Abstract
This Selected Issues paper provides background information and analysis on recent developments and critical issues for the Colombian economy. The study discusses the unemployment and stresses in the financial system and also focuses on fiscal issues. The following statistical data are presented in detail: national accounts at current prices and at constant prices, savings and investment, value of agricultural crops, mining production, structure of regular gasoline prices, indicators of construction activity, minimum wages, producer price index, interest rates, and so on.
III. Banking Stress in the Late 1990s25
30. After decades of steady economic growth and macroeconomic stability (albeit with moderately high inflation), Colombia has experienced slow growth and widening economic imbalances in recent years. This turnaround has had important repercussions on the financial system, which went through a period of considerable stress during 1998 and 1999. While the general conditions of the financial sector have since improved, significant challenges remain, including the privatization of some public banks and closure of others, and the strengthening of the mortgage institutions.26
31. As of December 2000, the Colombian financial system had 72 credit institutions with assets amounting to about US$44.5 billion (58 percent of estimated 2000 GDP). Due to a tradition of specialized banking, there were 27 private banks (including specialized mortgage institutions), with 55 percent of total assets, 8 finance corporations whose activities were largely directed to corporate banking (with 6 percent of assets) and 37 mainly small financing and leasing companies (with less than 3 percent of total assets). Public financial institutions, including operating banks, banks that have been closed, and second-tier financial institutions accounted for 36 percent of total assets, while foreign-owned institutions accounted for 15 percent of total assets. Most of the financial intermediation was undertaken through institutions owned by nine private conglomerates (grupos), of which three are foreign-owned.
A. Emergence of Stress in the Financial Sector
32. The boom of the early 1990s brought about a rapid expansion of bank credit and asset prices, particularly real estate. Lending was largely based on current repayment capacity, and credit risk analysis was influenced by rapidly increasing real estate prices. Credit expansion was particularly buoyant in the mortgage and consumer sectors, resulting in a significant rise in the household debt burden. Financial supervisory practices during this period were weak and regulatory forbearance was common in the case of the public banks.27
33. By mid-1998, economic growth had slowed and credit demand fell, partly reflecting the efforts by the private sector to bring down its debt burden. These developments also were associated with a rapid deterioration in the quality of the financial intermediaries’ assets. The ratio of nonperforming loans to total loans (NPL) jumped from about 8 percent in December 1997 to a peak of 16.1 percent in November 1999. In the case of mortgage loans, the deterioration was even more dramatic, jumping from about 6 percent in December 1997 to 19.8 percent in January 2000.28 While the financial system itself had a low exposure to exchange rate risk, the exchange rate depreciation of 1998-99 (Figure 1) contributed to the deterioration of its assets due to the large foreign exchange exposure of the corporate sector.
Colombia: Money and Credit, Nonperforming Loans, and Exchange Rate
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Sources: Banco de la República; and IMF’s Information Notice System.Colombia: Money and Credit, Nonperforming Loans, and Exchange Rate
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Sources: Banco de la República; and IMF’s Information Notice System.Colombia: Money and Credit, Nonperforming Loans, and Exchange Rate
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Sources: Banco de la República; and IMF’s Information Notice System.34. The economic downturn and the contraction in financial system liquidity accelerated the fall in property prices that had begun in early 1996, particularly in the intermediate and high end of the real estate market (Figure 2). The adverse effects on the housing sector of the deep decline in real estate prices was exacerbated by the fact that both loans and deposits of mortgage institutions were denominated in UPACs, a unit of account established in 1973 to index mortgage loans. The UPAC was originally linked to inflation, but was shifted to the benchmark 90-day deposit rate in the early 1990s. This change proved to be problematic in 1998 when market interest rates soared well above the rate of inflation (Figure 2) and servicing costs on mortgages increased much faster than the incomes of mortgage holders. To alleviate the immediate debt servicing problems, many loans denominated in UPACs capitalized interest. As a result of the fall in housing prices and the capitalization of interest, the principal of mortgage loans in many cases exceeded the value of the underlying collateral.
