COLOMBIA'S 2008 MACROECONOMIC OUTLOOK-AIMING FOR A

UNCLAS BOGOTA 000002 SIPDIS SENSITIVE SIPDIS WHA/EPSC FOR PMAIER; TREASURY FOR MEWENS E.O. 12958: N/A TAGS: ECON EFIN EINV AADP CO SUBJECT: COLOMBIA'S 2008 MACROECONOMIC OUTLOOK-AIMING FOR A SOFT LANDING REF: BOGOTA 7772 ¶1. (SBU) SUMMARY: As Colombia completes one of its best economic years in recent history with growth approaching seven percent, the outlook for 2008 foreshadows slower growth closer to the five percent average registered since 2003. Buoyed by an improving security situation, strong inflows of foreign direct investment and sound macroeconomic policy, unemployment continues to fall gradually while inflationary pressures remain moderate. Colombia's currency appreciation, high real interest rates and expanding current account deficit could threaten GOC efforts to engineer an economic "soft landing". END SUMMARY. 2007-Out with a Bang -------------- ¶2. (U) Although final data has not been announced, by virtually all accounts Colombia's private sector and public policymakers regard 2007 as one of the best economic years in recent memory. Continued improvements in the domestic security situation, high commodity prices, strong consumer demand from Venezuela, and record foreign direct investment (septel) fueled growth above 7 percent for much of the year. According to preliminary figures, foreign investment in 2007 reached USD 7.6 billion--Colombia's second highest total ever and almost 20 percent higher than in 2006. ¶3. Most experts predict that final year-end GDP growth will fall between 6.5 and 7 percent. Inflation spiked early in 2007, causing the GOC to miss its 4.5 percent target, but moderated in the second half of the year to settle near 6 percent. Unemployment remained stubbornly fixed for much of 2007, but according to preliminary data released December 28, dipped to close the year at 9.4 percent--the first single-digit rate since 1997. ¶4. (U) On the public sector side, Colombia's gross public sector debt fell to 42 percent of GDP in 2007 (from 52 percent in 2002) and the portion of debt denominated in foreign currency dropped to 30 percent (from 49 percent in 2002). Meanwhile, Colombia's international reserves increased over USD 5 billion to almost USD 21 billion, or the equivalent of more than nine months of total imports. The GOC took advantage of increased investor confidence from Colombia's improved security situation and its improving sovereign credit rating to refinance much of its debt during the year. Through restructuring debt at longer maturities and lower interest rates, the GOC expects to lower its overall debt service costs by 1 percent of GDP in 2008. 2008-In with Slower Growth -------------- ¶5. (U) Local analysts, citing a slowing U.S. and global economy, conservative monetary policy by Colombia's central bank, a weak U.S. dollar, and rising imports, predict the Colombian economy will expand at a slower pace in 2008. Recent polls of local financial institutions forecast an average growth rate of 5.5 percent, the Central Bank's benchmark interest rate remaining above 9 percent, and the Colombian peso depreciating moderately (5 percent) to around 2100 pesos per 1 USD. GOC Finance Minister Zuluaga, Central Bank Governor Uribe and Director of Public Credit Julio Torres have all emphasized the Colombian economy's overall strong fundamentals and pointed out the government's commitment to fostering long-term sustainable growth rather than periods of rapid expansion that risk overheating the economy. ¶6. (U) At a December 6 conference hosted by the Good Government Foundation, private sector experts including former Colombian Representative to the International Monetary Fund Guillermo Perry and National Association of Financial Institutions (ANIF) President Sergio Clavijo led credence to GOC assurances. Both Perry and Clavijo said that, without systemic changes in fiscal, labor, and tax policies, Colombia's maximum sustainable growth ceiling was around 5 percent. Clouds on the Horizon -------------- ¶7. (U) Fiscal constraints on public investment, rigid labor practices, and onerous tax rates will continue to restrain long-term growth. However, over the next year, most analysts point to the peso's appreciation, high interest rates, and a growing current account deficit fueled by rising imports, as the major threats to the Colombian economy. The peso's nearly 15 percent rise against the U.S. dollar in 2007 has crimped Colombian exports to the U.S., particularly in textiles, while making imports cheaper. Rising imports paired with the GOC's chronic fiscal deficit have raised concern that Colombia's current account deficit could reach destabilizing levels. High interest rates also worry the private sector, which has increasingly criticized GOC monetary policy for stifling business credit and investment with the region's second-highest real rates. Comment -------------- ¶8. (SBU) Despite some vulnerabilities, including sensitivity to a recession in the U.S., Colombia's economic outlook for 2008 remains solid. The consensus forecast growth rate of 5.5 percent tracks with GOC estimates included in the 2008 budget (ref B) and poverty reduction program and should not derail the Uribe Administration's plans to consolidate its economic gains and reduce poverty to 35 percent by 2010. Likewise, holding the benchmark interest rate near 9 percent in 2008 will bridle the Colombian economy, but should help the GOC meet its inflation target of 4.5 percent, moderate private sector demand for imports, and maintain the economy in a sustainable expansion. Nichols