Colombia and Latin America - The next geopolitical challenges

COLOMBIA AND LATIN AMERICATHE NEXT GEOPOLITICAL CHALLENGES

Alvaro Uribe Velez

July 2013

TOPICS FOR DISCUSSION

1. The trends that will define our future2. Latin America in a multi-polar world3. The 2013 outlook4. Latin America Urban Challenges5. The Colombian case

1. THE TRENDS THAT WILL DEFINE OUR FUTURE

There are X trends that will shape the global future in the next 20 years…

The global middle class expansion

The rise and flight of the emerging powers

Demography will determine destiny

The pressure for natural resources


The global middle class expansion

By 2030 a majority of the world’s population will not be

impoverished, and the growing

middle class will

determine global

consumption patterns

The rise and flight of the emerging powers

Asia will have surpassed North

America and Europe combined in terms

of global power, based upon GDP, population size,

military spending, and technological

investment

China alone will probably have

the largest economy,

surpassing that of the United States a few years before

2030

Demography will determine

destiny

In 2013 the world will have reached

8.1 billion habitants

Aging population,

shrinking young population,

migration and urbanization will

impact world social and economic

performance

The pressure for natural resources

Demand for food, water, and energy will grow by approximately 35, 40, and 50 percent

respectively owing to an increase in the global population

and the consumption patterns of

an expanding middle class

Source: U.S National Intelligence Council


By 2050, 19 of the top 30 economies by GDP

will be countries that we currently describe as

‘emerging’

China and India will be the largest and third-largest economies in

the world

Eight countries – India, China, Brazil, Russia,

Indonesia, Korea, Mexico and Turkey – will be

responsible for most of global growth up to 2025

Emerging economies will account for 68% of global growth by

2030

In 1980, 5% of goods were sourced globally. By 2000, this was 20%. By 2025, it will be 50%

In 1980, world exports accounted for one-sixth of global GDP. Today it is

a quarter. By 2030, it will have risen to a third

By 2030 the urban middle class will rise to 42% of the global population. The number of

people with daily income of $10 to $100 a day will rise from 1.8

billion today to 4.9 billion by 2030

Global energy demand rises by over one-third in the

period to 2035, underpinned by rising living standards in China, India &

the Middle East

Iraq accounts for 45% of the growth in global

production to 2035; by the 2030s it becomes the

second-largest global oil exporter, overtaking Russia

By 2035, almost 90% of Middle Eastern oil exports

go to Asia; North America’s emergence as a net

exporter accelerates the eastward shift in trade.

The need for electricity in emerging economies drives

a 70% increase in worldwide demand, with renewable accounting for

half of new global capacity

Electricity prices are set to increase with the highest prices persisting in the

European Union & Japan, well above those in China &

the United States

The energy sector’s water needs are set to grow,

making water an increasingly important

criterion for assessing the viability of energy projects

Two-thirds of the economic potential to

improve energy efficiency remains untapped in the

period to 2035


Global energy trends in the next 25 years…

Source: International Energy Agency


600 Urban Centers generate 60% of the world’s GDP

20% of the world GDP in 2010 was generated in 187 from North America

In 2010 China’s Metropolitan Areas generated 78% of the Nation GDP

74% of the Latin American and Caribbean population leaves in cities

Towards a urbanized world….


From 2010 to 2025, the GDP of the world biggest 600 cities will

rise by over $30 trillion

Over$10 trillion in additional annual

investments needed in cities by 2025

1 billion new consumers in

emerging market cities by 2025

60% of the new urban consumers

will be bases in 440 emerging cities

Annual consumption in Emerging 440

cities is set to rise by $10 trillion by 2025

Cities are expected to need to build floor space

equivalent to 85%of today’s building stock (An area de size of Australia)

