(Bloomberg) -- The number of companies in Colombia filing for insolvency this year is on track to reach its highest level in a decade, heaping pressure on President Gustavo Petro to pull the country out of its economic doldrums.
The surge in financially distressed firms is being driven by a sharp contraction in the construction industry, one of the nation’s biggest employers, that’s partly a result of a housing subsidy overhaul by Petro’s own government. Economists worry that ripple effects from businesses shutting down will hold back growth in the broader economy.
As of the end of September, 1,230 companies excluding those in health and finance had filed for insolvency proceedings this year, according to Colombia’s main corporate regulator. That’s more than in 2021 and 2022, and it will likely top last year’s 1,551 petitions, which was the highest since at least 2015.
Residential construction started to pull back after housing subsidies were altered in April 2023 to prioritize the poor and rural regions instead of major cities. But when builders shelve plans for new apartments or other projects, they not only stop hiring but also cancel orders for cement, windows, flooring, appliances and more.
“It has a huge social impact,” said Luis Guillermo Vélez, who led the regulator — known as Superintendencia de Sociedades — between 2010 and 2014. “When you don’t have the flow of money coming in, the weakest, most indebted companies fail first. But they won’t be the last.”
But even with subsidies, few of the vulnerable families Petro’s government hoped to help had the means to take on a bank loan. Smaller towns, meanwhile, had neither sufficient demand for large housing projects nor the public services infrastructure to support them. And many middle class families that would have been able to afford to buy a home with the help of a state stipend were suddenly excluded from the program.
As a result, around 50,000 subsidies from the “Mi Casa Ya” program were granted in 2023 — a drop of more than 20% from the previous year, according to Colombia’s comptroller general.
Builders, which usually take on large loans to finance projects, were already grappling with high interest rates in Colombia. But changes to the housing subsidies sapped demand, leaving many unable to meet financing thresholds needed to start construction, said Felipe Camacho, a partner at Bogotá-based investment bank Inverlink SA.
Billy Escobar, the current head of SuperSociedades, said the construction sector has taken longer to rebound since the pandemic, when most of Colombia’s existing insolvency processes started. Homebuilders require permits and land licenses, unlike other industries such as restaurants or hotels, he added.
Petro’s government made changes to existing housing programs in order to support the most vulnerable, and as a result more than 80% of subsidies were allocated to households in extreme poverty, the housing ministry said in response to a request for comment. It also pointed to high interest rates and construction costs as reasons for the decline in homebuilding.
While some of the changes to the subsidy program were reversed this year, with the government acknowledging it wasn’t stimulating construction in big cities, it continues to prioritize the most vulnerable and the consequences are still being felt.
Some 67 subsidized housing projects were scrapped nationwide in the 12 months through June, the most since at least 2016, according to real estate consultancy La Galería Inmobiliaria. The number of cancellations jumps to 203 when unsubsidized developments are included.
Meanwhile, total sales last year plunged by about 50% to the lowest level since at least 2009, said Alberto Isaza, La Galería Inmobiliaria’s co-founder. Given planning usually takes around 18 months, that drop affects projects set to be built in 2025, he added.
Juan Paulo MacAllister, who manages the development unit at IC Constructora SAS, said the builder has halted plans to expand existing developments and has shelved “several” other new projects. He acknowledged those decisions reverberate widely. “If I’m not building, I’m not buying” material or hiring workers, MacAllister said.
While Banco Davivienda SA expects overall construction to grow 2.4% this year, it will be driven by a 14% increase in public works. The lender sees housing and non-residential construction falling 3.3% in 2024 and contracting again in 2025.
A combined 127,000 jobs in the construction and manufacturing sectors were lost over the past twelve months, according to Colombia’s statistics agency. And it’s the links between those sectors and others that cause a domino effect, said José Ignacio López, president of economic think tank ANIF in Bogotá.
It’s not just that smaller companies “face a paralysis because of weak demand,” he said. “It’s really that there’s a short circuit.”
More trouble may be brewing in the near term. The Colombian construction chamber, known as Camacol, is warning that as the Petro government looks to cut spending, Mi Casa Ya subsidies will again be reduced by almost 60% from the 50,000 originally planned.
The tumult is nonetheless creating an opportunity for other investors. Escobar, the corporate watchdog, said he’s been approached by several buyout firms interested mostly in construction, infrastructure, and health.
Stephen Marks and his partners at Emmersion Capital built an initial pipeline of distressed Colombia assets after they noticed the growing number of struggling companies and the lack of liquidity available from local banks, which are trying to cope with a surge in past-due loans. “It’s almost as if a perfect storm has emerged recently that even didn’t exist last year,” Marks said.
For Vélez, the former regulator who now advises distressed companies, stagnant economic growth and a plunge in private investment is driving the surge in insolvencies. Gross capital formation finally turned positive in the second quarter of this year, eking out tepid 1.7% growth, after five quarters of steep contraction.
“If you lack confidence, you can have money but you won’t invest it,” Vélez said. “If there’s no private investment, what will end up happening is that more jobs will be lost.”
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