Moves by Central Bank Unlikely to Stop Peso’s Rise as Investor Funds Flow into Colombia

On October 23, 2009 Colombia’s peso slid 1% relative to the dollar, capping off a week that saw the peso fall by 3.9%, the largest decline since June. In recent sessions, the value of the peso dropped as traders speculated that Banco de la Republica, Colombia’s central bank, which is responsible for actively managing the country’s exchange rate policy, would attempt to weaken the peso.

In line with market expectations, on October, 23 the central bank announced that it would take steps to limit the rise of the peso, which has appreciated nominally against the dollar by 30% since March, 2009. Jose Ocampo, a former governor of the Banco de la Republica, who is currently a Professor of Professional Practice in International and Public Affairs at Columbia University in New York, explained that “the bank is intervening because the exchange rate is clearly overvalued for most Colombian exports.” Some economists, however, warn that any short-term exchange market action by the central bank is unlikely to have a significant effect on the peso’s long-term value.

Like many currencies, the Colombian peso has appreciated after sliding sharply following the collapse of Lehman Brothers and the outset of the 2008 financial crisis. On October 13, 2009, the Colombian peso was the strongest it has been, relative to the dollar, since August, 2008.

Marc Hoffstetter, a PhD economist from Colombia’s Universidad de los Andes, who specializes in international macro-economics and monetary policy, explained during a recent telephone call that “what happened in 2008 was exceptional.” According to Professor Hoffstetter, at the outset of the 2008 financial crisis “investors viewed the U.S. dollar as a safe haven, and large amounts of money flowed out of Latin America and other developing countries to the U.S.” As investors herded into what they perceived to be safe bets on dollar-denominated assets, countries across the globe, including Colombia, experienced sharp currency depreciations.

The value of the Colombian peso relative to the U.S. dollar plunged by 46% between August 1, 2008 and February 20, 2009, as peso-denominated assets were cashed out for dollars. More broadly, the U.S. Dollar Index, an instrument measured by the New York Board of Trade, that calculates the value of the dollar relative to a basket of currencies, increased by 3.5% between October and mid-November, 2008, as the dollar appreciated.

However, according to Simon Ringrose, Managing Director at Emerging Portfolio Fund Research Global (EPFR), a Cambridge, Massachusetts based consultancy, who was contacted by telephone this week, “there has been a complete reversal this year, after the massive outflows of ’08.” According to EPFR data, funds focused on emerging markets such as Colombia have received inflows worth US$50 billion so far in 2009. Colombia’s IGBC index climbed 36% since April, 30, 2009 as companies like Ecopetrol S.A., Bancolombia, and ISA caught the attention of investors.

In addition to attracting fund flows, Colombia has also been a target for direct investment. After falling sharply in the first quarter of 2008, foreign direct investment (FDI) and short-term capital flows have poured back into Colombia. According to data from Proexport Colombia, the country’s trade promotion agency, FDI in Colombia is expected to exceed US$9 billion by the end of 2009, a return to the pre-crisis investment level.

According to Professor Hoffstetter “what has happened in the past six months is a return to the previous trend” of peso appreciation. The recent inflow of foreign capital has corresponded with a rise in the peso’s value, relative to the dollar, of nearly a third, a rebound from the decline in late 2008. The exchange rate between the peso and the dollar closed at 1917, on October, 23 roughly the same level that was typical between June, 2006 and August, 2008, before the outset of the financial crisis.

With so many forces pushing the peso’s value up, intervention by the central bank is not likely to stop the peso's rise. According to a press release on Banco de la Republica’s website, the central bank plans to spend as much as 3 trillion pesos (US$1.6 billion) to buy U.S. dollars and government-issued peso bonds, but both Professor Hoffstetter and Mr. Ringrose, the portfolio fund specialist, view the move by the central bank to be unlikely to have a significant effect on Colombia’s exchange rate. Mr. Ringrose said, “there will be some short-term devaluation, but it’s not expected to sharply affect the situation” in the longer term. Professor Hoffstetter said that since about US$5 billion is exchanged for Colombian pesos every week, a short term action plan by the central bank “is not likely to have much of an impact."