Nearly 80 billion cubic meter increase in

municipal water demand expected in the world’s

cities by 2025

Over 2.5 times today’s level of port

infrastructure needed to meet rising container-

shipping demand

How cities will change the world…

2. LATIN AMERICA IN A MULTI-POLAR WORLD

Policy Changes since 1980 match four range of opportunities

Population

Close to 600 million people

Average age between 24

and 28

Per Capita Income in PPP

close to US$10.000

Poverty reduction

64% of our population is a expanding middle class

During the last decade 40 million people have left the poverty line

Life expectancy has increased from 65 to 75 years

Child mortality has been reduced by 50 per cent

Literacy rates are above 94%

Mobile phone penetration has increased by 78 per cent

Internet access has increased by 33%

Healthcare coverage has increased by 50 percent

water and sanitation coverage has reached 80%

Commodities in time of Demand

10 percent of the World oil reserves

6 percent of the World gas reserves Almost 50 percent

of the World cooper reserves

50 per cent of the World silver

reserves 13% of the World

iron reserves

26% of the World fertile land

24% of the World beef supply

Bio Reserves

20 per cent of the World

Biodiversity is concentrated in

the Amazon ring

Almost 50% of the World

potable water supply

57% of the world primary

forest


The strengthening of Liberal Democracy

The adoption of an

institutional Framework in

favor of foreign and

national investment

The construction of a sound

and sustainable social safety

net

The expansion of

export markets and

the commercial integration

with the World (FTA’s) A public

administration driven by

results

A sound Macroecono

mic Administration driven by fiscal and monetary prudence

Better regulatory

environment

Construction of strategic infrastructur

eThe

consolidation of an

innovation agenda

leaded by an improvement in education

A well capitalized financial

sector and the constant expansion of

financial services

The change process is a consequence of the consistency, congruence and sense of urgency that a group of countries have adopted as their policy cornerstone. Brazil, Mexico, Colombia, Chile, Peru and Uruguay represent 70 per cent of the region’s population and 75% of the regional GDP.

Today countries like Panama, Dominican Republic, Costa Rica, Salvador, Guatemala, Honduras, Paraguay, as well as most of the Caribbean States, are following that line of behavior


The regional current Political Map is a “Tale of two cities” like the Charles Dickens Book… (The ALBA and the non Alba Model)ALBA

(Leaders: Venezuela, Ecuador,

Bolivia, Nicaragua and Cuba)

Modern Democratic Center Countries (Brazil, Colombia,

Peru, Chile, México, Uruguay, Paraguay, Panamá, Republic Dominican, Costa

Rica, etc)

Cooperation with the U.S.

Pro Free Trade

Investment Confidence

Independent Institutions

Political Stability

State Long Term Policies and Mgt by Results

Organized Party Systems

The Democratic Center takes the lead: • Investment grade countries are in this Group: Mexico, Brazil, Chile, Colombia, Peru and Panama• Countries with more market access through FTA’S are in this group• Countries with more FDI are in this group• Countries with more Middle Class Expansion are in this group• Better fiscally sustainable social programs: Chile, Mexico, Brasil and Colombia

Only the group of Countries in the Democratic Center will become the regional active participants of the Emerging Markets Boom…some of the ALBA Members will see some benefits, but without solid long term development agendas, they will face transitory profits…

But not all the socio-economic models are a success story…

3. THE 2013 OUTLOOK

After decelerating for two consecutive years, Latin

American economies accelerated growth again at the end of 2012. Brazil’s recovery was an engine of performance

The region’s growth averaged around 3.2% in 2012 after 4.3% in 2011 and 6% in 2010

Latin America will approach its potential rate in 2013,

remaining the world's second best performing

region after Asia

Chile reported lower annual growth, although the economy reaccelerated to rates higher

than its long- term trend because of expansionary

monetary conditions

Colombia’s growth was below government

expectations reaching a 3.5% level

Due to the political transition, which generates temporary contractions the Mexican

economy began decelerating in the second half of the year

Brazil became the main contributor to Latin America’s growth

reduction in the past two years

Inflation was maintained on target with the

excepctions of Mexico and Brazil, that experienced

marginal increases

The 2012 experience….

