Corporate Challenges and

Opportunities in Colombia

in 2015

Elzbieta Czetwertynska

Colombia TTS Head

elzbieta.czetwertynska@citi.com

Treasury and Trade Solutions

1. Colombia General Overview

2. Citi Colombia Footprint

What is Colombia?

Source: Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

Opportunities

Colombia’s external debt

rating has improved, and

it currently stands at

investment grade

Colombia is the only country

in South America with

access to the Atlantic and

Pacific oceans

Colombia has never

defaulted on its

international indebtedness

55% of the population is

less than 30 years old.

There are nine cities with

over 500 thousand people

The Colombian banking sector

expanded rapidly since the 1990s as

foreign investment increased and

state assets were sold off during the

economic liberalization process

Since 1999 Colombian monetary

authorities allow the Peso to float freely.

Under the floating exchange-rate

regime, interventions in the

exchange-rate market are done only

under very specific circumstances

Since 1999 Colombia has

a one digit inflation and

has never suffered

from hyperinflation

Colombia is the oldest

democracy in Latin America

3

Colombia Overview

Source: Citi Research and Bloomberg.

Area : 1,141,748 sq km

Nominal GDP (2014) : US$375 billion

GDP per Capita (2014) : US$7,878

Real GDP Growth (2014) : 4.6%

CPI (2014) : 3.66%

Exports FOB (2014) : $56.98 billion

Imports CIF (2014) : $61.68 billion

FDI (2014) : $17.3 billion

Main Cities (population)

– Bogotá(Capital) 7.8 million

– Medellin 3.4 million

– Cali 2.3 million

4

The Highest Growth in 2014 among LatAm’s Major Economies

1. Venezuela 2014 GDP growth estimate.

Sources: Citi Research and Bloomberg, OECD, IMF (World Economic Outlook—October 2014) and DANE. Among the main countries in the region in terms of GDP.

Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

4.6%

2.5% 2.4% 2.1% 1.9%

0.5% 0.0%

(3.8)%1

LatAm and Caribbean

(Average Growth)

Growth of Gross Domestic Product, 2014

Colombian Growth Drivers

According to OECD

High investment in housing and infrastructure (12% growth)

Growth in private consumption (4.6%)

Solid labor market

Public expenditure

5

Colombia’s Main Figures 2014

Source: Citi Research and Bloomberg

http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us

https://www.moodys.com/credit-ratings/Colombia-Government-of-credit-rating-186200

GDP growth: 4.6%

Highest in the Region.

Average Growth Rate for

LatAm: 1.3%

Direct Foreign Investment:

US$17,290 million

Record Figure in the History

of Colombia

Urban unemployment

rate: 9.3%

8.7% Unemployment Rate

by the End of December

2014

Exports of goods and

services US$56,980 million

66% of Exports Were

Hard Commodities

1 million barrels per day of

oil production

Fourth Largest Producer in

South America

Controlled inflation 3.66%

Central Bank

interest rate: 4.5%

Aligned with

Government Forecast

4th largest economy in

LatAm and 28th in

the world

GDP Growth Forecast

for 2015: 3.5%

Population of 48 million

Colombia is the Second

Largest Spanish Speaking

Country in the World

Currently peace talks in

La Havana

Agreement has been

Reached in Three Out of

Five Points

US 35 billion to be invested

in infrastructure in the

near future

Investment Planned to Be

Financed Through Public/

Private Partnerships

The key drivers for Moody’s upgrade were

1. Expectations of continued strong growth dynamics

despite external headwinds

2. Sound fiscal management

6

Impact of Oil Price Decrease in Colombia’s Economy

A decrease in oil prices has an important impact in Colombia’s macroeconomic situation (7% of GDP comes from Mining and Oil).