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Foreign Firms Eye Mexico's Family-Owned Brewers

One of Mexico’s two major family-owned beer producers, long protected from foreign takeover by a vigilant controlling shareholder, may finally cede ownership to SABMiller, a U.K. based company that owns a large and diverse portfolio of brands from Europe, Asia, and Africa, according to industry insiders. If negotiations are successful, it will be the first time a foreign firm gets a taste of this lucrative segment of Mexico’s economy that has, until now, been dominated by local bottlers.

Fomento Economico Mexicano, S.A.B. de C.V., a holding company which controls the largest beer and soda producing operation in Latin America, may see its beer business acquired by a foreign bidder, as part of a larger trend of consolidation within the industry. On October 1, 2009 Femsa, as the company is known locally, filed a late-day report with the BMV, Mexico’s main stock market, disclosing that it is “engaging in conversations with various businesses, exploring opportunities involving its beer business.” Following the announcement, the company’s U.S.-traded ADR jumped by 20% from (US) $37.07 to $44.40.

Although Femsa has not named the companies involved in the talks, press sources including the Financial Times and the Wall Street Journal have cited sources close to the company stating that SABMiller and Heineken are engaged in the negotiations. Olly Wehring, an analyst for just-drinks.com, a U.K. based beverage industry market research group, said that the top candidate for a deal is “likely to be SABMiller.” He explained that “because [SABMiller] has not made any big transactions recently, they’ve got the money, and they’ve got the familiarity with the region” that would make a deal work.

Founded in 1890, Femsa emerged as one of Mexico’s major independent industrial giants, achieving success through the popularity of its Cuauhtémoc beer, named after a well-known Aztec leader, which is still sold today under the Indio label. According to Femsa’s most recent annual report, filed with the U.S. Securities and Exchange Commission, members of the Garza family, one of the company’s original founders, and several of their associates currently control just under three-quarters of Femsa’s Class B voting shares and are able to unilaterally block unsolicited takeover bids from outsiders. Until very recently, the Garza family has been unwilling to allow the company to be drawn under the umbrella a large multinational brewer. However, since Mexico is now being viewed as a primary target for multinational brewers, the time may be right for a deal.

Lauren Torres, a New York-based analyst who covers Femsa for HSBC, said “while the older generation in the family trust may have been slow to walk away, the younger generation has a different mindset.” Given the pressure for consolidation within the beer industry, even if the family had been reluctant to sell in the past, it is now likely to be willing to cash out while still the company is still doing well.

With popular beer brands like DosEquis, Sol and Tecate Femsa controls 40% of the Mexican beer market and earned a net profit of (US) $671 million in 2008, but still lags behind the industry’s giants. According to Michael Esterheld of Plunkett Research Ltd., a Houston-based market research firm that publishes the Food, Beverage, and Tobacco Industry Almanac, Femsa’s annual sales have been “smaller than a company like Anheuser-Bush Inbev’s.” For example, in 2008 Anheuser-Bush Inbev, the world’s leading beer conglomerate, reported total revenues of (US) $23 billion, almost ten times the sales generated during the year by Femsa’s beer division.

A foreign firm with experience managing a diverse, global brand portfolio could help boost Femsa’s international sales. Olly Wehring, of just-drinks.com, said “there’s loads of potential [for Femsa’s brands] in the U.S. and also in other beer markets where people are looking for something new, something different.” According to Lauren Torres, the HSBC analyst, Femsa brands like DosEquis have “not yet reached full market penetration, and are not as far-reaching as they could be.” In 2008 Femsa exported about one-tenth as much beer it sold in Mexico. Femsa’s Mexican beers, it seems, are still mostly consumed by Mexicans. After convincing the Garza family that the time is right to sell, a new owner would have the opportunity to try and convince more U.S. and global consumers that the time is right to give one of Femsa’s brands a try.