THE BLOG
02/05/2014 12:56 EST | Updated 04/07/2014 05:59 EDT

Why Colombia's is the Next Economy to Watch

Remember early 2008? Growth was great, resources looked scarce, and commodity prices were soaring. Scan the banter, and it almost seemed as if there were no new frontiers to tackle in the world economy. That worry actually spurred a search that ignited interest in new prospects. Colombia is a great example. It has advanced cities, a strong financial system and a growing consumer class, but it also has vast, untapped resources in very underdeveloped regions. As the world returns to growth, how is this 'new frontier' market likely to do?

Prior to the global crisis, Colombia's growth numbers were impressive. From 2004-2007, economic activity increased at an average pace just shy of 6 per cent. It paused in 2008, but quickly resumed a decent clip, notching a 6.6 per cent gain in 2011, and back-to-back 4 per cent gains in the past two years. Real GDP now stands 24 per cent above the 2008 level, an enviable record. Colombia is already very much on the move, suggesting that higher world growth will only enhance its prospects.

The potential is there, but securing future growth isn't guaranteed. Currently, the country's infra-structure is constraining growth, ranking 92nd in the world, according to the Global Competitiveness Index. Evidence suggests that it is 5 times more costly to transport goods inside the country than trans-ocean Asia-Colombia freight rates. Aware of this dilemma, the government has embarked on an aggressive, $27 billion infrastructure spending binge, awarding 40 concessions in a two-year time-frame. This activity is expected to boost near-term annual GDP growth by 1.5 per cent.

Canada is already quite active in Colombia. Total merchandise exports to Colombia rose on average by 8.4 per cent annually from 2000 to 2012. However, the pace was actually weighed down by the primary goods sector. Higher-valued exports actually increased by 24 per cent annually in the same timeframe, rising from just 5 per cent of total merchandise exports in 2000 to 28 per cent by 2012. Exports suffered a setback in 2013, but it is expected to be temporary. Trade between Canada and Colombia is roughly balanced. Imports are concentrated in agriculture, coal and oil and gas products.

Canadian investors are well-known in Colombia, particularly in the oil and gas sector. The crisis proved to be a setback to impressive investment activity, but it has since rebounded. Canadian direct investment in Colombia is now over 70 per cent higher than at the 2008 peak, at just under $1.8 billion. Thanks to the Canada-Colombia Free Trade Agreement, Canada's trade and investment activities in Colombia are expected to flourish in the upcoming global economic cycle.

Operating in Colombia is not without its risks. Institutions are weak, in particular the regulatory process. Environmental and social permits can take up to 18 months to secure, and mining and oil and gas exploration activity continues to be stalled. Ongoing security issues and corruption are also key concerns, and social conflict is quickly rising to the top among business-inhibiting concerns, with demonstrations nipping up to 0.5 per cent away from annual GDP growth.

Juxtaposed against the opportunities, these significant concerns can be daunting. However, risk-mitigating solutions are readily available. Given the huge potential and natural market advantages for Canadian firms, this week in Bogotá EDC officially opened its 18th international office in order to serve the needs of current and future Canadian operations in this dynamic market.

The bottom line? In a world of shrinking frontiers, Colombia presents a great opportunity for Canadian firms in a broad array of industries. With appropriate risk coverage, savvy traders and investors can do very well in the coming growth cycle in this very dynamic market.

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