Colombia: Real Estate Prices and Real Interest Rates
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Source: Banco de la República.1/ Nominal rates deflated by change in CPI over the preceding twelve months.Colombia: Real Estate Prices and Real Interest Rates
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Source: Banco de la República.1/ Nominal rates deflated by change in CPI over the preceding twelve months.Colombia: Real Estate Prices and Real Interest Rates
Citation: IMF Staff Country Reports 2001, 068; 10.5089/9781451808834.002.A003
Source: Banco de la República.1/ Nominal rates deflated by change in CPI over the preceding twelve months.35. In response to widespread complaints about creditor abuses, the constitutional court intervened in 1999 by ruling that mortgage debt payments could not be indexed to interest rates, and that interest could not be capitalized. Indexation of mortgage loans was subsequently linked to past inflation. In early 2000, the court established that interest rates on mortgage debt had to be capped by the central bank at the lowest rate in the market. Some Colombian observers have argued that an unintended consequence of these rulings (in conjunction with the multiple debtor relief programs described below), may have been to relax debtor repayment discipline in the mortgage sector.
B. The Policy Response
36. In dealing with the financial sector crisis, the authorities put in place a combination of policies to provide mortgage debt relief; restructure and recapitalize private banks, as needed; strengthen the regulatory framework; divest or liquidate public banks; and grant incentives to facilitate the restructuring of private debt.
37. Debt relief for mortgage debtors. Successive debt relief programs were implemented that used public funds to refinance mortgage loans at lower interest rates or reduce the principal of the loans. In November 1998 unemployed homeowners of low income housing received refinancing of their debt at preferential rates. In March 1999, debtors whose mortgages had interest rates above UPAC plus ten percentage points received new financing at preferential rates.29 The final package, passed in the context of a comprehensive housing law in December 1999, introduced debt reduction on the principal of the mortgages outstanding at the end of 1999. The new lower principal was estimated retroactively by replacing the UP AC index with one based on past inflation (UVR). To partially offset the loss in the value of their mortgage assets, financial institutions were given long-term treasury obligations that carried below market interest rates.
38. Public banks. A number of public banks were intervened and closed in 1999 (Caja Agraria, BCH, and Banco de Estado/Uconal), and a new bank, Banco Agrario, was created from the performing assets of Caja Agraria.30 Performing assets and the deposit liabilities from the other public banks that were closed were transferred to Bancafe, Granahorrar, and Banco Agrario.31 Bancafé is in the process of privatization,32 while various options are being considered for the resolution of Granahorrar. The authorities plan to divest from all public banks (except Banco Agrario) by the end of 2001. An asset management company (CISA), owned by Fogafin, has been entrusted with the responsibility of selling the unproductive assets of the closed public banks.
39. Private banks. Two large private institutions were taken over by Fogafin in 1999, as noted above, while smaller banks that failed were closed (Banco Andino, Banco Selfin, and Banco del Pacifico).33 In addition, a number of smaller cooperatives, insurance companies and trust funds were intervened during 1998 and 1999, and are in the process of liquidation.
40. Medium-sized private institutions received financial support from Fogafin, which amounted to about US$220 million as of February 2001.34 In May 1999 the government introduced a recapitalization plan under which it extended (through Fogafin) credit lines to the shareholders of the troubled institutions. These lines, which were given in the form of Fogafin bonds (and consequently did not imply cash disbursement for the government), carried a number of conditions: impaired assets were written off according to strict Fogafin criteria; annual performance criteria for each institution were established and monitored by Fogafin; and collateral covering 133 percent of the credit lines had to be submitted. Maturities of the recapitalization loans were from three to seven years, and the interest rate was linked to market deposit rates. While this scheme was generally successful in improving the capital adequacy ratios of the institutions that were supported,35 it does subject Fogafin to losses should the banks fail but not to the gains that would accrue if the banks’ fully recover.
41. Legal and regulatory reform. In July 1999, the banking law was amended with the purpose of strengthening prudential norms and the powers of the superintendency of banks (SB). The main provisions included an increase in the minimum capital for all financial institutions; the strengthening of procedures for the timely detection of troubled institutions; and the introduction of prompt corrective actions by the SB. In addition, the SB issued regulations to raise the level of provisioning of bad assets to international standards over a period of three years. These included a general provisioning requirement (equal to one percent of total assets) and changes to the methodology used to deduct collateral from provisioning requirements.36
42. Debt restructuring. In July 1999 the SB adopted a transitory regime for the classification of loans that facilitated the restructuring of debt with the financial sector under certain conditions. Under this regime, which lasted six months, financial institutions had to forego penalty charges and could establish grace periods of up to one year for the payment of interest and up to three years for the payment of principal. Furthermore, interest rates had to be agreed upon by the financial institution and the customer; and the maturity of the restructured loan could not exceed seven years. The total amount of loans restructured was about US$600 million. In addition, congress passed Law 550 on December 1999, creating an alternative debt resolution mechanism that suspended traditional bankruptcy procedures for five years. The new procedures are based on agreements between creditors and debtors under the auspices of the government (through the Superintendencia de Sociedades). They also replaced the veto power of shareholders; and permitted the modification of the legal priorities of the various types of liabilities, except for pension and labor related liabilities. Total restructurings under this law amounted to about US$250 million, as of September 2000.