3. THE 2013 OUTLOOK

Argentina

The country will face risks in 2013, although growth will improve in comparison with 2012

Uncertainty will increase

Inflation will be around 25%

Public expenditure will be the driver of economic growth

Central Bank will continue to be the main source of funding for the Central Government

Economy will grow 3.4% in 2013

Brazil

The economy experienced a small scale recovery at the

end of 2012

The recovery will strengthen in 2013, boosted by investment for the 2014 World Cup, as well as the fiscal and monetary stimulus package in place

The economy will grow 5% in 2013

Chile

Monetary conditions need to be stabilized before excess demand

threatens economic stability

Growth in 2013 will be around 4.3%

Inflation will remain on target

Source: World Bank

3. THE 2013 OUTLOOK

Mexico

The deceleration initiated at the end of 2012 will extend over the first half of 2013, as a change in political administration usually introduces a delay in the federal budget and private decisions on investment

The economy will grow only 3.5% in 2013 after 3.8% in 2012

Inflation is rising

Monetary tightening could affect growth performance

Great expectations are based on the new government reform agenda

Peru

The best performer with strong fundamentals and a well managed mining boom

Growth will reach 5.8% in 2013

Inflation will be between 1% and 3%

Venezuela

The fiscal deficit in 2012 reached troublesome levels, that will require

cuts in 2013

Growth will be around 1.5% and 2%

Declines in the oil price could trigger a recession

Inflation will reach 30%Source: World Bank

2009 2010 2011 2012e 2013f 2014f 2015f

Financial Flows

Capital Inflows 179.6 328.5 303.9 322.4 326.2 327.1 342.3

Private inflows, net 161.6 306.1 299.1 320.5 327.1 327.8 344.7

Equity Inflows, net 126.5 166.6 165.6 179.5 198.0 200.8 214.5

FDI inflows 84.9 125.3 158.3 167.3 182.4 176.3 184.2

Portfolio equity inflows 41.6 41.3 7.4 12.2 15.6 24.5 30.3

Private creditors, net 35.1 139.5 133.4 141.0 129.1 127.0 130.2

Bonds 45.9 72.9 85.2 95.1 72.2 57.7 60.2

Banks -1.7 21.7 51.7 41.4 42.7 45.2 51.4

Short-term debt flows -8.6 43.8 -3.0 4.3 12.7 23.4 16.5

Other private -0.5 1.1 -0.4 0.2 1.5 0.7 2.1

Offical inflows, net 18.0 22.5 4.8 1.9 -0.9 -0.7 -2.4

World Bank 6.6 8.3 -2.9 0.4 .. .. ..

IMF 0.4 1.3 0.2 0.1 .. .. ..

Other official 11.0 12.9 7.5 1.4 .. .. ..

3. THE 2013 OUTLOOK

Regional Financial Flows

Venezuela

InflationReduction in oil

production

Brain drain

Social conflict

InsecurityPrivate initiative in

Jeopardy

Bolivia

Loss of citizen support

Quality of live deterioration

Lack of private initiative

Loss in private investment

Ecuador

Press Liberties in danger

Lack of long term private

investment

Political stability at the expense of higher tensions

Oil driven political power

Nicaragua

Institutional deterioration (Reelection without

constitutional authority)

Corruption

Private initiative: Uncertainty

Shameful Chavistas

Bad policies are deteriorating the political and economic context in the ALBA Countries….