Main impact to occur in 2016 given 2015 tax revenues are paid

based in 2014 companies’ performance

For every $10 decrease in oil price government’s income is

impacted in $2.1 billion per year (approximately 0.5% of GDP)

Fiscal impact for 2015 estimated at COP 9 Trillion

Lower oil prices and a fall in FDI flows to Colombia generate FX

depreciation which compensates partially the fiscal impact

(for every COP10 depreciation Government receives approximately

additional $150 million)

Increasing fiscal deficit will require a tax reform and additional

government debt which could be allowed under the fiscal rule due to

materiality of impact (in a below $60/B scenario)

Central Bank likely to control inflation through monetary policy

Macroeconomic Impact of Lower Oil Prices

WTI at US$55

Colombia 2014 2015 2016

GDP 4.60 3.5 3.0

Inflation 3.66 3.3 3.0

Fiscal Deficit 2.30 2.9 3.5

Unemployment 8.70 9.5 10.5

7

Peace Talks Status

Timeline

November 2012—FARC rebels declare two-month ceasefire and peace talks begin in Cuba

July 2013—FARC chief negotiator states the armed conflict is nearing an end, and calls on left-wing parties and unions to join efforts

December 2014—FARC’s unilateral ceasefire

January 2015

– President Santos says government ready for bilateral ceasefire with FARC

– Three months after the start of the FARC’s “unilateral, indefinite” cease-fire, the guerrillas violated it

– President of France François Hollande offered “financial and technical” support to a post-conflict Colombia

Breakthroughs

Agreement on the first three items of a five-point agenda

1. Rural development. Development programs for infrastructure, social development and farming policy among others

2. Political participation. Guarantees for the political movement formed after the conflict ends

3. Drug trafficking. FARC’s final cease of any activity related with drug traffic

Challenges of a Successful Process

Disarmament: FARC negotiators show reluctance to turn in their weapons after signing a peace accord

Demobilization: Colombia must contend with a wave of former fighters, most of whom have no education or marketable skills

Financing

– According to the government1, the minimum cost2 of Colombia’s Peace Deal for the next 10 years would be about US$44.4 billion

– Although the government states that the cost is still lower than the current war expense, there is an anticipated need for

Implementing structural reforms to make sure there is sufficient funding for such post-conflict programs

Reevaluation of government spending and taxation

1. October 2014 estimated by Peace Commission and presented to Colombian Senate.

2. To be used in demobilization, victims compensation and return of displaced population. (Presentation of Peace Commission to Colombian Senate).

8

Foreign Direct Investment (“FDI”) in Colombia

Source: Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

FDI Inflows. 1994–3Q14 (US$ in Million) In 2013 Colombia Reached a New

Record in FDI: Nearly 10 Times of

What it Received 10 Years Ago

Colombia is the Leader in Terms of

Investor Protection in the Region

and 10th Worldwide

Avg.

2003–2011

2012 2013

Source: Doing Business 2015—World Bank.

1. Index: 0–10 and 10 = the best score.

9

Colombia has Easy Access to Markets around the Globe

Source: Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

Over 935 Weekly Direct International Flights

More than 6.197 Weekly Domestic Flights

Less than 6 Hours to the Main Capital Cities in Latin America

More than 20 Different Airlines Operating in Colombia

Canada

US

Mexico

Ecuador

Peru Brazil

Chile

Argentina

Germany

France

Spain

Los Angeles

8H20M

Mexico City

4H45M

Quito

1H30M

Lima

3H00M

Santiago de Chile

5H00M Buenos Aires

6H15M

Sao Paulo

5H45M

New York

5H35M

Toronto

6H05M

Madrid

9H40M

Paris

10H40M

Frankfurt

11H15M

Caracas

1H20M

10

Colombia Tops the Region in the World Bank’s Doing Business Report

Source: Doing Business Report 2015. World Bank, Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

* Position between 189 economies.

** Positive numbers indicate an improvement in the business environment.

Getting Credit

Registering Property

Trading Across Borders

Dealing with

Construction Permits

Position Out of

189 Economies

Position Out of 189 Economies

Change in Rank 2014–2015**

Factors with Positive Behavior 2014–2015

Positions Change 2014–2015** (US$ in Million)

11

Some Examples of High Profile Colombian “Multilatinas”

Source: Investment Environment and Business Opportunities in Colombia January 2015 /http://www.proexport.com.co/en.

* The brands mentioned are trademarks/registered marks.