C. The Fiscal Cost
43. The estimated gross fiscal cost of the banking crisis to date is about CP 14.3 billion (8.4 percent of the estimated GDP in 2000) (see Table 1). This cost excludes proceeds from any asset recovery of the public banks, repayment of the loans extended to shareholders of private banks, and the fiscal carrying cost resulting from the financing.37 Fogafin staff estimates that about half of these costs can be recovered. The bulk of the resources were devoted to public bank resolution (61 percent of the total) where the heaviest losses were concentrated. The other significant expenditure was related to mortgage debt relief (21 percent of total).
Colombia: Estimated Gross Fiscal Cost of the Financial Crisis
(In billions of Colombian pesos)
The column “Other” includes recoveries from non-performing assets sales, loan portfolio administered by Granahorrar and privatization of Bancafe and Granahorrar.
Includes US$1,300 of pension liabilities.
Includes recapitalization of CISA - Bancafe US$268 and BCH US$269.
Operations performed to date.
Repurchase agreements between Fogafin and public banks (Bancafé, Granahorrar and FES).
Colombia: Estimated Gross Fiscal Cost of the Financial Crisis
(In billions of Colombian pesos)
| FOGAFIN | Central Administration | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Cash | Bonds | Total | Cash | Bonds | Total | Cash | Bonds | Total | ||
| I. Debt relief to mortgage debtors | 73 | 390 | 463 | 2,500 | 2,500 | 73 | 2,890 | 2,963 | ||
| Relief under 11/98 decree | 222 | 222 | 0 | 222 | 222 | |||||
| Relief for debtors in arrears (<6 months) | 108 | 108 | 0 | 108 | 108 | |||||
| Interes reduction (5/99-12/99) | 73 | 60 | 133 | 73 | 60 | 133 | ||||
| Debt relief framework law (10/99) | 350 | 2,500 | 2,850 | 350 | 2,500 | 2,850 | ||||
| II Assistance to constructors | 146 | 146 | 146 | 0 | 146 | |||||
| III. Relief to cooperatives | 200 | 200 | 0 | 200 | ||||||
| IV. Relief to mortgage institutions for looses on repossessed assets | 0 | 8 | 8 | 0 | 8 | 8 | ||||
| V. Public banks 1/ | 1,460 | 5,089 | 6,549 | 0 | 4,060 | 5,089 | 9,149 | |||
| Banco Granahorrar | 307 | 426 | 733 | 307 | 426 | 733 | ||||
| Caja Agraria 2/ | 370 | 370 | 2,600 | 2,600 | 2,600 | 370 | 2,970 | |||
| Bancafe3/ | 1,488 | 1,488 | 0 | 1,488 | 1,488 | |||||
| BCH 3/ | 141 | 1,405 | 1,546 | 141 | 1,405 | 1,546 | ||||
| Banco del Estado/UCONAL | 967 | 850 | 1,817 | 967 | 850 | 1,817 | ||||
| IFI-FES | 45 | 550 | 595 | 45 | 550 | 595 | ||||
| VII. Other banks | ||||||||||
| Megabanco | 192 | 286 | 478 | 192 | 286 | 478 | ||||
| VIII. Recapitalization of private banks 4/ | 490 | 490 | 0 | 490 | 490 | |||||
| IX. Purchase assets 5/ | 350 | 350 | 350 | 0 | 350 | |||||
| X. Relief to Interbanco | 189 | 189 | 189 | 0 | 189 | |||||
| Total | 2,410 | 6,263 | 8,673 | 3,150 | 2,500 | 5,650 | 5,560 | 8,763 | 14,323 | |
| (in percentage of 2000 GDP) | 1.4 | 3.6 | 5.1 | 1.8 | 1.5 | 3.3 | 3.2 | 5.1 | 8.4 | |
The column “Other” includes recoveries from non-performing assets sales, loan portfolio administered by Granahorrar and privatization of Bancafe and Granahorrar.
Includes US$1,300 of pension liabilities.
Includes recapitalization of CISA - Bancafe US$268 and BCH US$269.
Operations performed to date.
Repurchase agreements between Fogafin and public banks (Bancafé, Granahorrar and FES).
