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Alvaro Uribe, President of Colombia, has always been a preacher of foreign investment as a fundamental economic policy that would help fuel the country’s growth.

But there is a major reason he wants to promote Colombia as a foreign investment destination so passionately.  The Colombian economy shrank 0.5% during the second quarter of this year, pushed down by the industrial & retail sectors, which are, the biggest employers in the domestic economy. It was the third straight quarter in which the Colombian economy has fallen, the longest slump in a decade.

In order to spur growth in Latin America’s fifth-biggest economy, the government has decided to spend over $28.5 billion in infrastructure projects, whereas the Central Bank has cut rates from a record high of 10% in November 2008 to a record low of 4% in September this year.

Where the Money is Flowing to

To date, foreign investment has mainly focused on the oil, mining & manufacturing industries, with foreign investment in the oil sector exploding during the last few years. From small independent oil & gas companies such Pacific Rubiales, Benchmark Energy & West Canyon Energy to big multinationals such as Exxon (XOM)  British Petroleum (BP).

Oil sector investment has risen eight fold since 2002, last year the inflow of money into the sector was in the region of $3.5 Bn to finance projects in the Magdalena Medio and llano basins. The latter has barely been explored and it is the one that would seem to offer the biggest potential going forward.

Foreign investment in the mining and quarrying sector has been propelled for the recently discovered gold &coal fields in different regions of the country. FDI in this sector has grown 29% based on year-to-date figures. Furthermore, Colombia enjoys the largest coal reserves in Latin America. It has over 17 billion tons in coal reserves, while annual production is only 70 million tons, less than 1% of measured reserves.

The financial sector has recently been targeted by major financial services companies such as Citigroup  & HSBC which are currently offering first floor services, whilst Fitch Rating Services recently bought a major Colombian rating agency.

The Colombian stock market has also recently entered into an agreement with the Peruvian and Chilean stock markets to study the possibility of markets’ integration, widening the opportunities for foreign investors & speculators to have some exposure in the region with most potential in Latin-America.

Finally, the retail sector has seen heavy inflows from multinationals such as France’s Casino and Carrefour and Chile’s Fallabella that took advantage of the expansion in the internal demand driven by the strongest growth of the economy in more than four decades. Retail has grown by a factor of 10 since 2002

Where are the Opportunities

Sadly Colombia has suffered in the recent past due to security issues, with most of the required investment in the biggest projects being held back by the preceding governments, so opportunities are virtually endless in various sectors.

The llanos basin is a much underexplored & underdeveloped area that accounts for over 40% of Colombian territory. Investment in oil, agricultural & infrastructure sectors will expand in the years to come as new oil discoveries & bio-fuel projects stimulate the government intervention in infrastructure.

Because of anti-cyclical policy and decades of long decay, it is expected that infrastructure investment will boom in the coming years. Recently, the government announced over $2.8 Bn in spending for highway projects, just for 2009 that are to be financed by selling shares of the national petroleum company, Ecopetrol.

Tourism & construction should also benefit as the recognition of Colombia as a major tourist destination in Latin-America based on its tropical weather & incredible bio-diversity. Cities like Cartagena, Santa Marta and Barranquilla have been targeted for investments in hotel, condo and golf projects. The coffee region was categorized by The New York Times as one of the most attractive regions in the world.

Many thanks to Luis Rodriguez of E-Bursatil for this guest post