One of the largest food companies in

Colombia, Nutresa has presence in

12 countries in LatAm, with manufacturing

plants in 8 of them. Recently, the company

signed an agreement to acquire 100% of

the shares in Tresmontes Lucchetti SA

in Chile for US$758 million

Carvajal SA, is a conglomerate

with presence in 15 countries

and recognized for its role in the

field of packaging, stationery,

design and advertising

Colombina SA is one of the country’s leading

companies in the production and marketing of

sweets, chocolate and biscuits. The company has

strengthened its international strategy with the

opening of 11 branches throughout the Americas and

has a production plant in Guatemala to supply the

American market

Tecnoquímicas is specialized in health

products and services, personal care and

household cleaning, processed foods, and

agricultural and veterinary products in

Colombia and LatAm. The company has

direct resence in Central America through its

3 plants in El Salvador

SURA Brand is currently well

known in the insurance, pension

and investment fund business

through its operations in Mexico,

Peru, Uruguay and Chile. In 2011,

the group bought ING assets in

LatAm for US$3,614 million

12

Regulatory Environment

General

Solid regulatory environment focused on reforms to improve business conditions and adequately protect investments

Colombia faces certain challenges as its judiciary system continues to be slow and judicial decisions continue to leave room for

legal uncertainty

Reforms

Amendment of rules pertaining to investment funds

– Raised risk management standards (SAR)1

– Improved transparency standards

New rules pertaining to data protection

FATCA pursues foreign financial institutions to prevent tax evasion by US citizens and residents through use of offshore accounts

Underway

2015 Tax Reform: Additional tax reforms are expected during the course of the year

Risk Bureau Restriction: Limits the information sent to the credit bureau in order to protect customers

Transnational Corruption: Transnational corruption acts will be considered criminal acts

1. SAR: Sistema de Administración de Riesgo.

13

Anti Money Laundering Environment

Data Privacy

Demographic data/information can be shared with third parties in

most cases, locally and abroad, based on general authorization from

customer. Anti Money Laundering data cannot be shared

Cash Transactions Reports-CTR

Legal obligation for customers to fill out a cash declaration form for

amounts equal or greater than ~US$5,000

Banks must identify monthly aggregated transactions totaling

~US$25,000 per customer

Banks must send that information to the UIAF on a monthly basis

Context

Banking Law

Non-residents cannot open bank accounts, except for very specific

transactions (i.e. to pay for a foreign investment or loan)

Domestic banks cannot open dollar accounts, except for certain

types of companies (i.e. travel agencies, hotels, embassies,

free trade zones, airlines)

Monetary obligations between residents in Colombia must be paid in

local currency

There are no restrictions to pay any obligation in cash (COP)

“Colombian authorities are deeply committed to combating money

laundering and have achieved a significant number of convictions. …

With respect to confiscation of illicit property, Colombian legislation is

among the few that provide for “extinción de dominio” (domain extinction)

which facilitates the forfeiture of illicit property through a process separate

from money laundering criminal procedures.” (2005 Financial System

Stability Assessment Update, International Monetary Fund)

The Government of Colombia (“GOC”) is a regional leader in the fight

against money laundering and terrorist financing” (US Department of State,

2012 International Narcotics Control Strategy Report)

14

Corporate Tax Environment

General Taxes

Income tax rate CIT rate 25%

CREE1 9% (complementary to income tax)

VAT2 rate 16%

Capital Gain tax rate 10%

Other Taxes

Capital Gain tax rate 10%

GMF3: 0.4% on financial transactions (Debits)

ICA4: 0.2% to 1% on total income (Municipal)

Withholdings

– 33% on foreign short-term debt unless trade related

– 14% on long-term debt

2014 Tax Reform

a) Wealth Tax

It applies for taxable years 2015, 2016 and 2017 to legal entities who are

Income Tax taxpayers

2014 Tax Reform (Cont’d)

b) Surcharge on Income Tax for Equality (CREE)