Colombia: Estimated Gross Fiscal Cost of the Financial Crisis
(In billions of Colombian pesos)
| FOGAFIN | Central Administration | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Cash | Bonds | Total | Cash | Bonds | Total | Cash | Bonds | Total | ||
| I. Debt relief to mortgage debtors | 73 | 390 | 463 | 2,500 | 2,500 | 73 | 2,890 | 2,963 | ||
| Relief under 11/98 decree | 222 | 222 | 0 | 222 | 222 | |||||
| Relief for debtors in arrears (<6 months) | 108 | 108 | 0 | 108 | 108 | |||||
| Interes reduction (5/99-12/99) | 73 | 60 | 133 | 73 | 60 | 133 | ||||
| Debt relief framework law (10/99) | 350 | 2,500 | 2,850 | 350 | 2,500 | 2,850 | ||||
| II Assistance to constructors | 146 | 146 | 146 | 0 | 146 | |||||
| III. Relief to cooperatives | 200 | 200 | 0 | 200 | ||||||
| IV. Relief to mortgage institutions for looses on repossessed assets | 0 | 8 | 8 | 0 | 8 | 8 | ||||
| V. Public banks 1/ | 1,460 | 5,089 | 6,549 | 0 | 4,060 | 5,089 | 9,149 | |||
| Banco Granahorrar | 307 | 426 | 733 | 307 | 426 | 733 | ||||
| Caja Agraria 2/ | 370 | 370 | 2,600 | 2,600 | 2,600 | 370 | 2,970 | |||
| Bancafe3/ | 1,488 | 1,488 | 0 | 1,488 | 1,488 | |||||
| BCH 3/ | 141 | 1,405 | 1,546 | 141 | 1,405 | 1,546 | ||||
| Banco del Estado/UCONAL | 967 | 850 | 1,817 | 967 | 850 | 1,817 | ||||
| IFI-FES | 45 | 550 | 595 | 45 | 550 | 595 | ||||
| VII. Other banks | ||||||||||
| Megabanco | 192 | 286 | 478 | 192 | 286 | 478 | ||||
| VIII. Recapitalization of private banks 4/ | 490 | 490 | 0 | 490 | 490 | |||||
| IX. Purchase assets 5/ | 350 | 350 | 350 | 0 | 350 | |||||
| X. Relief to Interbanco | 189 | 189 | 189 | 0 | 189 | |||||
| Total | 2,410 | 6,263 | 8,673 | 3,150 | 2,500 | 5,650 | 5,560 | 8,763 | 14,323 | |
| (in percentage of 2000 GDP) | 1.4 | 3.6 | 5.1 | 1.8 | 1.5 | 3.3 | 3.2 | 5.1 | 8.4 | |
The column “Other” includes recoveries from non-performing assets sales, loan portfolio administered by Granahorrar and privatization of Bancafe and Granahorrar.
Includes US$1,300 of pension liabilities.
Includes recapitalization of CISA - Bancafe US$268 and BCH US$269.
Operations performed to date.
Repurchase agreements between Fogafin and public banks (Bancafé, Granahorrar and FES).
44. Much of the cost was financed with the issuance of bonds (61 percent of total). Fogafin bonds that were used to recapitalize public banks are linked to treasury commitments to include their servicing payments in the annual budgets, while those used for private bank capitalization carry no treasury commitment. Bonds issued for mortgage debt relief are Treasury bonds (TES) that carry explicit government guarantees. Fogafin bonds have limited tradeability and, compared with TES, are discounted by the market.
45. While significant resources have been devoted to the problems of the financial sector in Colombia, the cost has not reached the proportions of some other recent banking crisis. In this regard, the latest estimates of the costs of other crises are 56 percent of GDP in Indonesia, 21 percent in Korea, and 19 percent in Mexico.38
D. The Housing Sector and Mortgage Institutions
46. The economic recovery contributed to an improvement in the financial sector as a whole in 2000, as manifested in the rise of the capital adequacy ratio (from 11.2 percent in December 1999 to 13.8 percent in December 2000); the fall in nonperforming loans (from 13.5 percent to 11.1 percent); the increase in past due loans covered by provisions (from 34 percent to 49 percent); and the reduction in financial sector losses (from about US$1.3 billion to US$700 million).
