COLOMBIA'S 2010 ECONOMIC FORECAST: POSITIVE GROWTH, BUT SLOW

UNCLAS BOGOTA 000231 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EINT PGOV CO SUBJECT: COLOMBIA'S 2010 ECONOMIC FORECAST: POSITIVE GROWTH, BUT SLOW RECOVERY REF: A) BOGOTA 177; B) BOGOTA 139; C) 09 BOGOTA 3576 D) 09 BOGOTA 4120; E) 09 BOGOTA 3878; F) BOGOTA 163 G) 09 BOGOTA 3309; H) 09 BOGOTA 3359 ¶1. (SBU) Colombian Finance Minister Oscar Zuluaga projects a 2.5 percent GDP growth rate for 2010, which is supported by both local and international analysts. Zuluaga, however, told us that Colombia's economic recovery will be slow and behind those of Brazil, Chile, and Peru on account of Colombia's high dependency on the U.S. and Venezuelan export markets. Inflation for 2010 is expected to be around 4 percent, but unemployment will have a hard time breaking into single digits. Construction, mining, petroleum, and financial sectors will be the strong performers in 2010 due to large infrastructure projects, high demand for coal, increased oil production, and 126 million acres of oil and gas blocks up for sale. End Summary. 2.5 Percent GDP Growth for 2010: Behind its Neighbors and the Global Average -------------- -------------- -------------- ¶2. (SBU) GOC's Finance Minister Oscar Zuluaga told EconCouns that economic growth for Colombia in 2010 will be positive, but around 2.5 percent, which falls below the International Monetary Fund's world growth projection of 3.9 percent. Zuluaga added that Colombia will not experience growth rates like Brazil, Chile, and Peru, which are expected to be above 5 percent, because Colombia's economy relies too heavily on the U.S. and Venezuela. He noted the slow U.S. recovery has adversely affected Colombia's economy and that Brazil, Chile, and Peru are more diverse in their export markets, particularly with Asia. Exacerbating the issue are Chavez' actions to halt the flow of Colombian exports to Venezuela, which has reduced trade by 33 percent in 2009 compared to 2008 (Ref A). ¶3. (SBU) Inflation for 2009 was roughly 2 percent, a record-low rate that Colombia had not seen since 1955. Colombia's Central Bank has set a goal of 3 to 4 percent for inflation in 2010, while the private sector projects a 3.9 percent inflation rate. Analysts note the following factors will increase inflation: low central bank rates, currently at 3.5 percent, the 2010 increase in minimum wage, which is 1.64 percent over inflation (Ref B),and an increase in government spending (Ref C). Increased GOC Spending and More Oil & Gas Exploration -------------- -------------- ¶4. (SBU) Colombia plans to spend billions in new infrastructure projects with the goals of creating more jobs and bringing goods to markets more quickly and cheaply (Ref D). Additionally, the GOC is offering 168 oil and gas blocks, both on and off shore, that cover over 126 million acres. In October 2009, Colombia began producing over 700,000 barrels per day (bpd),the highest in over a decade, and expects to hit 800,000 bpd in 2010, according to Alejandro Martinez, President of the Colombian Association of Petroleum producers, (Ref E). These statistics coupled with Colombia's investment climate for oil and gas should attract several bids. The mining sector is also growing with gold at record high prices and an increase in demand for cleaner coal. ¶5. (SBU) The potential for job creation is significant in the construction, mining, and energy sectors, but it will not make a notable dent in the unemployment rate, where 2.5 million Colombians are out of work. A prominent think-tank, Fedesrollo, predicts a double digit unemployment rate for 2010 and highlights the cost of hiring formal sector workers is too high to see significant drops in unemployment (Ref F). Selling State Assets to Maintain Fiscal Discipline -------------- -------------- ¶6. (SBU) The GOC's 2010 budget reflects a 7 percent increase from 2009, but already Zuluaga is looking to cut the budget by about US$3 billion, or 4 percent of the budget, to reach a fiscal deficit target of 4.5 percent of GDP (Ref C). Additionally, he expects that the GOC will sell its 59 percent stake in the third largest power generation company, IsaGen, by June. This sale will provide the GOC US$1.5 billion. However, Presidential elections are in May and the former Director of the National Planning Department, Juan Carlos Echeverry, notes that the sale of such a large asset will take at least six months, when a new government could be forming that may or may not agree with the sale. Diversify, Diversify, Diversify -------------- ¶7. (SBU) Colombia's over reliance on the Venezuelan market coupled with the lack of a U.S.-Colombia Free Trade Agreement (FTA) have energized the GOC to seek other markets through FTAs. Currently, the GOC is awaiting ratification of FTAs with the U.S., Canada, Norway, and Iceland (Ref G). On the negotiating table are its FTAs with the EU and South Korea. Looking ahead, the GOC is planning a quick FTA with Panama as well as trade agreements with the Dominican Republic and Uruguay. The GOC also has embarked on an aggressive trade agenda with Asia in the pursuit of new markets (Ref H). If the pending FTAs are ratified, Colombia has the potential to see growth rates of at least 5 percent, according to Luis Villegas, President of the National Association of Industries (ANDI). Comment: 2009 - A Bumpy, But Less Rocky Road -------------- ¶8. (SBU) Colombia weathered the global economic crisis in 2009 better than others in the region, largely because of its conservative lending habits and sound fiscal policy. While the World Bank predicts GDP growth for Latin America in 2009 to be -2.2 percent, Colombia's economic growth in 2009 is projected at zero percent, with the possibility of achieving slight positive growth, according to GOC officials. Foreign direct investment for the year reached US$9.5 billion, only a billion off its record performance in 2008. Trade, however, dropped 14 percent through November compared to 2008 due to the economic slowdown, Ecuador's temporary tariff hike on Colombian exports, and Venezuela's actions to halt Colombian exports. GOC officials are happy to see 2009 pass, but realize that many challenges lie ahead. BROWNFIELD