3. THE 2013 OUTLOOK

Building Modern

Democracies (5 parameters)

Security

Freedoms and Private Initiative

Independent Institutions

Social Cohesion

People Participation

A dynamic Economic

transformation

Investment Target Policies

Maintaining Fiscal and Monetary

transformation

Integrate commodity and knowledge based

economies

Expand export markets

Create an Entrepreneurship culture

(Innovation agenda)

Closing Social Gaps

Improve education (quality, coverage,

vocational)

Insure Universal Healthcare

Formal Job creation

Access to Finance

Climate Change,

Environment and Energy

SustainabilityExpand renewable

sources

Install an energy efficiency conscience

Improve waste management

Protect the Amazon Ring

Reduce Co2 Emissions

Despite the changes that have been achieved some important challenges remain…

3. THE 2013 OUTLOOK

The region top challenges

THE BIG 4 BIG CHALLENGES…

Security

Transportation

Business Climate

Environmental Quality

The right mix of goals in Latin American Cities

4. LATIN AMERICA’S URBAN CHALLENGES

SECURITYCity Country Homicides Rate per 100K

San Pedro Sula Honduras 1.143 158

Juarez Mexico 1.974 147

Maceio Brazil 1.564 135

Acapulco Mexico 1.029 127

Tegucigalpa Honduras 1.123 99

Caracas Venezuela 3.164 98

Torreon Mexico 990 87

Chihuahua Mexico 690 82

Guatemala Guatemala 2.248 74

San Salvador Salvador 1.343 58

Ciudad de Panamá Panamá 543 31

Medellin Colombia 1.624 70

Cali Colombia 1.720 77

Bogota Colombia 1.387 19


SECURITY

Prevention

Education

Youth Employment

Citizen Participation

Social Programs

Social inclusion

Sanction

Intelligence

Man Power

Technology

Risk Mapping

Effective Judicial Systems

Technology

Call Centers

City Cameras

Rapid Response Tracking

Criminal Databases

Crime Scene Profiling

CSI

Communitary Support

Informants

Neighborhood Councils

Prompt denounceme

nts

Policy framework…


TRANSPORTATION

1. Buenos Aires receives 1.4 million cars per day

2. Bogota has one million cars and 400.000 on average circulate every day

3. In Sao Paulo people who drive lose almost 3 ours in one of the many 100km traffic jams the city faces every day

4. The increase in per capita income has triggered the most rapid demand for cars in our region recent history

City Cars Motorcycle Taxis

Bogota 792.000 116.000 49.000

Buenos Aires

4.285.000 470.000 45.000

Caracas 820.000 114.000 12.400

Mexico City

5.592.000 108.420 182.000

Sao Paulo 4.386.000 652.000 38.639

Lima 453.000 27.000 81.826

Key Figures 2007 (Source CAF 2009-2010)


TRANSPORTATION

Policy Actions

Integrated Massive Transportation

Systems

Reduce daily car circulation

Promote Car Pooling

Toll Roads for Rapid AccessExpand metro-

linesImprove urban

planning promoting functional districts

Policy framework…


BUSINESS CLIMATE

Country DB 2011 DB 2010 DB 2012

Mexico 35 41 48

Peru 36 46 43

Colombia 39 38 45

Chile 43 53 37

Argentina 115 113 124

Uruguay 124 122 89

Ecuador 130 127 139

Brazil 127 124 130

Venezuela

172 170 180

1. Countries are measured by their capacity to create an adequate environment for doing business

2. Cities thus are the true epicenter of economic activity, requiring the right institutions to guarantee a competitive development of private initiative

3. The World Bank Doing Business report represents a good instrument of measurement


BUSINESS CLIMATE

Indicator Brazil Chile Mexico Colombia Peru Venezuela

Starting a Business

(Proceadures)

13 8 6 9 6 17

Starting a Business (Days)

119 22 9 14 27 141

Days for Construction

Permits

411 155 105 50 188 395

Hours devoted to pay taxes (Hours

per year)

2.600 316 404 208 380 864

Days to enforce a contract

616 480 415 1.346 428 510

Enforcing Contracts (Cost

% Claim)

16.5 28.6 32 47.9 35.7 43.7

Cost to export US$ per

Container

US$1.730 US$745 US$1.420 US$1.770 US$860 US$2.590

The regional challenge to improve our business climate


BUSINESS CLIMATE

Cutting Red Tape

Simplifying procedures

Online services

Expedite Business

registration

Expedite contractual

judicial execution

Entrepreneurial Spirit

Incentives for starting a business.

