BusinessWeek reporter Roben Farzad recently traveled to Columbia to determine whether or not the “third tier” (globally speaking) economy there was ready for mainstream foreign direct investment and an “equity culture”. From an investment perspective, Columbia is the next frontier after the BRIC countries (Brazil, Russia, India, China). Its stock market has increased 14-fold since 2001 with a still modest total capitalization of $59 billion.

The one-time murder capital of the world and former home to infamous drug cartel Pablo Escobar, Medellín (pop 2.4mm) is reemerging as the commercial hub of the nation. The president, Alvaro Uribe, unlike most South American leftist leaders, sits right of center and has an approval rating above 60% in his now second term in office. His government is very much interested in attracting growth through foreign investment and understands that this can only be achieved by driving the paramilitary drug lords out of the urban commercial centers, which he’s made good progress at so far.

The U.S. has incentive to stay on good terms with and help Colombia grow as relations with Venezuela and Equador continue to deteriorate. The U.S. has sent $5 billion in aid since 2000 - the 4th largest financial aid recipient of the U.S.

The Colombian stock exchange, called Bolsa de Valores, is merely 12 people sitting in front of trading screen in an office building in Bogotá’s financial district. The exchange closes at 1PM because all business that needs to be transacted for the day is typically done by then. With such a limited number of buyers and sellers in their emerging market, volatility is the norm. In 2005 the Bolsa was up 128% (second best in the world that year). It took a 45% dip last year when many emerging markets were hit - second worst loss in the world. It is down 5% in 2007. Bolsa-listed stocks can only be bought with pesos and there are no Colombian mutual funds available to foreign investors.

Some upcoming public offerings on the Bolsa include Procafecol, a local coffee producer (Juan Valdez), and $4 billion state oil company Ecopetrol, which will likely get listed on the NYX. The only Colombian stock currently listed on the NYX is Bancolombia, whose shares are up 20-fold in the last 5 years.

U.S. investment banks have been buying up companies in Colombia and Colombian companies are slowly starting to export their products to the U.S. to grow faster. The two countries are on the verge of a free-trade agreement, something president Uribe is pushing hard for.

Although murders and other violence is dropping, infrastructure in Colombia continues to degrade and is in need of billions in investment. Many investors are waiting for that to happen to open the floodgates for other markets inside the country. The government is hesitant to break from its old-world traditions of owning all infrastructure, though. They are having trouble raising bond money because they can only deliver 6% returns instead of the 20% they yielded 10 years ago. Critics say there is plenty of private money waiting to fund the infrastructure projects if the government could just adopt an equity frame of mind instead.

The lengthy article has some great descriptions of his personal interactions in Colombia and some more detail on its violent history and how much better it is now. Extreme Investing: Inside Colombia