Venezuela - A Free Option for Colombian Corporate Growth April 29, 2019 Venezuela – A Free Option for Colombian Corporate Growth Venezuela was once the second most important destination of Colombian exports after the United States, representing around 17% of our exports in 2007-2008. However, the economic situation of our neighbor led Colombian companies to stop trading, given the hard times for currency repatriation and payments. Since January 2019, this country is facing a political turmoil after Juan Guaidó, president of the Venezuelan National Assembly, proclaimed himself interim president. The political uncertainty of the neighboring country peaked after dozens of countries backed Guiadó as interim president of Venezuela, including the US and the European Union, opening the door for a political transition that leads us to deeply analyze the effects for the Colombian market. A Venezuela turnaround story will be a watershed moment for the Colombian economy. Colombian GDP could be boosted by 0.8% per year, without considering the potential expansion of Colombian corporations. Most sectors would benefit, and many companies listed on the BVC would have a growth free option if the Venezuelan economy recovers. On this front, Grupo Nutresa, Avianca Holdings, Fabricato, Enka, and Cementos Argos would be on the positive side of the equation since they had a direct or indirect operation in Venezuela. This doesn’t mean they are the only ones: infrastructure, utilities, textiles, food, and retail could take the lead to recover the industrial production of a country which vastly lacks investment. Additionally, financial institutions would benefit from a potential growth in loans to companies that would expand its footprint to Venezuela. Other sectors such as oil and gas could be affected in the short term, taking into consideration that, in our view, the first step for taking Venezuela to a healthy level is to increase oil production to previous levels, that means, moving from around 800kboed to 2.7mn-3mn bopd, which will probably have a negative impact on oil prices, taking Ecopetrol to the negative side of the equation. Despite all of this, the bet is clear, a change of course for Venezuela will bring opportunities for Colombian companies in most sectors and for most names, something that will change dramatically the medium- and long-term view of the Colombian economy. Figure 1. Evolution of the trade balance with Venezuela (USDmn FOB) 8.000 1.140,44 7.000 Analysts 6.000 6.070,69 Name: Jairo Julián Agudelo Restrepo 5.000 Phone: (574) 6047048 4.000 E-mail: [email protected] 502,55 3.000 Name: Juliana Aguilar Vargas, CFA 2.000 291,41 124,54 Phone: (574) 6047045 2.555,96 1.000 E-mail: [email protected] 1.422,88 354,29 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Name: Federico Perez Garcia Exports Imports Commercial Balance Phone: (574) 6048172 E-mail: [email protected] Source: Grupo Bancolombia, DANE. Venezuela – A Potential Driver for Colombian Growth Venezuela was once the second most important destination of Colombian exports after the United States, representing around 17% of our exports in 2007-2008. However, the economic situation of our neighbor led Colombian companies to stop trading, given the hard times for currency repatriation and payments. For this reason, today, Venezuela represents less than 1% of our exports, not being material for Colombian economic performance. Additionally, most Colombian corporations that had direct operations in Venezuela left the country, some after making their own decision but some due to expropriations, while just a few were able to maintain their direct exposure, something that we see as a potential growth driver in the medium term, as they could take the lead in an eventual change of course. Table 1. Colombian exports by region (% of total) Region 94-06 07 08 09 10 11 12 13 14 15 16 17 18 Aladi 24% 30% 30% 26% 21% 21% 23% 23% 23% 26% 25% 27% 27% CAN 9% 7% 7% 7% 8% 6% 6% 6% 6% 8% 8% 7% 8% MERCOSUR 11% 19% 19% 14% 6% 6% 7% 7% 7% 7% 6% 5% 5% European Union 18% 14% 12% 14% 13% 16% 15% 16% 17% 17% 16% 14% 12% US 41% 33% 37% 39% 42% 39% 36% 31% 26% 28% 32% 28% 25% Venezuela 9% 17% 17% 12% 4% 3% 4% 4% 4% 3% 2% 1% 1% Germany 4% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Ecuador 5% 4% 4% 4% 5% 3% 3% 3% 3% 4% 4% 4% 4% Belgium 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Peru 4% 3% 2% 2% 3% 2% 3% 2% 2% 3% 3% 3% 3% Japan 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Mexico 2% 2% 2% 2% 2% 1% 1% 1% 2% 3% 3% 4% 4% Others 31% 36% 34% 37% 42% 49% 50% 55% 60% 55% 52% 