COLOMBIA: SECOND QUARTER PERFORMANCE BODES WELL

UNCLAS SECTION 01 OF 03 BOGOTA 008814 SIPDIS DEPT PLS PASS EXIM FOR MARCELO LEFLEUR E.O. 12958: N/A TAGS: ECON EFIN EPET PREL EFIN EFIN EPET PGOV PREL CO SUBJECT: COLOMBIA: SECOND QUARTER PERFORMANCE BODES WELL FOR 2005 UNCLASSIFIED SIPDIS PROG 8/22/05 CHG: MKDRUCKER ECON:ADONNALLY ECON:FFERNANDEZ, ECON:MFERGUSON, USAID:PDAVIS AMEMBASSY BOGOTA SECSTATE WASHDC E.O. 12958: N/A TAGS: ECON EFIN EPET PREL EFIN EFIN EPET PGOV PREL CO SUBJECT: Colombia: Second Quarter Performance Bodes Well for 2005 ¶1. Summary: The Colombian economy continues to grow steadily, fueled by increased exports, a strong peso, and a low, stable inflation rate. These factors in turn increased investor confidence leading to record levels for the stock exchange and a dramatic increase in private investment. While the government is optimistic about recent growth statistics, fiscal and budgetary reform legislation are still required to consolidate Colombia,s gains in the medium- to long-term. The long-term outlook is bright despite the question of Uribe,s reelection. End summary The Good News Keeps Coming ¶2. Colombia,s economic indicators continue their positive trajectory. Government estimates for GDP growth for 2005 have been increased to 4 percent from 3.8. Trade in the first semester grew 37 percent over last year, and Colombia is running a USD 1.7 billion USD trade surplus. Exports to the US have grown by 17 percent according to the United States International Trade Commission (USITC),led by exports under the ATPDEA program. Traditional exports have been helped by surging world prices, but non-traditional exports are also growing despite the peso,s revaluation (20 percent since early 2004). Foreign Direct Investment continues to grow, and is up 33 percent over last year, reaching USD 822 million in the first quarter. Unemployment has also dropped from 13.4 percent in December to 11.4 percent by June. ¶3. The Colombian government also reached agreement with the International Monetary Fund (IMF) on a new stand-by program and expects to graduate from the IMF program in November ¶2006. IMF Mission Chief for Colombia, Robert Rennhack, is optimistic about Colombia,s current fiscal and economic situation. During a meeting with Econoff and USAID Economist, Rennhack pointed to the growth of foreign investment in Colombia,s extractive sectors and higher than expected tax inflows as evidence of Colombia,s improved fiscal outlook. Rennhack was also pleased with Colombia,s surprisingly strong export numbers, and added that the strength of the Colombian peso relative to the dollar was likely more permanent than originally projected. Rennhack noted that fiscal reforms are needed to consolidate short-term gains in the macro economy, and said he hopes the GOC will maintain its clear and focused monetary policies in the run-up to the 2006 elections. ¶4. Colombia,s fiscal health also continues to improve. The fiscal deficit for 2004 was only 1.6 percent of GDP, and thanks to growing revenues and export revenues from oil, the GOC has lowered its deficit target for 2005 to 1.6 percent of GDP from 2.5 percent. 2Q05 deficit is currently 1.8 percent of GDP and is likely to total 2 to 2.2 percent at year-end. The GOC has also continued its process of lowering its overall debt burden from a high of 58 percent of GDP in 2003 to slightly over 50 percent of GDP. At the end of 2004 foreign currency debt equaled 41 percent of GDP and was two times annual exports. Moreover, the GOC has taken advantage of liquidity in Colombian capital markets to change the composition of the debt from approximately 60 percent foreign debt/40 percent domestic to 60 percent domestic/ 40 percent foreign debt. The GOC also prepaid USD 1.25 billion of IDB debt in early 2005 and is expecting to re-purchase another USD 700 million in debt in September 2005. The Central Bank is also studying the use of USD 2 billion in reserves to buy back additional debt. International reserves are at a record USD 15 