Identifier
Created
Classification
Origin
05BOGOTA221
2005-01-07 21:29:00
CONFIDENTIAL
Embassy Bogota
Cable title:  

COLOMBIA'S ECONOMY IN 2004 LOOKED STRONG, BUT...

Tags:  ECON ETRD EINV EAGR PGOV CO 
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C O N F I D E N T I A L SECTION 01 OF 02 BOGOTA 000221 

SIPDIS

STATE PLS PASS USTR

E.O. 12958: DECL: 01/05/2015
TAGS: ECON ETRD EINV EAGR PGOV CO
SUBJECT: COLOMBIA'S ECONOMY IN 2004 LOOKED STRONG, BUT...

Classified By: Ambassador William B. Wood, reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 BOGOTA 000221

SIPDIS

STATE PLS PASS USTR

E.O. 12958: DECL: 01/05/2015
TAGS: ECON ETRD EINV EAGR PGOV CO
SUBJECT: COLOMBIA'S ECONOMY IN 2004 LOOKED STRONG, BUT...

Classified By: Ambassador William B. Wood, reasons 1.4 (b) and (d)


1. (C) Summary: While the Colombian economy posted
positive results in 2004, the sustainability of such
performance is still in question. On the macroeconomic side,
growth reached almost 4 percent; IMF targets for the budget
deficit, inflation, and reserves were either met or exceeded;
public indebtedness declined to less than 50 percent of GDP;
exports and imports both increased over 15 percent; foreign
direct investment increased over 70 percent; the stock market
surged forward buoyed by investor confidence; and
unemployment, while still in double digits, declined. Behind
the good news, however, lurked structural problems that
threaten the longevity of the recent recovery: basic "guns
vs. butter" pressures on spending; an inability to address
key pension and fiscal reforms; failure to position the
country for optimum gains under an FTA; and the government's
susceptibility to special interests, be it exporters
clamoring for protection from exchange risk or industries
unwilling to face competition under an FTA. While there are
signs that the Government wants to take the steps necessary
to overcome these problems, there are also signs that it may
not be able to completely resist sectoral pressures. End
Summary.

The Positive Numbers


2. (U) The Colombian economy continued its recovery in

2004. Growth will be somewhere in the 3.5-3.8 percent range,
just shy of the projected 4 percent and in keeping with
2003's 3.7 percent growth. The GOC met the 2.5 percent GDP
target for the budget deficit (thanks in large part to record
oil revenues) and inflation, at 5.5 percent, was the lowest
in 49 years and met the IMF program target. The peso
appreciated 12 percent in 2004 in real terms, allowing the
Central Bank to increase reserves 30 percent to USD 13
billion, but also generating considerable concern among
exporters. The peso's appreciation also helped total
indebtedness drop to less than 50 percent of GDP, and allowed

the GOC to switch the composition of the debt more heavily
towards domestic sources. Despite the appreciation, exports
grew over 20 percent in 2004, outstripping import growth of
15 percent. Export growth was greatly aided by price
increases for coffee, oil and coal that helped offset the
effects of the peso's appreciation. Non-traditional exports
also posted their largest increase since 1999.

3. (U) Investor confidence, both foreign and domestic, also
increased. The stock market grew by almost 50 percent for a
second straight year - the second best performance of any
world market monitored by Bloomberg. Foreign direct
investment increased over 70 percent from 2003, led mostly by
increased investment in extractive industries. Large
multinationals, such as ExxonMobil and Telefonica returned to
Colombia and regional investors from Brazil bought up the
national airline and a local steel mill.


4. (SBU) While at 12.5 percent, unemployment is down from 18
percent when President Uribe took power, many see its
persistence as the single biggest threat to President Uribe's
popularity. While the numbers at the end of the year show
improvement, the year has seen spikes as high as 17 percent
and the average at 14 percent. Central Bank economists note
that unemployment is a lagging indicator, but after 2 years
of strong positive growth, the government is still waiting
for a decline to single digit levels.

The Underlying Dark Clouds


5. (C) The Uribe government faces structural issues that
need to be addressed if the current economic recovery is to
yield sustainable results. These include a need to
rationalize spending and tax collection and shoring up the
social security system (whose trust fund ran out in 2004).
Government attempts to fix the problem via law in 2002 and
public referendum in 2003 either failed or were watered down.
Attempts in 2004 to pass these reforms also failed. The
result, the GOC has cut back on some spending, but has not
been able to rationalize its collections (which at 20 percent
of GDP are already higher than the Latin American average).
Colombia's tax rate, at 38.5 percent is high, as is its VAT
at 16 percent. The tax base has also grown from 400,000 to 1
million since 2002 thanks to stopgap reforms, but a more
systemic reform has been impossible. According to central
bank officials, the fiscal situation could be summed up
easily: constitutionally mandated transfers to the regions
take up 5 percent of GDP; another 5 percent of GDP goes to
security; 5 percent for social security and pensions; and 5
percent for debt payment. Thus, the government runs out of
collections (20 percent of GDP) before it can even pay for
its basic operations or key social programs.


6. (C) Under the Uribe Administration, budget items for
security have increased 46 percent. Although Congress wants
more money for social programs, Uribe plans to continue
funding security items first, then social programs. Uribe,s
policy is bent on fixing the ship, not just plugging holes.
2004 began with Colombian security forces stationed in every
municipality throughout Colombia, an environment not seen in
over 40 years. According to the the Colombian Vice
President's Human Rights Office, 2004 ended with a 41 percent
decrease in displacements of Colombian citizens. Key
indicators, such as kidnappings and murders have also
decreased by over 50 percent since Uribe came to power.
The security mission is working.


7. (C) The FTA with the US will offer Colombia important
new opportunities, but the GOC's inability to resist sectoral
pressures and get its economy ready for greater competition
could reduce these benefits. The GOC began the FTA
negotiations thinking it could use narco-terrorism to seek
special treatment. The Colombians tried to raise this
argument at the highest levels, but failed to win support for
it. Subsequently, during the sixth round of FTA
negotiations, the GOC took a positive step and began to
negotiate, but we are still far from closure on key sectors
such as intellectual property and agriculture. Both of these
sectors are fearful that an open market will fatally damage
their businesses.


8. The GOC is facing a difficult challenge. While President
Uribe's commitment to fully take advantage of an FTA is
unquestioned, the steps his government needs to take require
goring many of the oxen of his key supporters. The GOC
recognizes the need to modernize both its agencies and
Colombia's economy and infrastructure to prepare for an FTA.
To that end, they have begun to focus on what they call the
"internal agenda"- a series of initiatives designed to
increase Colombia's competitiveness. To date, however, there
have been no concrete proposals put forward, a testament to
the difficulty of balancing the many sectoral interests
involved. Many of these changes require legislation and
President Uribe has no political party to exert discipline on
the Congressional ranks. President Uribe must also change a
protectionist mind-set not only in the business sector but in
much of the government's bureaucracy.


9. (C) The recent GOC decision to provide subsidies to
flower and banana exporters to counter the negative effects
of the peso's 14 percent depreciation reflects the
government's susceptibility to internal pressure. A
mechanism to protect other politically powerful agricultural
groups is also under design according to the Minister of
Agriculture. These efforts have drawn criticism for favoring
a select few rather than the many, but the GOC continues to
believe in such support mechanisms.
WOOD