure a $12 billion loan from the IMF.

Emerging Market Bonds: Why JP Morgan and Amundi Are Fleeing Asian Markets

Amundi does not find Asian bonds attractive

Emerging market (EEM) (EMB) fund managers are increasingly fleeing Asian bonds and piling into Latin America (ILF) and Turkey (TUR) local currency debt (EMLC) (LEMB). Abbas Renani, global emerging markets strategist at Amundi Asset Management, does not find Asian bonds attractive currently. He prefers Latin America and Turkey bonds.

The yield difference is huge

Data reveals that the yield difference is substantial in some cases. Turkey’s 10-year benchmark bond is currently offering a 10.37% (as of May 15). From Latin America; Brazil’s (EWZ) is at 10.08% and Mexico (EWW) at 7.2% and Colombia (ICOL) at 6.3%. On the other hand, 10-year bonds of popular Asian markets (AAXJ) such as China (FXI), Thailand (THD), South Korea (EWY), and Malaysia (EWM) are offering 3.7%, 2.5%, 2.3%, and 3.9%, respectively. Moreover, China’s debt situation continues to pose a tail risk to Asia.

Exceptions within Asia: India & Indonesia

“In Asia, the only currencies that we do like are India (EPI) and Indonesia (EIDO),” said Renani. “We want to allocate to countries with the highest opportunities, not just countries with good opportunities.”

India’s 10-year sovereign bond is currently trading at a 6.8% yield. Indonesia’s is at 7.1%. From a currency perspective, India and Indonesia present an opportunity for bond (BND) (AGG) investors. So far in 2017, the Indian rupee and the Indonesian rupiah have been appreciating against the greenback. The Indian rupee has strengthened by about 6% against the US dollar (UUP) (between Jan 2 through May 15), while the Indonesian rupiah has strengthened by 1.65% during the same period. Strengthening currency presents an opportunity for foreign portfolio investors to gain exposure to local debt.

JP Morgan’s Amoa shares the same view

Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JPMorgan (JPM) Asset Management, also likes emerging market local–currency bonds as they’re currently relatively inexpensive considering a weaker dollar. Among emerging markets, Amoa is particularly bullish on Argentina (ARGT), Mexico (EWW), Brazil (EWZ), and Turkey (TUR). Again we see a tilt towards Latin America (ILF) and Turkey from yet another prominent fund manager here.

The Best And Worst ETFs For Investing in Latin America

Investing in Latin American equities

Directly investing in Latin American markets can be risky for foreign investors as most of the countries are frontier markets. ETFs investing in Latin America stock markets are largely concentrated in two major markets – Brazil and Mexico. While some countries have opened up their stock markets to foreign investors, these economies remain difficult to access due to illiquidity and poor trading exchanges.

Investors betting on the revival of Latin American economies have two options. They can either consider investing in ETFs providing exposure to the entire Latin American region or place their bets in the continent’s largest markets through country-focused ETFs.

Regional ETFs

The iShares Latin America 40 ETF (ILF) provides exposure to the overall Latin American region but 80% of its holdings are concentrated in Brazil and Mexico, followed by Chile, Peru and Colombia. It invests in a portfolio of the 40 largest companies in the region, which are more than 50% dedicated to the financial and consumer defensive sectors. YTD, this ETF has climbed up 14%.

Another popular Latin American ETF is the SPDR S&P Emerging Latin America ETF (GML). This ETF invests in a basket of 245 stocks, thereby providing larger exposure to various stocks in the region. YTD this ETF has gained 15.1%.

Country ETFs

Investors seeking concentrated exposure in specific countries can consider investing in the following country ETFs:

  • iShares MSCI Brazil Capped ETF (EWZ)
  • iShares MSCI Mexico Capped ETF (EWW)
  • iShares MSCI Chile Capped ETF (ECH)
  • Global X MSCI Argentina ETF (ARGT)
  • iShares MSCI All Peru Capped ETF (EPU)
  • iShares MSCI Colombia Capped ETF (ICOL)

ETFs investing in Brazil have outperformed in the last two years as the country continues to recover from a recession. YTD the iShares MSCI Brazil Capped ETF has gained 13.4% as investors are pinning their hopes on reforms in a recession-struck country.

The Greatest Risk Facing Latin American Economies Is the One We Cannot See

The risk we cannot see

Latin American equity has been a strong performer thus far this year. The iShares Latin America 40 ETF (ILF) has returned 12.7% so far this year (as of March 23), an outsized driver of emerging market (EEM) (VWO) performance. The rally, driven by the commodity price rebound has been instrumental in driving up the stock market. The market upswing and the continued preference for emerging market debt seems to indicate that investors in the Latin American economies are shrugging off the near-term risks posed by the Trump administration.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”ILF” compare=”EEM” displayPrices=”Lines” performance=”true” from=”2017-01-01″ to=”2017-03-23″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

Pockets of uncertainty

However, the greatest risk facing the Latin American economies is the one we cannot see, said Arthur Rubin, Head of Latin America Debt Capital Markets, SMBC Nikko Securities America, Inc., during a March 23 interview with Bonds & Loans. There remain pockets of uncertainty, says Rubin. “The new norm under the Trump administration maybe pockets of uncertainty, driven by unpredictable and unforeseen policy initiatives that don’t really last that long.” The markets are already pricing in the rate hikes expected in the U.S. However, in the event of a policy occurrence beyond the expected, emerging markets such as those placed in Latin America, stand more exposed to risk of possible repercussions.

