With Colombian Peace in Limbo, Molson and Femsa Assess Exposure

  • Foreign investors say they’re continuing investment plans
  • ‘It’s best to remain on the sidelines right now’: fund manager

Molson Coors Brewing Co.’s foray into Colombia earlier this year was met with great fanfare, with the brewer making a bet on consumer growth and a new era of openness in the market.

Then last weekend, Colombians unexpectedly rejected a peace agreement between the government and Marxist guerrillas. The peso fell, and a credit rating downgrade for the country became more likely. Those developments are forcing foreign companies to reassess the risks in a market many have viewed as having enormous potential for growth if its middle class can continue to expand and violence can be quelled.

Molson Coors, which has its headquarters in Denver and Montreal, says the fallout from the referendum hasn’t changed its outlook for investing in Colombia, including plans to work with local soda giant Postobon SA to compete in the light beer segment. And other international companies, from Telefonica SA to Fomento Economico Mexicano SAB, are thus far undeterred by the latest political events in the Andean nation. The question is whether the government can reassert itself after the setback and burnish Colombia’s image as a promising place to invest.

“A large part of the long-term story hinged on the peace deal,” said Nishant Upadhyay, a New York-based portfolio manager who oversees about $19.5 billion in emerging market debt at HSBC.

Colombia, Latin America’s fifth-largest economy, has been trying to rebound this year after foreign investment fell 28 percent in 2015 to $11.7 billion, dragged down by a slumping commodities market. The peace deal was supposed to open entire violence-riddled swaths of the country to development for the first time in decades; President Juan Manuel Santos forecast an additional 1.5 to 2 percentage points of growth a year thanks to the accord.

Efforts to diversify the economy to reduce dependence on oil, coal, coffee and gold have been slow to take hold. More immediately, Colombia needs to raise taxes this year to offset a loss of oil revenue and prevent a downgrade by ratings companies. That will probably come in the form of a bill to increase the sales tax.

Trying to reassure the markets, Finance Minister Mauricio Cardenas said Wednesday the government plans to send a tax proposal to Congress next week. “We’re going to fight for a tax reform,” he said, adding it’s going to be very tough on tax evasion and strong on the non-profit sector.

“I fear that the tax bill will be watered down with no positive implications,” said Sean Newman, a senior money manager at Invesco Advisers Inc. in Atlanta whose firm oversees $800 billion of assets. “It’s best to remain on the sidelines right now. This news is negative for all Colombian assets.”

The Senate on Tuesday passed a law raising some liquor taxes, evidence that the Santos administration can still get laws through Congress, Cardenas said in an interview Wednesday on Bloomberg Television. The peso rose 1.6 percent against the dollar on Wednesday to 2,929.37. It’s still down 1.5 percent since Sunday.

Some companies say they see the peace vote in a different light. Even though the accord was rejected by a thin margin, the voting result was accepted by most Colombians and the parties involved in the peace deal pledged afterward to keep working on an agreement. That outcome reflects the strength of Colombia’s democracy, said a person familiar with the views of Telefonica, one of the nation’s largest phone carriers. The country represents 2.8 percent of the Madrid-based phone company’s total sales.

Femsa, Latin America’s largest convenience-store chain and biggest Coca-Cola bottler, is betting the government will continue its reform plans and supports a “non-discriminatory, structural reform that is progressive, encourages investment, promotes industrial growth and grants judicial guarantees,” the company said.

“We understand this as a time to reflect and to build a country with more and better opportunities for all,” Femsa’s communications office said in an e-mail. “We reiterate our commitment with Colombia, its institutions and rulers, maintaining our strategic plans of consolidation in the country.”

Oil Attacks

It’s unclear whether the guerrillas, who were never defeated militarily, would be prepared to accept alterations to a peace agreement they already signed with Santos. Government negotiators on Monday returned to Cuba, where the peace agreement was hammered out, to meet with guerrilla leaders to find a way out of the impasse.

The ceasefire between both parties has helped state-owned Ecopetrol SA, which has seen a decline in attacks on its oil fields and pipelines, Chief Economic Officer Juan Carlos Echeverry said in an interview at Bloomberg’s global headquarters in New York on Tuesday.

The company’s financial and production plans through 2020 are unchanged by the vote result, Echeverry said, adding that he expects the talks to resume and doesn’t see a bleak scenario at the end of the year.

On the tax reform, he said Colombia policy makers will react responsibly and creatively to maintain investment grade. "There is a strong commitment," he said.

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