Is Colombia really better than the UK?

 

  My first trip to Colombia pretty much lived up to all of my expectations. I got robbed just after I crossed the border from Ecuador and then my bus was repeatedly stopped at military checkpoints and checked for weapons. When I finally got to Cali, a city in the south, my first night’s sleep was shattered when guerrillas blew up a police station.

 

  As a freelance journalist looking for good stories it was perfect. Many of the locals were happy to talk to me in Cali that night (turns out they didn’t like the local police all that much). But the longer I stayed in the country, the more I realised what had happened to me was beginner’s luck. I travelled the rest of Colombia extensively, but try as I might, nothing that exciting happened again.

The fact is Colombia is becoming a boring country. One that’s less fruitful for aspiring journalists, but safer and more prosperous for its people.

 

  But it seems that in the West, not everyone has got the memo.

For example, in my last piece for The New World, I really got under one reader’s skin with my praise for the country. I said: "Countries such as Colombia and Peru are in far better macroeconomic nick than the UK".

 

That, said reader ‘Freddye Mays’, is “utter garbage”.

It wasn’t exactly the most constructive criticism I’ve ever received. But Freddye’s comment got me thinking.

 

On almost any macroeconomic measure you choose to look at, Colombia and Peru outscore the UK. But a lot of people in this country still see them as inherently risky or unstable countries.

A quick chat with a pal of mine who works for Spanish bank BBVA confirmed this. I mailed him my original statement about the good Latin America being safer than the UK and asked what he thought.

“I agree... though I think people far less contrarian than me would contest it.”

It had never even occurred to me that I was being contrarian – I thought it was just common sense. So today I’m going to explain why I think the ‘good’ Andean economies – Peru, Colombia and Chile – are in far better macroeconomic shape than the UK.

 

And don’t forget. The fact that readers like ‘Freddye Mays’ disagree, or that bankers think this is contrarian, is good for us. It means the investment isn’t a crowded trade.

Why do I think the Andeans look good?

 

The most obvious thing to look at first is a country’s debt. After all, you can hardly claim to be in a healthy macroeconomic position if you’re up to your eyes in IOUs.

Britain’s debt pile currently stands at 68% of GDP. That’s better than European basket cases like Greece, whose debt is around 170% of GDP. And it’s better than Japan, which owes about 200%. But it’s still an awful lot of debt.

 

Moreover, Britain’s ‘real’ debt burden is much higher. Over the years, our politicians have made a lot of expensive commitments – such as generous public sector pensions or expensive private finance initiatives – without ever bothering to put aside the money to pay for it. Broker Tullett Prebon reckons that once you add in these “unfunded off-balance-sheet liabilities”, the UK government’s true debt is 167% of GDP.

 

But over by the Andes, things look much better.

 

Colombia’s total debt level is 46% of GDPs, while Peru’s is 22% of GDP. As for Chile, its debt stands at around 11% but it’s also used the copper boom to build up a $15bn sovereign wealth fund.

What’s more, debt in these countries has been trending downwards over the last decade, unlike in the UK, where even supposedly extreme ‘austerity’ measures haven’t been able to stop the debt pile growing bigger.

 

Another advantage is that, because these countries are coming from poorer beginnings, their politicians haven’t made a load of expensive, unpaid-for, ‘First World’ commitments.

Where central bankers still have power

 

The next thing to look at is monetary policy. When the Bank of England decided to keep the base interest rate at 0.5% last week, no one paid much attention. After all, the rate has been like that for so long that it almost seems normal now.

 

Except of course it isn’t. It’s the lowest rate in the Bank’s 300-year history – an extraordinary measure that shows the true weakness of the UK economy.

 

It also means that one of a central bank’s key monetary policy weapons – cutting interest rates – has no more bullets left. That’s why the Bank’s resorting to quantitative easing – an even more extreme measure. And that’s why George Osborne is resorting to desperate measures to improve the country’s debt profile.

 

The good Andean countries were also affected by the financial crisis. And they too took extraordinary measures, cutting rates to record lows. The difference is that their problems were temporary. As their economies picked up speed, their central banks jacked rates back up.

That means those countries now have a useful buffer. If the economy starts to hit the skids, the central banks have more tools at their disposal to remedy it.

 

Of course, the Andean economies aren’t the only emerging-market countries to have high interest rates. For example, Brazil’s benchmark rate of 7.25% is higher than the rates in any of theirs. But it’s also a historical low for Brazil, where high rates have always been needed to battle inflation. So, even though the base rate is so high, Brazilan policymakers probably don’t feel that they’ve got that much room to cut it further.

 

But in Chile, Peru and Colombia, current rates are well above historical lows. And that gives them a big advantage if the going gets tough.