PRESIDENT FILLS CENTRAL BANK VACANCIES WITH

C O N F I D E N T I A L BOGOTA 000728


NOFORN

EEB/IFD/OMA ASIROTIC; WHA/EPSC: AWONG; TREASURY AJEWELL

E.O. 12958: DECL: 01/15/2024
TAGS: ECON EFIN PGOV CO
SUBJECT: PRESIDENT FILLS CENTRAL BANK VACANCIES WITH
TECHNOCRATS AS BOARD SLASHES RATES

REF: A. 08 BOGOTA 3624

B. BOGOTA 560

Classified By: CLASSIFIED BY ECONOMIC COUNSELOR LAWRENCE J. GUMBINER FOR
REASONS 1.4 (B) & (D)


1. (C) SUMMARY: In surprise announcements February 27,
President Uribe named two respected economists to fill
openings on the Central Bank Board while the current Board
cut its benchmark rate 1 percent amid slowing growth. The
appointments defied expectations that President Uribe, a
frequent critic of the Bank's tight monetary policy, would
select at least one private sector representative more
amenable to reducing interest rates. At the same time, the
Board's full point rate cut, the third rate decrease in six
months, exceeded consensus projections for a half-point
reduction and underscored the Bank's growing concern about
Colombia's economic outlook. While the appointments
generally received positive reaction based on their
professional merit and likelihood to follow sound economic
policy, the aggressive rate cut received mixed reaction.
Nevertheless, private comments by at least one outgoing Board
member indicate the Bank is embarking on a looser monetary
policy through the rest of 2009. END SUMMARY.

Technocrats Get the Nod
--------------


2. (C) With the departure of Board Members Juan Mario Laserna
and Leonardo Villar and President Uribe's consequent
opportunity to sway the seven-member Central Bank Board with
his fifth and sixth appointment, many outside observers
expected Uribe to act on his previous criticism of the Bank's
tight monetary policy (ref B) and opt for candidates from the
private sector rather than orthodox economists. Defying
those expectations, President Uribe appointed Vice Minister
of Finance Juan Pablo Zarate along with University of
Manzinales Rector Cesar Vallejo Mejia. Various contacts,
such as former Director of Public Credit Julio Torres, told
us that President Uribe originally intended to take a middle
course appointing Jose Felix Lafaurie, President of the
National Cattlemans' Assocation (FEDEGAN),as the "private
sector" representative along with Zarate or Colombian
Representative to the World Bank Jorge Humberto Botero, but
decided on Vallejo after Lafaurie declined Uribe's offer.
(COMMENT: Lafaurie appointment would likely have proven
controversial, given his lack of macroeconomic policy
experience as well as rumored ties to former paramilitaries.
END COMMENT.)

New Faces Well Received
--------------


3. (C) The financial community generally welcomed the
appointments of Zarate and Vallejo as competent selections
during a challenging economic period and a bolstering of the
Central Bank's independence from the executive branch. Sergio
Clavijo, President of the National Association of Financial
Institutions (ANIF) and a former Central Bank Board member,
told us ANIF applauded both appointments as individuals with
extensive public policy and economic management experience.
Alejandro Gaviria, Dean of Economics at the University of the
Andes, and German Verdugo, Economic Studies Director at
leading brokerage firm Correval, echoed the praise for
Zarate's macroeconomic expertise and Vallejo's public policy
experience, but noted that Vallejo may play a less visible
role on the Board due to his more limited macroeconomic
policy experience.


4. (C) Immediately prior to his appointment, Zarate served as
the Technical Vice Minister at the Ministry of Finance and
Public Credit where he worked closely with Finance Minister
Zuluaga and was a good interlocutor of the Embassy. Zarate
previously served as Director of Colombia's National
Statistics Agency (DANE) and the National Guarantee Fund
(FOGAFIN) which is similar to the Federal Deposit Insurance
Corporation in the U.S. Zarate has held board positions at
several GOC entities including Ecopetrol, Electrocaribe, the
National Agricultural Bank (Banco Agrario),and the National
Hydrocarbons Agency (ANH). An economist by training with a
degree from the University of the Andes, he has traditionally
maintained a low profile on GOC economic policy decisions,
but is widely respected as one of the most astute technical
minds in the Finance Ministry. He is likely to follow an
orthodox anti-inflation policy line, but as a former Vice
Minister and close colleague of Minister Zuluaga may still be
subject to some political pressure.


5. (C) Following tenures as Vice Minister of Finance and
Director of National Planning in the 1980s, Cesar Vallejo
worked as a university professor and consultant, before
becoming Rector of the University of Manzinales. Vallejo has
a masters degree in Economics and a bachelors degree in
philosophy from Javeriana University. He is a friend of
influential National Association of Industries (ANDI)
President and Central Bank policy critic Luis Carlos
Villegas, who served in the GOC during the same period, and
reportedly recommended to President Uribe that he select
Vallejo for the Board. While also likely to take a generally
orthodox policy tack, Vallejo's informal ties to the business
community may make him more amenable to looser monetary
policies.


6. (SBU) Natalia Salazar Ferro was named to replace Zarate as
Technical Vice Minister of Finance. She most recently served
as Director of Macroeconomic Policy at the Ministry, and has
prior experience in economic policy positions in DNP and the
Central Bank. Before entering government, she worked as an
associate researcher at prominent economic thinktank
Fedesarrollo, Vice President of ANIF and an economics
professor at University of the Andes.

Slowing Economy Spurs Aggressive Rate Cut
--------------


7. (SBU) The current Central Bank Board provided the second
surprise of the day by cutting its benchmark rate 100 basis
points to 8 percent citing slackening inflationary pressures
and the weakening global economy. The cut is the third since
July 2008 when the rate stood at 10 percent. In the Bank's
announcement the Board expressed confidence that it will meet
its 2009 target inflation range of 4.5 to 5.5 percent, but
hinted that further interest rate cuts may be on tap in
coming months.

Too Much of a Good Thing?
--------------


8. (C) Reaction to the large interest cut was mixed, despite
idespread criticism in the business and financial community
throughout 2008 that the Central Bank was strangling economic
growth with too conservative monetary policy. Verdugo
praised the cut as a positive and well-timed measure to
reinforce growth amid the steady roll of negative economic
news. He also suggested that the Bank has room for further
cuts given lower expected inflation in the coming months.
Gaviria admitted surprise at the size of the rate reduction,
but said it was sound given slowing inflation and rising
unemployment. He welcomed the Bank's less cautious stance on
rates as important step toward a more countercyclical
monetary policy. On the other hand, Clavijo told us he
considers the 1 percent rate cut to be excessive, suggesting
that a half point trimming would have been more appropriate
given the recent steep devaluation of the peso against the
dollar. He added that, absent efforts to halt the peso's
slide by selling international reserves, the sharp rate cut
could fuel the currency's devaluation.


9. (C) In possibly the clearest signal that the Central Bank
appears more concerned about slowing growth and increasingly
comfortable with inflation, departing Board Member Juan Mario
Laserna told Econoff March 3 that there was broad agreement
on the Board for an aggressive cut. He expressed confidence
that the Board would reduce the benchmark rate another
150-200 basis points to between 6 and 6.5 percent by the end
of 2009. Laserna said that, in the absence of financing
options for fiscal stimulus measures and with a looming
national election in 2010, a shift by Colombia to a clear
countercyclical monetary policy was the only real economic
tool available to head off a further decline in growth and
increase in unemployment.


BROWNFIELD