‘Near-Shoring’ Ensuring Colombia’s Growth and Providing Opportunities for Investors?

As Colombia looks to rebound from the COVID-19 pandemic, diversifying its exports away from oil is of increasing importance. Its reserves are estimated to potentially deplete in the next 6 years according to the government website. ‘Near-shoring’, the outsourcing of business processes to countries in the same region may provide a solution to this. The business practice has gained greater attention in the past year as companies aim to make their supply chains more robust.

 

Columbia’s is increasingly attractive as a location for near-shoring, particularly for US firms. The comprehensive free trade agreement between the USA and Colombia in 2012 eliminated many tariffs on services. With the fallout from the US-China trade war continuing and the COVID-19 pandemic exposing the fragility of companies’ supply chains, 1 in 4 US companies with operations in Asia are considering ‘reshoring’ or ‘nearshoring’ according to PWC China. Near-shoring would enable US-firms to reap many of the benefits of reshoring while not incurring the higher costs of labour by switching domestic production back to the US market. Equally, Colombia is only a 3-hour flight from Miami, and lies in the same time-zone as the US’s East Coast.

 

Colombia has significant infrastructure in place for near-shoring after government investment and economic policies. The establishment of iNNpulsa in 2012, a government agency which promotes and support new ventures in technology by helping them find funding, has led to the emergence of 2,696 start-ups in Colombia, as reported in their survey. Further, the building of high-tech facilities such as ‘Ruta N’ in Medellin has led many companies to relocate their services to the region. Ruta N hosts 320 technology companies from over 30 countries and has created 8,000 jobs since 2012, noted by the Andalou Agency.

 

The appointment of President Ivan Duque and the implementation of his National Development Plan in 2018 has further enhanced Colombia’s capabilities for near-shoring. His 6.5 billion USD investment in the Science, Technology and Innovation sector (STI) has vastly improved the skills of Colombia’s labour force. This, combined with incentives enabling technology companies to receive tax breaks for up to 7 years has been influential in firms relocating operations. For example, Endava, a multinational technology and software service company, chose Bogota as its first base for establishing operations in Latin America. Equally, the likes of Google and Facebook have opened permanent offices in the country. This has culminated in the Columbian Software and IT industry doubling its sales between 2011 and 2019 reaching 8.2 billion USD according to the International Data Corporation. The government has also promised to increase broadband access to 70% of the country and convert existing 2G&3G networks to 4G by the end of 2021, upgrading Colombia’s communications infrastructure.

 

However, there are several hurdles that could hinder Columbia’s transition and reduce near-shoring investment opportunities. Columbia’s attractiveness is due to the government’s large investment in the labour force and infrastructure. Considering Columbia’s relatively small industrial base, investment needs to continue apace to keep on attracting firms. Columbia’s government could run into potential trouble as it tries to show its commitment to fiscal targets and prevent their bond rating from falling to ‘Junk’ status. Fitch Ratings’ report last November kept the government bond at BBB-, the lowest investment-grade level. They maintained a negative outlook citing the ‘uncertainties about government’s capacity to decisively cut deficits and stabilize and eventually lower debt in the coming years.’ At the end of 2020, the budget deficit stood at 7.5% of GDP and Columbia’s Fiscal Rule Advisory Committee agreed to suspend government deficit limits until 2022, as the country sought to recover from the pandemic. The government has considered selling its majority stake in transmission company, Interconexion Electrica SA, that could generate 4.2 billion USD and show rating agencies its commitment to fiscal targets, according to Bloomberg, . A failure to prevent its bond rating from falling could make it more expensive for the government to invest further and this could hinder Columbia’s development as it tries to compete against other nations in the region as a potential location for companies to near-shore.

 

Ultimately, Columbia and its investors will play a key role if the growth of ‘near-shoring’ continues. Investors, particularly from US firms, will pay close attention to the government’s achievement of fiscal targets. Underachievement may hamper future investment opportunities in near-shoring, with other nations in the region such as Mexico also offering attractive bases for multinational firms. However, strong foundations are already in place for Columbia, with close ties to the USA and its significant investment in its technological infrastructure and labour force. Perhaps the solution to Columbia’s oil dependency is near and imminent.

 

By Ainle McGuinn

Sector Head: Jared Gibson

 

 

 

 

 

 

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