MAY 28, 2007
By Roben Farzad
Extreme Investing: Inside Colombia
An improbable journey from crime capital to investment hot spot. Can this boom last?
COVER STORY PODCAST
"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 (C ) 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
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.
Colombia Rising Colombia is particularly extreme. 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 (MO ), Toyota (TM ), 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 (CQB ) 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 (CS ), 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
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. (BSC ) "You really cannot
overstate the importance."
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
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.
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 (NYX )
listing could be in the offing. The only other Colombian stock listed in the U.S. is
Medellín-based Bancolombia (CIB ), 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 (SAB.L ) PLC
took over Colombia's biggest brewery, Bavaria, for a record $7.8 billion, with Merrill Lynch (MER
), JPMorgan Chase (JPM ), Lehman Brothers (LEH ), Morgan Stanley (MS ), and Citigroup (C )
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
(KFT ), 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.
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
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
Corrections and Clarifications
"Extreme Investing: Inside Colombia" (Cover Story, May 28) suggested that Colombia does not
qualify for the Standard & Poor's/IFCG Frontier Index of 22 nations. In fact, Colombia's market
value and liquidity place it in a more developed index tier of the broader S&P/IFCG Index family.