Access to credit

Tax compliance simplification

Bankruptcy legislation

Investor Protection

Legal stability

Security

Zero tolerance with corruption

Incentives

Infrastructure

Energy

Roads

Water and sanitation

High Quality Utilities

Broad Band

Human Capital

Access to tertiary

education

Proficiency in math and science

Bilingual professionals

High Quality Universities

Policy framework…


ENVIRONMENTAL QUALITYLatin American Green City Index

Nine of 17 cities derive more than

80% of their electrical energy from

renewable sources

Often those cities with the most

renewable energy tend to have the weakest climate

change policies. Of the nine cities with

over 80% renewable energy, only three score better than

average in this Index category

Only nine cites have full or partial eco-

building standards. Just five have full

regulations in place to motivate

households and business to lower their energy use

Only four fully promote citizen

awareness on ways to improve the energy-

efficiency of buildings

According to official data, fourteen cities collect and dispose over 95% of waste, and for eight cities the figure is 100%

Waste generated per person, at an Index

average of 465 kg per year, is noticeably

lower than the figure in last year’s

European Green City Index, at 511 kg per

year

On average 94% of residents in cities in

the Index have access to sanitation, and for 13 cities the figure is over 90%

Wastewater treatment, on the other hand, is very

poor. On average only 52% of wastewater is treated, and eight of 17 cities treat less

than half their water. Two treat none


ENVIRONMENTAL QUALITY

Policy Framework

Energy • Efficiency• Energy

Matrix in favor of renewable energy.

• New building codes

Emissions• CO2

reduction targets

• Air Quality norms

• Transportation Standards

• Greener Vehicles

Waste Management.• Better

Standards• Improveme

nt of collection techniques

• Capture and energy use of methane gases

Water and Sanitation• Better service

provision• Resolve

coverage for low income informal settlements.

• High technology in residual water treatments

Environmental Governance• Better

statistical information

• High technical personnel

• International Best practices in policy design

Land use• Orderly

planned expansion

• Utilities coverage

• Prevent informal settlements

• Land titles policies

Policy framework…


Security

28.837 homicides

2.882 kidnappings

69 homicides per 100.000 habitants

1.645 terrorist attacks

350 mayors out of their municipalities

158 municipalities without police

Economy

Average Economic Growth 1994-2001: 2.1%

GDP per Capita: US$2377

Investment as % of GDP: 16.5%

Exports: US$11.975 million

FDI: US$2.100 million

Inflation: 6.99%

Fiscal balance: -3.2%

Social

Unemployment: 16.2%

Health Coverage: 25 million Colombians

Pension affiliates: 4.5 million

Poverty: 57%

Education Coverage: Primary 97%, High school: 57%, University: 24%

Mobil Phone Lines: 4.6 million

Internet coverage: 1.9 million

Eleven years ago Colombia was a fragile state…The Colombian Paradox: a long and stable democracy in a permanent threat from

