Late last month, the IMF released an interesting set of papers on Colombia. One of them - How Healthy is Colombia's Corporate Sector? by Mercedes Vera Martin - provides an assessment of financial indicators and foreign exchange exposure in the Colombian corporate sector, relying mainly on balance sheet and profitability analysis for a substantial number of firms, based on data through 2007. The analysis suggests that the Colombian companies are overall in good financial health.

Colombia's corporate sector is well capitalized, leverage is relatively low, and liquidity remains adequate. Profitability of the corporate sector has improved over the years, thanks mostly to efficiency gains. Analysis for a selected number of firms suggests that corporates in Colombia have low foreign exchange risk, although additional information on derivative positions could help provide a more complete assessment. The analysis of expected default probabilities (EDFs), using Merton's Contingent Claims Analysis (CCA), supports the conclusions of the balance sheet analysis. Colombia has historically reported lower EDFs than the rest of the region; and although corporate sectors in Latin America have been negatively affected through the current financial turbulence, only a modest share of Colombian corporates have been affected.

In what follows we summarize their analysis:

1. Like many emerging market countries, Colombia has been affected by the ongoing turmoil in global financial markets. The resulting decline in asset prices, depreciation of the exchange rate, and increase in financing costs have important implications for the balance sheets of both the public and private sector, including corporates.

2. The capacity of the corporate sector to respond to these shocks will depend not only on the size of the shocks, but also on the initial health of the financial sector at the onset of the crisis. In this chapter, we provide an assessment of financial sector indicators in the Colombian corporate sector, relying mainly on balance sheet and profitability analysis for a substantial number of firms. Foreign exchange exposure in 2007 is also analyzed for a smaller number of corporates. While the balance sheet and income statement analysis provides a good sense of the health of the corporate sector, it does not incorporate a forward-looking risk assessment from market participants. To address this, we also look at expected default frequencies (EDFs) under the Contingent Claims Approach (CCA), using Moody's KMV data.

3. The analysis suggests that the Colombian companies are overall in good financial health. The Colombian corporate sector is well capitalized, leverage is relatively low, and liquidity remains adequate. Profitability of the corporate sector has improved over the years, thanks mostly to efficiency gains. Analysis for a selected number of firms suggests that corporates in Colombia have low foreign exchange risk, although additional information on derivative positions could help provide a more complete assessment. EDF analysis supports the conclusions of the balance sheet analysis. Colombia has historically reported lower EDFs than the rest of the region; consequently, the implicit credit quality of Colombia's corporates compares well with others in the region.

We strongly recommend our audience to read the remaining of the pieces in the IMF website by clicking in the link below:

IMF 2009 Selected Issues Papers for Colombia