billion, after the Central Bank purchased approximately USD 4 billion over the past 18 months in an attempt to slow the peso,s revaluation. The sound fiscal policy has lowered interest rates to historically low levels (6.93 percent). Inflation is also at historically low rates and the GOC expects to meet its 5 percent target this year. The Colombian stock market has also been a bright spot, growing 43.7 percent from January through August, making it the fourth most lucrative market in terms of net returns tracked by Bloomberg. Potential Problems on the Horizon -------------- ¶5. While the current trend is positive, there are some structural issues, which need to be addressed if Colombia,s economic recovery is to continue. Chief among these are budgetary, tax, and further pension reform. With Colombian elections taking place during the first quarter of 2006, analysts expect these reforms will be considered during the latter half of that year at the earliest. ¶6. Economists agree that the budgetary reform is a priority for Colombia. Colombia,s global competitiveness depends on freeing major portions of government spending from constitutionally mandated ear-marks, such as pensions and transfers. Additionally, focusing on tax reform will contribute to Colombia,s future business development and growth. According to Embassy data, Colombia has the highest income and corporate tax rates in Latin America (38.5 percent personal and corporate rate) ¶6. Colombia,s debt continues to be of concern to economists. Although the GOC is taking full advantage of the strong peso to swap its debt out of dollar- or Euro-denominations, concerns exist about a possible crowding-out effect of local debt (known as TES,s) tightening access to credit or placing inflationary pressure on the currency, despite historically low level inflation. Colombia,s debt is also currently sustainable as a result of high commodity prices, especially oil, coal and coffee. If the prices or export volume of these commodities rapidly decline, the government will have to tighten fiscal spending to meet its bottom line. Statistical Tables -------------- Real GDP Growth BILL CP BIL USD GDP Growth 1999 72,250 86.2 --- 2000 74,363 83.7 2.9 2001 75,393 81.7 1.5 2002 76,637 80.9 1.8 2003 79,820 83.8 3.9 2004 83,369 97.3 4.1 1Q05 21,261 25.7 3.6 Source: National Planning Department GDP Percentage Growth-Sector SECTOR 2002 2003 2004 IQ-2005 Agriculture 00.6 03.1 02.09 03.36 Mining 4.3 12.1 02.82 05.08 Utilities 03.0 03.3 02.91 00.41 Manufacturing 01.1 04.2 04.77 -00.99 Construction 12.7 12.4 10.65 10.60 Hotel/Rest. 01.4 05.1 05.62 07.27 Transport/Commun. 03.0 04.5 05.05 03.53 Financial 02.4 04.6 04.33 -02.69 Social Services 00.9 01.2 02.76 02.44 Bank Services -------------- 13.9 12.16 -14.15 Subtotal 01.8 03.9 03.82 03.09 Taxes w/o IVA -2.3 -1.9 05.96 10.99 GDP 01.8 03.9 03.96 03.61 Source: National Planning Department CPI Index Inflation 1998 16.7 1999 9.23 2000 8.75 2001 7.65 2002 6.99 2003 6.48 2004 5.50 2005 Jan 0.82 Feb 1.02 Mar 0.77 Apr 0.44 May 0.41 June 0.40 July 0.05 Aug 0.00 Source: Central Bank (Banco de la Repblica) Unemployment (Percent) 1997 12.0 1998 15.6 1999 18.1 2000 19.7 2001 13.8 2002 15.1 2003 13.1 2004 12.1 JAN 05 13.2 FEB 05 14.0 MAR 05 13.1 APR 05 12.0 MAY 05 12.5 JUN 05 11.4 Source: DANE (National Statistics Directorate) Imports Exports (USD million) 1998 14,635 10,822 1999 10,659 11,596 2000 11,800 12,700 2001 11,996 12,329 2002 11,897 11,975 2003 13,022 13,127 2004 15,626 16,729 1Q05 4,400 4,536 Source: ProExport (Colombian Trade Promotion Agency) ¶8. Now is the time for Colombia to take advantage of good economic conditions to get its financial house in order. Colombia,s President in the 2006 ) 2010 period will need to get Congressional support for fiscal and budgetary reforms. With those reforms and a benign international economic environment, Colombia can continue to grow at moderate rates indefinitely. With an improving security situation, Colombia,s growth rate could improve significantly. WOOD