COLOMBIAN ECONOMIC OUTLOOK: WHAT A DIFFERENCE A

UNCLAS BOGOTA 000007

SIPDIS
SENSITIVE

WHA/EPSC FOR MROONEY; EEB/OMA ASIROTIC; TREASURY FOR AJEWELL

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CO
SUBJECT: COLOMBIAN ECONOMIC OUTLOOK: WHAT A DIFFERENCE A
YEAR MAKES

REF: A. 08 STATE 134459

B. 08 BOGOTA 3076

C. 08 BOGOTA 3289

D. 08 BOGOTA 4263


1. SUMMARY. After four years of averaging over 5 percent
growth capped by a record 7.5 percent expansion in 2007,
Colombia's economy slowed significantly in 2008 under the
combined pressure of currency appreciation and high interest
rates in the first semester, and the cratering of commodity
prices, international credit and global demand in the second.
Turmoil in the economies of Colombia's two largest trade
partners, the United States and Venezuela, have further
darkened the outlook for 2009 with current growth estimates
ranging from 1-3 percent and worries of recession growing.
As a result, the GOC has postponed some 2009 administrative
outlays, accelerated infrastructure spending, and sought out
new trade and investment flows. Rising pressure to free up
monetary policy has also led the Central Bank to cut its
benchmark rate for the first time in almost three years.
Many local analysts say, however, more interest rate cuts and
greater emphasis on diversification and competitiveness will
be necessary to return Colombia's economy to high sustained
growth in the long term. END SUMMARY.

2008: Good Times Winding Down
--------------


2. (U) While the GOC began 2008 aiming for a soft landing of
5 percent GDP growth, the Colombian economy steadily
decelerated over the year along with GOC forecasts. After
reducing the growth forecast to 4 percent in October, on
December 22, Finance Minister Zuluaga announced that the GOC
was lowering its final 2008 GDP growth estimate to 3.5
percent. At the same time, according to Colombia's National
Statistics Department (DANE),unemployment rose to 10.8
percent in November compared to 9.4 percent in November 2007.
The increase represents 2.1 million Colombians unable to
find work (236,000 more than last year) and a significant
step backwards from the Uribe Administration's public goal to
maintain unemployment in the single digits. The GOC,
likewise, missed its inflation target of 4 percent with DANE
announcing January 2 final 2008 inflation of 7.7 percent. On
the trade side, Colombia ended the year with an anticipated
trade deficit of USD 1.1 billion after the strong Colombian
peso fueled record imports projected to total USD 42.9
billion--a 40 percent increase over 2007. At the same time,
high prices for oil, coal and other commodities boosted
Colombia's export revenues to USD 41.8 billion, according to
preliminary DANE calculations, but export volumes declined
and are expected to fall further in 2009 amid slackening
world demand;


3. (SBU) Minister Zuluaga and other GOC officials publicly
attribute the slowdown to the global downturn, citing
tightened international credit and reduced demand for
Colombian commodities in the U.S., Europe and Asia. Local
analysts from Colombia's largest foreign bank BBVA, Citibank,
and the National Association of Industries (ANDI),however,
say blaming the global crisis oversimplifies Colombia's
slowdown, which they date back to interest rate and capital
control decisions (ref B) in late 2007 and the negative trade
impact of the peso's appreciation (ref C). Rather, they have
told us the slowdown simply became more evident following the
broader downturn in developed economies in 2008. Many
observers also blame the high cost of food and fuel, two
extended strikes in the transport sector, labor stoppages in
the mining sector, and the slow pace of public investment in
the first year of new municipal and departmental governments,
as further bridles on 2008 performance.

Gloomy 2009 Ahead
--------------


4. (SBU) Based on the weak 2008 exit, the GOC has lowered its
2009 GDP public forecast to 3 percent, citing decreased
consumer confidence, lower anticipated public revenues from
mining, and higher import costs due to the weakening peso.
Most local financial institutions and analysts, such as
Fedesarrollo and ANDI, estimate growth closer to 2 percent
while Central Bank President Juan Dario Uribe has warned
growth could fall to 1 percent. In a private meeting with us
on December 17, Minister Zuluaga said he expected 2009 growth

to fall between 1 and 2 percent and identified increased
public investment as key to keeping the economy out of
recession. Zuluaga admitted that GOC predictions of 2008
soft landing did not foresee the sudden decline in commodity
prices, the tightening of international credit markets, or
decrease in external demand, and policymakers were now in
catch-up mode.


5. (SBU) Although a December poll of leading Colombian
economists concluded that inflation would cool to 5.3 percent
in 2009, Fedesarrollo estimates that unemployment could reach
13 percent in 2009 as the industrial sector contracts
slightly (0.3 percent) and export revenues fall to as low as
USD 32 billion based on declining sales to U.S. and Venezuela
and lower commodity prices. Representatives of three of
Colombia's largest export-driven employment sectors, cut
flowers, coffee, and textiles, told us they are expecting
decreased demand for their products in the U.S. and Europe,
but expect the recent depreciation of the peso to help offset
declines in demand. The three sectors have not yet
experienced significant reductions in employment. However,
most analysts anticipate decreases in remittances from
expatriate Colombians in 2009, lower foreign direct
investment (FDI) from overstretched multinationals, and
mounting consumer losses (estimated to reach as high as USD 1
billion) from the collapse of numerous illegal pyramid
schemes (ref D) to further exacerbate Colombia's economic
ailments.

