Is Colombia Heading for a Decline from an Emerging to a Frontier Market?

Trading volumes in Colombian equities are increasingly lower, the country is losing participation in global indices and the outlook is not improving. What changes would this bring?

Trading volumes in Colombian equities are increasingly lower, the country is losing participation in global indices and the outlook is not improving What changes would this bring?
September 06, 2023 | 12:50 PM

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Bogotá — The lack of liquidity in the Colombian market means that the country is at high risk of ceasing to be classified as an emerging market and becoming one denominated as a frontier market, among the characteristics of which are low liquidity, on the one hand, and high risks.

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Emerging markets include countries that are in the process of becoming a developed economy; frontier markets are less advanced economies in the developing world. The market classifies economies into different categories: developed and emerging are the most common, but one step below are the frontier economies or markets, i.e., economies that are smaller than the emerging ones, less developed and with greater problems.

It is precisely illiquidity and risk that are the two words that describe the Colombian market today.

In fact, JP Morgan issued a warning of what could happen to the Colombian market if liquidity continues to be reduced.


“We do not see any major positive factor for Colombian equities”, according to the US bank.

It also assured that “an unattractive macroeconomic scenario and an uncertain political outlook keep us on the sidelines. It is mostly on valuations that Colombia stands out, as multiples are heavily discounted, but that comes with poor downside and weak earnings. We continue to believe that [US financial institution] MSCI could reclassify Colombia out of emerging markets, which would lead to outflows and lower visibility”.

MSCI has already taken action regarding the liquidity of Ecopetrol, the largest issuer in the Colombian equity market.

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“Following Ecopetrol’s removal from the index in November 2022, Colombian equities are on the verge of breaching MSCI’s liquidity threshold, and the index provider could decide to open a consultation process to reclassify them as a frontier market, which, in our view, would further pressure valuations. valuations even more,” said JP Morgan.

On the other hand, Germán Cristancho, an equity expert at Davivienda Corredores, assured that “we must not lose sight of the fact that investors have been seeing how Colombia has been losing relevance in international indices and probably falls as strong as the one registered today (September 5) are a component of that”.

In addition, Cristancho does not rule out that, in the near future, the discussion on whether Colombia should be reclassified as a frontier market will be opened.

“I do believe that there is a mixture of waiting for Colombia to fall into this type of market category, added to the fact that Colombia continues to leave indices, as it recently left MSCI’s small cap index,” he added.


MSCI made the announcement of the cancellation of the MSCI Colombia Small CAP Index as part of the review of the index in August 2023. It also confirmed the elimination of Grupo Argos and Cementos Argos shares in that update.

“According to section 2.4 of the MSCI Global Investable Market Indexes Methodology, indices such as the MSCI Global Investable Market (GIMI) Large, Mid or Small Cap indices may be discontinued if fewer than the required minimum number of securities are eligible for inclusion when applying a given methodology to a market,” the announcement said.

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An opportunity?

Although the fall into the frontier category can be seen as negative, it also implies an opportunity, since the country will be attractive to other types of investors.


“Colombia could be a very small market to be considered emerging, but of a very good size within those considered as frontier, and with very good conditions because one sees frontier markets and they are countries with very bad macroeconomies, such as Egypt, for example, with very complicated macro conditions. In that group there are complex African countries, and if you look at Colombia, it is a country with challenges but its problems are more of market size, the macro scenario is good, despite the risk, because there is an independent bank, there is an adherence to the fiscal rule, so there is a public that can still be interested in Colombia,” according to MSCI.

In fact, Cristancho assures that in conversations with investors in New York he has been able to establish that Colombia is beginning to appear on the radar of a group of investors with a lot of money, but willing to assume many more risks with the purpose of having double-digit returns and even double their investments in periods of up to five years.

“However, even if we are on the radar of other investors, it is not a good sign, it is a warning sign and a withering of an initiative for institutional investors”, concluded Cristancho.

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