Emerging Markets: An Analysis of ’s Investing Environment

Brittany Finkelstein

Senior Undergraduate Honors Thesis

Department: Finance, Insurance, and Real Estate

Faculty Advisor: Dr. Andy Naranjo

University of Florida

Date: April 23, 2014 Table of Contents Introduction ...... 3 Market Conditions ...... 4 Gross Domestic Product Growth ...... 4 Interest Rates ...... 5 Inflation Rates ...... 6 Risk ...... 8 Political risk ...... 8 Economic risk ...... 10 Intellectual Property Rights Risk ...... 12 Structure of Capital Markets ...... 13 Development ...... 13 Equity Markets ...... 13 Derivative Security Markets ...... 15 Organization ...... 16 Involved Parties ...... 16 Transactional Systems ...... 17 Government Regulation ...... 18 Domestic Firms ...... 18 Foreign Investors ...... 20 Taxation on Foreign Investors ...... 22 Financial Market Performance ...... 23 Equity ...... 23 Debt ...... 26 Investment Opportunities ...... 30 Types of Investment ...... 30 Private Equity ...... 30 Foreign Direct Investment ...... 31 Evaluation of Investment in Specific Industries and Sectors ...... 32 Conclusion ...... 35 References ...... 37

Introduction

In the most recent decades, international investors have been looking to emerging markets for the larger returns rewarded to them for taking on a higher degree of risk. The emerging markets of interest have been grouped and coined, for example the BRIC

(Brazil, Russia, India, and China) countries. The newest group of countries have been coined the CIVETS countries, Colombia being one of them. In comparison to Brazil, investors have put little focus on Colombia possibly due to the perceived risks of investing in the country as well as the country’s infamous reputation for the trafficking of narcotics.

In recovering from the “lost decade” for economic development that impacted Latin

America in the 1980’s (NationMaster, 2013), Colombia has maintained a high level of growth despite the falling growth rates experienced by other countries in the region, such as Brazil (Bocanegra, 2013). In addition to favorable market conditions, the country has been implementing new initiatives to further develop the structure of the capital markets and adjust the government regulations for investments to encourage both domestic and foreign investors. Furthermore, in comparison to neighboring countries in the region, both Colombia’s equity and debt markets have performed well. As a result of the country’s progress over the past few decades, more investment opportunities have either become newly available or more attractive then they previously were. This thesis further analyzes and evaluates the investing environment in Colombia with an in-depth look at the market conditions, the structure of the capital markets, the performance of the country’s financial markets, and the investment opportunities available. Market Conditions

To better understand investment in Colombia, an investor needs to be familiar with the conditions of the country overall. An individual investor should understand the Gross

Domestic Product (GDP) growth, interest rate, inflation rate, and risk environments.

More specifically, in terms of risk, there are the different aspects that consist of political risk, economic risk, and intellectual property rights risk.

Gross Domestic Product Growth

Through 2017, Colombia’s GDP growth is expected to float between 4% and 4.5%. In

2007, the rate was 6.9%, but it fell to 1.7% in 2009. However, GDP has recuperated and has maintained at least a 4.0% rate since 2010, the mining sector being the underlying driving factor behind this strong economic growth (MarketLine, 2013). Based on historical GDP percentage growth from 1961 to 2012, the mean growth rate is about

4.28% with a standard deviation of 2.2%. This demonstrates that, statistically, Colombia will only have negative GDP growth less than 5% of the time (World