Success during Congress Debate: Wealth Tax was reduced

from 4 to 3 years, and the proposed rate was reduced

from 1.75% to 1.15% in the first year

Further down in 2016 and 2017, collection is compensated by a new

surcharge to Income Tax for Equality (CREE) equivalent to

– 5% for year 2015

– 6% for year 2016

– 8% for year 2017

– 9% for year 2018

Withholdings

– 39% on royalties—2015, 40%—2016, 42%—2017, 43%—2018

– 10% on Consultancy, Technical Services, Technical Assistance

Wealth Tax

2015 2016 2017

Tax base 782 829 879

Tax rate 1.15% 1% 0.40%

Tax (A) 9.0 8.3 3.5

Income Tax Cree & Cree Surcharge

2015

Tax Base 158

Income Tax 25% 39.6

Cree 9% 14.2

Cree Surcharge (B) 7.9

Total Tax 61.7

Total (A+B) 16.9

Taxable Year Tax Rate Taxable Base

2015 1.15%

2016 1.00%

2017 0.40% Equal or Higher than $5.000 million of Colombian Pesos, and up.

Equal or Higher than $5.000 million of Colombian Pesos, and up.

1. Income Tax for Equality (CREE: Contribucion de Renta para la Equidad).

2. VAT: Value-added tax

3. GMF: Gravamen a los Movimientos Financieros

4. ICA: Impuesto de Industria/Comercio y Avisos y Tableros 15

Industry Specifics—Colombia

Infrastructure

Construction industry with the fastest growth 7.6% on average)

Transport infrastructure Plan announced by

Government (US$55 billion)

Public-private partnerships (“PPP”) to support

infrastructure—concessions

Infrastructure funds with a mandate to invest in Colombia

The construction industry still restrained by the internal

security situation

Telecommunications

Significant investments taking place in this industry

(US$10 billion 2014–2018)

Mobile market growth fuelled by prepaid segment with low usage,

more competitive prices for subscriptions

Expected subscription growth over 2014–2018 is weak

The dominance of Claro remains an issue for market competition

and growth

Pharmaceutical and Healthcare

Increased investment in healthcare has driven growth in

pharma consumption

Counterfeit drugs continue to represent up to 40% of the market1

Some 14% of Colombian population remains uninsured2

Most of the local production is dependent on imported active

pharmaceutical ingredients (“APIs”)

Retail

Modern retail space gaining importance, traditional small outlets still

account for half of food sales by value

Traditional stores will remain popular with low-income consumers,

who lack the purchasing power to buy in bulk and lack transportation

Price remains the decisive factor in many consumers’

purchasing decisions

Mass grocery retail formats catering for lower-income consumers,

offer significant growth potential

Source: Business Monitor International. Industry Report & Forecast Series. Colombia Infrastructure Report Q1 2015, Colombia Telecommunications Report Q2 2015, Colombia Pharmaceutical and Healthcare Report Q2 2015 and Colombia Retail Report Q1 2015

1. Business Monitor International. Industry Report & Forecast Series. Colombia Pharmaceutical and Healthcare Report Q2 2015 Page 9.

2. Business Monitor International. Industry Report & Forecast Series. Colombia Pharmaceutical and Healthcare Report Q2 2015 Page 9.

16

Opportunities and Challenges

Opportunities

Explicit backing from the IMF and the ratings agencies has

boosted confidence in the economy

The government’s endorsement of public-private

partnerships (“PPP”) as a means of procuring infrastructure

has supported an active concessions market

The Pacific Alliance, in addition to the increased number of

FTAs that the Government is negotiating, is expected to

boost the growth of exports. This will encourage the

development of infrastructure to support logistics operations

The global demand for coal remains high and Colombia is

South America’s largest coal producer

Significant infrastructure projects in the near future

(Metro, roads, etc.) with interesting business opportunities

Challenges

Lower that initially expected GDP growth due to drop in

oil prices

Significant currency depreciation due to lower oil prices and

signs of inflationary pressures

Lower fiscal income led to high taxation and more taxes are

likely to come

Peace Process: finalizing the peace process is at the top of

the Government’s agenda. Once signed this will impact the

economy and present its own challenges

17

1. Colombia General Overview

2. Citi Colombia Footprint

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19

TTS Citi Colombia Full Solution Offering

Payables

Integrated Payments Service

Commercial Cards

Vendor and Tax Payments

Project Implementation and

Client Services

Regional Implementation Management

Global Account Documentation

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Citi Online Investments (OLI)

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