Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Colombia Is Becoming Latin America's Next EM Star
Transcript
- Lucas: So there's this quiet outperformer in emerging markets this year, and it's not in Asia. Colombia's Colcap index is up about 18 percent year-to-date, and the peso is one of the few EM currencies actually gaining against the dollar. I think we need to talk about why. Luna: Colombia at the top of the EM leaderboard is not something you'd have predicted two years ago. Back in 2022, it was getting hammered by inflation and political uncertainty. Lucas: Right, and that's exactly what makes the turnaround interesting. The central bank, Banco de la República, held its benchmark rate at 9.5 percent at the May meeting, even as peers like Brazil and Chile were cutting. On the surface that sounds tight, but it's actually a sign of credibility. Luna: Credibility that the market is rewarding. The five-year CDS spread on Colombian sovereign debt has compressed by roughly 80 basis points this year, which is a huge vote of confidence. Lucas: And it's not just fiscal. Colombia has become a major energy exporter beyond oil. Ecopetrol has been diversifying into natural gas and renewables, and with global energy prices staying elevated, that export revenue is providing a buffer that many EM peers don't have. Luna: The current account deficit has narrowed to around 3.5 percent of GDP, from over 6 percent in 2022. That's a massive swing. Lucas: Exactly. And the government has stuck to its fiscal rule—primary surplus targets that were written into law after the 1990s crisis. That institutional memory matters. The finance minister announced this week that the 2026 deficit target of 2.2 percent of GDP is on track. Luna: So when you look at the EM universe, Colombia offers a combination that's rare right now: decent growth, falling inflation, a credible central bank, and energy exports that aren't just oil. That's a pretty strong pitch. Lucas: And foreign direct investment is reflecting it. FDI inflows hit $4.8 billion in the first quarter, up 22 percent year-over-year, with a big chunk going into energy infrastructure and nearshoring-related manufacturing. Medellín is becoming a hub for software development and business process outsourcing. Luna: That nearshoring piece is interesting because Mexico has been getting all the headlines, but Mexico's peso strength has actually hurt its competitiveness. Colombia offers lower labor costs and a time zone that works for U.S. companies. Lucas: And the government has been actively courting it. There's a new tax incentive for companies that set up export-oriented operations in designated zones outside Bogotá. It's still early, but the pipeline looks promising. Luna: So what could go wrong? I mean, Colombia still has security challenges, and the political situation is fragile. President Petro's approval ratings are in the low 30s. Lucas: You're right—political risk is real. But the institutional framework has held. The central bank remains independent, the fiscal rule has been respected, and the constitutional court has blocked some of the more aggressive reform proposals. That institutional resilience is actually what investors are pricing in. Luna: It's almost like Colombia is benefiting from a 'flight to quality' within EM, where investors are looking for countries with strong institutions and external buffers, not just high growth. Lucas: Precisely. And the market is starting to broaden. The Colcap isn't just Ecopetrol and Bancolombia anymore. You have companies like Grupo Nutresa, which is a food processing giant, and Interconexión Eléctrica, which runs power grids across the region. The equity story is diversifying. Luna: Let's touch on the bond market too. Colombian hard-currency bonds have rallied this year, and local currency bonds are offering real yields of around 4.5 percent. For EM income investors, that's attractive. Lucas: And the IMF just completed its Article IV consultation last month, and praised Colombia's macroeconomic framework. That kind of external validation matters, especially when markets are skittish about the next U.S. election cycle and trade tensions. Luna: So the question becomes: can Colombia sustain this without overheating? Domestic demand is picking up, credit growth is accelerating, and the labor market is tightening. Lucas: That's the central bank's concern. They've signaled they're in no rush to cut rates, and they might even hike again if inflation doesn't continue its downward path. Headline inflation is at 5.8 percent, still above the 3 percent target. So policy discipline will be tested. Luna: But compared to where it was a few years ago, the trajectory is clearly positive. And for investors who've been burned by Argentina or Turkey, Colombia feels like a safer bet. Lucas: One thing I'd flag is that Colombia's debt to gdp ratio is still around 55 percent, which is manageable but not low. The fiscal rule requires it to decline over time, so there's not much room for new spending. That could cap growth in the short term. Luna: Still, the broader EM context helps Colombia. With China slowing and geopolitical risk in Eastern Europe and the Middle East, Latin America is getting a second look. And within Latin America, Colombia has the institutional edge. Lucas: If you look at the EEM ETF, which tracks a broad EM index, Colombia's weight is still tiny—under 1 percent. But active managers are increasingly overweight. That shift is worth watching. Luna: It's a reminder that EM investing isn't just about the big stories. Sometimes the most compelling opportunities are in countries that have quietly fixed their fundamentals. Lucas: And look, we have the privilege of covering these markets without any ads or sponsors pushing a narrative. That independence lets us focus on what actually matters. If you like that approach and want to support it, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep us ad-free and focused on the data. Appreciate everyone who chips in. Lucas: So back to Colombia—the next catalyst to watch is the central bank's July meeting. If they hold steady again, that will reinforce the credibility story. If they cut, the market might read it as a dovish pivot. Either way, the long-term thesis depends on fiscal discipline and export diversification holding up. Luna: And on the ground, we'll be watching how nearshoring flows evolve and whether the energy transition actually brings new investment into renewables. Colombia has hydro, solar, and wind potential that's barely been tapped. Lucas: Right. So Colombia is a story about institutional credibility paying off in a skeptical world. Not flashy, but durable. And in emerging markets, durable is rare.