INTERNATIONAL FINANCIAL TURMOIL ROILS COLOMBIAN

UNCLAS BOGOTA 000273 SIPDIS SENSITIVE SIPDIS WHA/EPSC FOR PMAIER; EEB/OMA:ASIROTIC; TREASURY FOR MEWENS E.O. 12958: N/A TAGS: ECON EFIN PGOV CO SUBJECT: INTERNATIONAL FINANCIAL TURMOIL ROILS COLOMBIAN MARKET REF: BOGOTA 2 ¶1. (SBU) SUMMARY: Amid recent turmoil in global markets and fears of a recession in the United States, the Colombian stock market suffered its fourth-worst drop ever on January ¶21. Despite regaining some ground on January 22, the market remains in negative territory for 2008 and concern has grown in the Colombian private sector that a U.S. economic downturn could slow Colombia's economic expansion (reftel). While most analysts believe Colombia is well-positioned to weather turbulence in international markets, many local investors worry the Banco de la Republica will keep Colombia's interest rates high, putting further short-term negative pressure on the Colombian economy. END SUMMARY. ¶2. (SBU) Colombia's stock index (IGBC) fell 7.65 percent after all listed stocks, including index powerhouse Ecopetrol, declined January 21. The Colombian market rebounded moderately following the Federal Reserve's January 22 three-quarter point interest rate cut, but remains down over 15 percent for 2008. Since the beginning of the year fears have grown among the local private sector that a U.S. recession could impede Colombia's 2008 growth outlook of 5.3 percent. ¶3. (SBU) Colombia's close economic relationship with the U.S.--the U.S. remains Colombia's largest trading partner and source of foreign direct investment--amplifies the impact of economic downturns in the U.S. on the Colombian economy. Exports to the U.S. slowed in 2007 while imports increased due to the Colombian Peso's 11 percent appreciation against the dollar. The currency appreciation not only hurt key Colombian export sectors such as textiles and cut flowers, but the consequent shift in trade has increased pressure on Colombia's current account deficit. Colombian exporters increasingly fear that a recession in the U.S. could exacerbate the slowdown in demand and worry the Banco de la Republica will maintain high interest rates (9.5 percent) to control inflation while other central banks cut rates to stimulate growth, thereby driving the Colombian peso still higher against the dollar and further harming export competitiveness. ¶4. (SBU) According to German Verdugo, Economic Research Director for the local brokerage firm Correval S.A., in the last 40 years when the U.S. economy has grown less than one percent per annum, the Colombian economy shed as much as two percent off GDP growth in the same year. However, Verdugo said that, due strong global demand for Colombian hydrocarbon and mineral commodities at the moment, he expected the negative effects of a potential U.S. recession to register less than in previous cases. Finance Ministry Public Credit Director Julio Torres similarly noted Colombia's strong growth fundamentals, rising international reserves, and improving debt picture as evidence Colombia can absorb this round of international market turmoil. ¶5. (SBU) Conversely, Anwar Rodriguez, Economic Researcher at Colombia's prominent economic thinktank Fedesarrollo, said the deceleration of the U.S. economy has traditionally lowered demand for Colombian products in the U.S. and slowed inflows of investment capital. Rodriguez told us that, if turmoil in international markets continued to persist or the U.S. slipped into recession, the impact on the investment side may be more acute because of capital controls the GOC instituted in May 2007 to bridle speculative capital inflows. Rodriguez believes that the controls could dissuade foreign investors from parking capital in Colombia just when the economy needs it the most. Brownfield