Belt-tightening Underway
--------------


6. (SBU) Doubts are also growing that Colombia can maintain
its fiscal deficit targets, already straining under competing
security and social spending demands. Minister Zuluaga told
us oil prices need to stabilize at USD 60 per barrel to avoid
significant revenue declines from lower oil royalties and
taxes. As a preemptive step, the GOC has already delayed USD
1.4 billion in 2009 spending, or 2.2 percent of the USD 67
billion budget, to avoid ballooning the fiscal deficit in the
slowing economy. The GOC plans to limit most of the
"postponed" spending to administrative costs such as official
travel, communications, new hiring, etc. Minister Zuluaga
said spending on social programs, infrastructure, and
security will not be affected. Nevertheless, military,
police and counternarcotics officials have told Embassy
MilGroup and NAS contacts that they expect tighter 2009
budgets and slower disbursements. The GOC will reevaluate
whether to make the cuts permanent in mid-2009 after more
revenue data is available. In the meantime, the budget, which
allocates USD 35 billion to operations, USD 18 billion to
debt service and USD 14 billion to investment, still
represents a 13 percent increase from 2008.


7. (SBU) Besides budget cuts, Zuluaga said the GOC will
complete the sale of state-owned electrical generator Isagen
to help replace anticipated revenue shortfalls. In October
GOC also arranged USD 2.4 billion in supplemental financing
from the International Monetary Fund (IMF) and World Bank.
Nevertheless, the GOC expects the recent declines Colombia's
national debt (USD 45.8 billion) as a percentage of GDP to
reverse from 21.7 percent in 2008 to 22.2 percent in 2009 due
to more expensive financing costs. As a broader sign of
belt-tightening, the GOC raised the 2009 minimum wage by only
7.7 percent (staying constant with inflation),despite
labor's request for a 12.5 percent increase and DANE's own
calculation that the cost of living for lowest income
Colombians rose 8.8 percent in 2008.

How Do We Get Out of this Mess?
--------------


8. (SBU) According to Gallup, 50 percent of polled Colombians
now say the economy is their top concern, up from 20 percent
in May and more than double the 22 percent who cite public
security. Meanwhile, President Uribe's popularity has slid
from 75 percent in October to 70 percent in December,
according to the same polling, and tension has grown in the
GOC economic team after the resignations of Senior Advisor
Cecelia Alvarez and Financial Superintendent Cesar Prado in
the wake of the pyramid scandals, as well as the departure of
long-time Tax Director Oscar Franco and rumors about Minister
Zuluaga's potential exit,



9. (SBU) Amid this backdrop, GOC policymakers are busily
searching for levers to stimulate the economy, but declining
revenues, a lack of available international finance, and a
large existing national debt burden leave little room for
short-term fiscal stimulus. Most observers see monetary
policy as the most practical recession-fighting tool left to
the GOC. To this end, the Central Bank Board unanimously
agreed December 19 to cut its benchmark interest rate from 10
percent to 9.5 percent. The cut represents the first rate
reduction since 2006, and follows a growing chorus, led by
President Uribe, to loosen monetary policy in an effort to
head off recession. Ricardo Duran, Chief Analyst at
brokerage firm Corredores Asociados, told us that the
December 19 rate reduction was welcome, but must be followed
by several more cuts to at least 8 percent to stave off
recession.


10. (SBU) GOC officials have also announced plans to
accelerate already-planned infrastructure investment, with
USD 4.5 billion appropriated for the sector in 2009. GOC
officials hope rising oil production, from 511,000 barrels
per day (bpd) to 623,000 bpd over the last year, a profitable
domestic banking sector, the removal of capital controls on
foreign investment, USD 8 billion in FDI inflows in the first
9 months of 2008, high international reserves (USD 23.6
billion),and the stabilization of the Colombian peso will
further cushion the Colombian economy from the worst effects
of the global financial turmoil.


11. (SBU) ANDI President Luis Carlos Villegas told us that
for Colombia to recover to the sustainable growth levels
above 5 percent necessary for lasting poverty reduction,
Colombia must innovate, look to new export markets (including
Canada, Asia, and Central America),and seek new FDI sources
such as China and the Middle East. Villegas recounted
accompanying President Uribe at the November Asia-Pacific
Economic Cooperation (APEC) meetings in Peru where Uribe met
with 14 Asian heads of state to discuss investment in
Colombia--including postponing his return to Bogota until the
middle of the night in order to meet with the Sultan of
Brunei--as part of a growing GOC focus on diversifying
economic partners. Nevertheless, Villegas emphasized that,
as Colombia's largest trade and investment partner, it is
very important for Colombia's long-term economic development
to avoid letting the U.S.-Colombia Trade Promotion Agreement
slide past 2009 without U.S. congressional ratification.
NICHOLS