56% 59% Source: Grupo Bancolombia, DANE. Table 2. Colombian exports to Venezuela by product group (USDmn FOB ave.) Product / year 05-07 08-10 11-13 14-16 17-18 Total 2,400 3,855 2,187 1,220 337 Animals & animal prod. 308 549 120 28 7 Food & beverage, tobacco 210 230 167 238 67 Chemical products 247 399 256 337 109 Textiles and clothing 313 684 258 47 10 Vehicles 525 157 36 11 5 Other groups 797 1,836 1,350 559 139 Source: Grupo Bancolombia, DANE. Economic Impact of a Turnaround in Venezuela In light of the above, what would happen to the Colombian economy if Venezuela goes through a political change? Would it be positive for Colombian corporations? On the one hand, there’s the potential impact of the reactivation of our direct exports to Venezuela and exports to our commercial partners that would also experience a positive impact on their exports to Venezuela, while at the same time there will be a positive impact on our corporations flexing their investment muscle in the Venezuelan market, where the lack of industry and infrastructure is evident. With the intention of calculating and answering the previous questions, our macro research team carried out a regression analysis to estimate the potential impact on our economy of a potential recovery of the Venezuelan economy. It is important to note that this analysis was based on past events and the relevance the Venezuelan market had on the economic performance of our trading partners in previous years. In conclusion, Venezuela came to represent more than 1pp to the economic performance of our commercial partners. In the same line, 1pp of additional growth in our commercial partners (including Venezuela) represented more than 0.77pp in the Colombian economic growth rate. In other words, a full recovery of the Venezuelan economy could increase our potential GDP growth rate from 3.5% to around 4.3%. This without including a potential expansion if our corporations take the lead and the advantage of expanding into the Venezuelan territory. Figure 2. Evolution of GDP performance Figure 3. Venezuela’s contribution to Colombia’s partners Partners GDP (with Venezuela) Contribution Growth Colombian GDP 2.0% 25% Partners GDP (without Venezuela) 20% 1.5% 15% 7.5% Venezuela's contribution 1.0% 10% 5.5% 5% 3.5% 0.5% 0% 1.5% 0.0% -5% -0.5% -10% -0.5% -15% -2.5% -1.0% -20% -4.5% 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Source: Grupo Bancolombia, IMF. Source: Grupo Bancolombia, IMF. As shown in figures 1 and 2, the Venezuelan economy had its golden years in the period 2004-2008, when its imports from our commercial partners were at its highest, representing on average 1.3% of our partners’ GDP performance. Additionally, in the period 2007-2008, Venezuela represented around 17% of Colombian total exports, its highest since 1994. Overall, it doesn’t take a genius to infer that a political change in Venezuela will be highly positive for the Colombian economy and its equity market. However, uncertainty and volatility remains, as this type of political and economic structural change (if it took place) doesn’t happen overnight. Despite this, markets moves on expectations, for which companies with direct exposure to Venezuela, or a potential advantage from previous relations, should remain in the mind of investors as at any given moment they could start going upward if fundamentals move in the right direction. Equity Market – Which Stocks would Benefit the Most from a Venezuelan Turnaround? The Colombian equity market was negatively affected by the economic performance of Venezuela and its economic decisions that affected the property of direct investments but also trading as FX repatriation difficulties, and high inflation, created a chaos for accountability and financial forecast. There could be more, but so far, the companies that were negatively affected by the Venezuelan economic collapse were: Cementos Argos: Cementos Andino’s Cement Plant Expropriation Cemargos’ operation in Venezuela, Cemento Andino, was Table 3. Cementos Andino’s est. value (USDmn) expropriated by the government in 2007 and the company never received payment for this plant, which has a total cement capacity of Venezuela 1mn tons/year. If the situation in Venezuela normalizes, Cemargos could receive the owed payment for this plant and, although it is still Cement capacity (mn tons) 1.0 very early to quantify the potential payment, any additional cash the company could receive will help with their deleverage strategy. EV/ton (USD) 319.6 Assuming the multiple EV/ton of cement paid in recent transactions Est.