47. Mortgage institutions, however, remain weak mainly as a result of the problems in the housing sector and the high rate of loan delinquency.39 While the drop in real estate prices appears to have bottomed out, prices remain depressed and the quantity of repossessed assets is large. A recent increase in migration from Colombia has contributed to keeping prices low by increasing the supply of properties for sale. The implications for the financial sector are significant: the five private mortgage institutions hold about 30 percent of banking assets, and some are linked to large domestic banks through common ownership. Credit risk faced by the mortgage institutions, arising from the conditions in the housing market, is further compounded by liquidity and interest rate risk, derived from the liquidity mismatch between assets and liabilities and from the cap on lending rates established by the constitutional court (while deposit rates are market determined). The authorities have introduced a partial interest rate guarantee mechanism to protect mortgage institutions against interest rate risk, and are preparing the regulatory framework for the creation of mortgage-backed securities (MBS).40 In addition, the authorities are assessing the condition of each mortgage institution to determine their capital needs, and are considering various alternatives to induce greater consolidation of the sector as a means of increasing efficiency and diversifying risks in the sector.
E. Conclusion
48. The financial crises in Colombia must be viewed in the context of the economic deterioration in recent years, the existing financial sector vulnerabilities, and the external economic shocks. Supervisory practices also were weak, particularly with regard to the public banks, at a time of rapid credit growth that helped fuel a real estate bubble. The political crisis during the Samper administration (1994-98) and the growing concerns about the sustainability of the domestic and external economic imbalances contributed to ending the boom cycle. The Asian and Russian crises, and the difficulties faced by neighboring Brazil also had an impact in 1998 through adverse term of trade developments and tightened access to external financing, and contributed to the pressures against the exchange and interest rates.
49. The resolution strategy adopted by the Colombian authorities has relied mainly on providing debt relief to mortgage holders, resolving the public banks, and financing the capitalization of private banks. When the latter was not feasible (as in the case of Granahorrar and Bancafe), Fogafin took control and ownership of these institutions. While this strategy, as opposed to one that closed insolvent institutions, might reduce fiscal costs in the short run, it remains subject to considerable risks should the economy experience a future downturn.
Bibliography
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Prepared by Luis E. Breuer.
Mortgage institutions (Corporaciones de Ahorro para la Vivienda or CAVs) are savings and loans institutions that until recently had a specific regulatory regime. In the July 1999 reform of the banking law, CAVs were given until 2002 to transform themselves into banks.
Public banks often followed political objectives and were allowed to operate despite their acknowledged capital weaknesses.
After a significant improvement in the first half of 2000, loan delinquency in the mortgage sector increased again during the second half of the year.
Fogafin, the public deposit insurance agency, administered the first two rounds of debt relief, which were funded with the revenues from the financial transaction tax approved in late 1998 (see Chapter VII) and with proceeds from a US$100 million loan granted in 1999 by CAF.
The purpose of Banco Agrario is to provide credit to small farmers.
Bancafé and Granahorrar were private institutions that were intervened and taken over by Fogafin in 1999.
In preparation, Bancafé has undergone significant downsizing, reducing the number of staff from 7,300 to 4,800 and the number of branches from 390 to 280, between September 1999 and December 2000.
A medium-size bank, Banco Uconal, was also taken over by Fogafin in 1998 and merged with the Banco de Estado. The merged bank is in the process of being liquidated.
These included Banco Union, Superior, Colpatria, Interbanco, Multibanco, and Credito. In addition, a number of small finance and leasing companies and IFI, a public second-tier bank, received support from Fogafin.
Capital adequacy ratios were improved by the write-off of impaired assets and the increase in capital in the form of Fogafin bonds.
The main different between Colombian provisioning rules and international principles are related to the treatment of collateral when provisioning for bad loans. In the Colombian case, the historical value of the collateral is partially deducted from the constitution of provisions. This practice may lead to the underestimation of provisions and overestimation of the capital of financial institutions, particularly CAVs.
The carrying cost was 0.4 percent of GDP in 2000 and, after increasing to 0.9 percent of GDP in 2001, is projected to stabilize at about 0.5 percent of GDP in 2002-05, and will subsequently fall to the order of 02–0.3 percent of GDP until 2010.
SM/00/194, p. 33.
Nonperforming loans for the mortgage sector fell to 11.8 percent in June 2000 (from their peak of 19.8 percent in January 2000), following debt relief in early 2000, but have subsequently returned to their high level. The persistence of high unemployment and the fact that debt relief has not compensated the loss of income flows of unemployed workers may have contributed to the resurgence of loan delinquencies.
While the plan to introduce MBS would take time to become fully operational, these instruments will help reduce liquidity and interest rate mismatches for lenders. However, the problems with past due loans still need to be addressed.