Local-debt winning investor favor

While Rubin does agree that the volume of international debt issued globally is on the rise, he doesn’t see Latin American economies such as Colombia (GXG) (ICOL), Peru (EPU), and Chile (ECH), taking the plunge, just yet. Credit spreads, which are beginning to tighten for many economies, are still wide enough for certain LatAm economies.

Local currency emerging market debt is already flying high amid U.S. policy reshuffle. The current and expected U.S. policy reshuffle including monetary policy tightening, along with protectionist curbs are expected to strengthen the U.S. dollar (UUP), which works against holders of emerging market (EEM) (VWO) dollar-denominated debt which gets expensive with a rising dollar. This is when local-currency debt takes center stage as the instrument that is immune to such policy risk.

What Could Make Dollar-Funding an Attractive Option in Colombia?

Peso funding continues to be attractive in Colombia

There’s a perception that credit conditions tightening in Colombia (GXG) (ICOL) will cause borrowers to begin to look towards dollar funding. However, SMBC Nikko Securities America sees peso funding continuing to be attractive and sufficient, at least for now. If growth in Colombia starts moving up to around 3 or 4%, such that demand for credit becomes more robust, then we could see the constraint showing up, said Arthur Rubin, Head of Latin America (ILF) Debt Capital Markets at SMBC.

What could make dollar-funding at attractive option?

  1. The need for international funding should arise only when we see sustained high levels of economic growth in the region, which is when we would also witness a rise in local funding cost, and credit spreads between local and international funding, tightening.
  2. Moreover, with the markets already pricing in the two 25 basis point increases by the Fed this year, it would only take an unexpected occurrence, to make dollar-funding attractive for countries like Colombia (ICOL), Peru (EPU) and Chile (ECH).

For now, dollar-funding isn’t as compelling an option

For now, credit growth in the corporate sector in Colombia has been declining, keeping any stress on bank liquidity at bay. We are still seeing a number of Colombian peso bonds being floated. Large borrowers such as utilities and consumer firms are able to secure peso funding domestically. Moreover, local-currency funding continues to prove more attractive in cost terms as compared to dollar-funding.

“The need to diversify funding sources in both Peru and Colombia, hasn’t really been there,” said Rubin. “With domestic capital markets and local-currency funding being able to suffice the funding needs arising in Colombia and Peru as of now, going abroad for dollar-funding isn’t as compelling an option.”

Why The US-Colombia Trade Agreement Has Not Been Attacked

So far, Colombia is safe

Unlike its Latin American counterpart Mexico, Colombia (ICOL) has not been mentioned explicitly by the new US administration when it comes to trade. The US is the largest export destination for Colombia. The two countries already have a trade agreement known as CTPA (United States-Colombia Trade Promotion Agreement) which was signed in 2006 and has been in force since 2012.

As far as goods trade is concerned, the graph below will shows that for the most part, the US has had a goods trade deficit with Colombia, though it enjoyed a trade surplus in 2014 and 2015. This may be part of the reason why the Trump administration has not attacked the CTPA — at least so far.

However, this is not to say that Colombia (GXG) will be immune to the Trump Administration’s views on trade protectionism.

The Colombian peso has tanked, along with several emerging market currencies after the US  presidential elections in November, going beyond the 3,100 pesos to one USD. However, the announcement of a crude oil production cut by OPEC and non-OPEC members helped support the peso and it is now trading at 2,850 to one USD. Increased oil prices (USO) are also expected to support the peso.

Not worried on trade

There are two reasons why Colombia is not excessively worried about the terms of its bilateral trade with the US.

First, as seen from the figures provided in the above graph, the size of overall trade – when looked from the perspective of the US – is low. As the US administration allocates resources to attacking countries with larger trade deficits such as Mexico and China, Colombia would find itself quite low on the list of priorities.

Secondly, Colombia is a close ally of the US when it comes to the war on drugs. With hopes of ensuing peace after coming to terms with FARC (Revolutionary Armed Forces of Colombia), the country would expect cordial relations with the US to continue.

Pacific Alliance comes together

At the same time, Colombia is supporting Mexico, along with Peru, another Pacific Alliance member, as far as trade restrictions by the US are concerned.

Colombian President Juan Manuel Santos was reported by the New York Post as saying “We want to join the call of countries that adhere to the principles that have been so good for the world: free trade, respect for treaties… multilateral solutions.”

This solidarity with its Latin American trade partners is to ensure that its stance on trade protectionism is known, but is diplomatic enough not to irk the US. In an uncertain world, Colombia will likely give priority to its strong political and economic relationship with America.

In the next article, we’ll look at an emerging market in Europe which is keep a close watch on US trade policy.