terrorist groups, drug dealers and organized crime…

5. THE COLOMBIAN CASE: NO LOST CAUSES

WE INTRODUCED A COMPREHENSIVE POLICY FRAMEWORK…

Social Cohesion

Investment with fraternity

Democratic Security

Confidence

Security as a Democratic Value

Security

for all

Confront all

criminal organiza

tions

Security without martial

law

Security with

freedoms and human

rights protection

Security in

coordination with

the people

Investment Target

Security:HumanLegal

Political

Sound Macroeco

nomics

Incentives

Access to markets

Competitiveness factors:• Infrastr

ucture• Regulat

ion• Connect

ivity• Logistic

al chain

Social Cohesion

Highest quality in education

Universal

healthcare

Access to

Finance

Stable Jobs and

entrepreneurial spirit

Connectivity


OUR POLICY ACHIEVEMENTS GENERATED A TURNING POINT

Indicator 2002 2010

Homicides 28.838 7.400

Kidnappings 2.882 123

Homicides per 100K Habitants

69 16.3

Terrorist attacks

1.645 250

Municipalities without mayors

presence

350 0

Municipalities without police

158 0

Indicator 2002 2010

Average Economic Growth

2.1% 4.3%

GDP per Capita

2377 5300

Invest % GDP 16.5% 24.6%

Exports US$11.000

US$ 39.000

FDI US$2.100

US$ 7.000

Inflation 6.9% 2.5%

Indicator 2002 2010

Unemployment 16.2% 11.6%

Health Coverage 25.1 million

43.1 million

Pension affiliates 4.5 million

7.1 million

Poverty 57% 38%

Education coverage

(Primary, Hs, University)

97%57%24%

100%79.4%35.5%

Mobile phone users

4.6 million lines

41 million lines

• Reached the highest economic growth in more than 20 years

• The largest education, health and connectivity coverage in its history

• The largest poverty reduction in Colombian history

• The biggest FDI rates in history• The lowest violence records in 30

years

• Expanded the middle class• Highest exports in

Colombian History• Paramilitary groups

dismantled• FARC structure severely

dismantled• Per Capita income more

than doubled


Structural Elements

Political Stability

Sound Macroeconomic Management

Human, Political and Legal Security

Competitive elements

Investment incentives

Access to markets (Canada, EU, EEUU, MERCOSUR, etc.)

Free Trade Zones

Logistical advantages

Legal stability agreements

Comparative elements

Investment Grade

Stable institutions

Growing internal demand

Complementary

Human Capital

New World Class Sectors incentives

Strong financial system

We made Colombia a viable country for FDI due to a multiplicity of factors…


In 2002 it was believed that by 2009 Colombia oil production will not

be able to attend national demand

In 2003 the oil and gas sector

restructuring was designed

ECOPETROL undertook a strategy shift to become a more competitive and professional corporation

The National Hydrocarbon Agency was

created

Between 2002 and 2010 341 exploration

and production contracts were signed

In 2007 ECOPETROL was capitalized by 10%

through local capital markets. 486.000

Colombians bought shares

Between 2002 and May 2010 447 new fields were explored

From 2002 to 2010 successful

exploration passed from 40% to 61.4%

Seismic exploration in the country (Onshore,

Offshore and 2 dimensions) increased

by more than 250%

Colombia is currently close to produce 1 million oil barrels per day

Success triggers

Security: Investment, exploration

Government Reform: New ECOPETROL and

ANH

Investment target policies: New players and new exploration

and production contracts

The case of the oil sector in Colombia: Change is possible


Colombia has 2 billion barrels of

proven oil reserves

Colombia reached 1 million barrels per day in

2012

Colombia consumes

298.000 barrels per day

The USA is Colombia’s mayor

oil export destination

Colombia has 4.7 trillion cubic feet of Natural Gas

Reserves

Colombia has 5643 million short tons of

recoverable coal reserves, the largest in

South America

Colombia produces approximately 82 million short tons,

while only consuming 5.6 million short tons.


Key elements in Colombia’s energy outlook

Security

Maintain Macro-Vision and Micro-

Management

Continue dismantling all

terrorist organizations

Continue dismantling drug cartels apparatus

Strengthen Citizen Security agendas

with local authorities

Economic

Face new trends of currency

appreciation

Maintain and increase FDI flows (Security, incentives

and stability rules)

Fiscal Policy to face new countercyclical

challenges

Increase tax collections

Expand new trade markets through

FTA’s

Social Cohesion

Fight labor informality and

create quality jobs

Insure education and health quality

Expand vocational

training coverage

Create Entrepreneurial Family Transfers

program

Political

Judicial reform

Strengthen Democratic Center

Improve local institutional

capacity

New law implementation

(Victims and land)

Prevent the emergence of

populist movements


Colombia current challenges

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Colombia and Latin America - The next geopolitical challenges

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