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Viewing cable 06BOGOTA1870, COLOMBIA'S ECONOMY: STILL DEFYING GRAVITY

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Reference ID Created Released Classification Origin
06BOGOTA1870 2006-03-01 21:56 2011-08-25 00:00 UNCLASSIFIED Embassy Bogota
VZCZCXYZ0000
RR RUEHWEB

DE RUEHBO #1870/01 0602156
ZNR UUUUU ZZH
R 012156Z MAR 06
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 2683
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS BOGOTA 001870 
 
SIPDIS 
 
SIPDIS 
 
DEPT. PLEASE PASS TO EXIM BANK FOR MARCELO LEFLEUR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CO
SUBJECT: COLOMBIA'S ECONOMY: STILL DEFYING GRAVITY 
 
REF: A. BOGOTA: 11257 
 
     B. BOGOTA: 01383 
 
1. (Summary) The Colombian economy demonstrated strong growth 
in 2005, despite the GOC's limited progress in addressing 
structural economic issues.  GDP growth will be close to 5 
percent and IMF targets for the budget, deficit, inflation 
and reserves were either met or exceeded.  Public debt is 
less than 50 percent of GDP because of 5 billion USD worth of 
debt swaps and buy-backs, while exports grew more than 26.6 
percent in 2005.  Foreign direct investment grew 24 percent 
over 2004 and the stock market maintained its top 4 ranking, 
according to Bloomberg.  Most importantly, unemployment 
continued to decline.  But there are still significant areas 
for improvement.  Two-thirds of the budget is still 
congressionally earmarked, severely limiting the GOC's 
spending flexibility; the GOC has not made sufficient 
progress in addressing structural fiscal reforms and the GOC 
continues to prove its susceptibility to special interest 
groups.  The Free Trade Agreement will stimulate further 
improvement in these areas. (End Summary) 
 
THE GOOD NEWS 
------------- 
 
2. Colombia's GDP growth for the year will surpass 
expectations and will likely be between 4.8 and 5.1 percent 
when it is announced in March or early April 2005.  The GOC 
budget deficit at one percent of GDP was well under the IMF 
target of two percent of GDP.  Inflation was the lowest  in 
50 years at 4.86 percent.  The average foreign exchange rate 
appreciation of the peso between 2004 and 2005 was 11.9 
percent, allowing the GOC to increase reserves beyond IMF 
targets, and restructure 5 billion USD worth of external debt 
with significant EURO and USD denominated buy-backs.  The 
peso's appreciation also helped lower total foreign 
indebtedness to approximately 36 percent of GDP.  Colombia 
now benefits from a debt structure that is more heavily 
comprised of domestic vs. externally issued debt. 
Notwithstanding the significant appreciation of the peso, 
exports grew 26.6 percent in 2005.  Petroleum exports, which 
account for 53 percent of traditional exports, grew 31.5 
percent.  Coalexports, which account for 25 percent of 
traditional exports, grew 40.2 percent over 2004.  Colombia 
currently boasts a 1.3 billion USD positive balance of trade. 
(NOTE: Total non-hydrocarbon exports grew by 22%) 
 
3. Investor confidence, both foreign and domestic, continued 
to increase in 2005.  S&P found that Colombia's ratio of 
investment to GDP has risen to more than 21 percent. Growing 
international reserves and declining external obligations led 
S&P to upgrade Colombia's long-term sovereign risk rating 
from stable to positive.  The stock market continues to be 
among the top four for return on equity worldwide, as rated 
by Bloomberg.  The index moved from 4,489 in January 2005 to 
9,513.2 by the close of the year.  Market capitalization was 
50.7 billion USD by December 2005, an increase of 106 percent 
over last year.  Domestic investment in plant and equipment, 
a good measure of future expanded productivity, grew 49.5 
percent in 2005.  At the same time Foreign Direct Investment 
(FDI) increased by 39 percent in the period of January to 
September 2005 over the same period in 2004.  Colombians 
abroad repatriated 1 billion USD via portfolio investments, 
despite capital controls implemented in 2004 (REFTEL A) and 
an unofficial estimate places net foreign direct investment 
around 5.2 billion USD for 2005 (3.3 billion USD confirmed 
between January and September 2005). 
 
4. 2005 was also a record year for mergers and acquisitions. 
Phillip Morris entered the Colombian market by purchasing 
COLTABACOS for 314 million uSD and South African brewer 
SAB-Miller purchased Colombia,s largest brewery, Bavaria, 
for 7.8 billion USD.  The number of independent banks shrank 
because of mergers and foreclosures, going from 41 at the 
beginning of 2005 to 21 by the close of the year.  Eleven 
banks of the 21 are currently filing chapter 11 and another 9 
merged during the course of the year.  Other purchases of 
note were BBVA,s purchase of GranAhorrar and the entrance of 
Falabella, a SODIMAC affiliate and Ripley,s of Chile, a 
Carrefour affiliate into the consumer credit market. 
 
5. While the government has been realigning its debt 
structure, big businesses have been financing more of their 
growth via bond markets.  Despite this trend, the loan 
portfolio of the entire banking sector grew 11.41 percent 
over the same period last year accompanied by a continued 
decrease in the value of past due debt (from 1.5 million 
dollars in Sept 2004 to 877,688 USD in Sept 2005). 
 
6. Colombia's high structural deficit was offset in 2005 by 
increased tax receipts, mainly from growing exports.  More 
than 19.3 billion USD were collected, with the greatest 
increases in corporate and personal income tax categories (14 
percent more than targeted).  Colombia,s tax base of one 
million individuals and companies is small, but it has more 
than doubled since 2002. The government plans to continue 
encouraging individuals to pay taxes and is more aggressively 
targeting tax evaders.  The GOC's target for tax collections 
in 2006 is a reasonable 48 trillion COP (21.3 billion USD). 
 
OPPORTUNITIES FOR IMPROVEMENT 
----------------------------- 
 
7. The GOC hopes to continue its reforms and is focusing on 
rationalizing spending and tax reform.  2004 tax reforms 
improved collections by both increasing collections and 
 
expanding the tax base.  Nevertheless, with the region's 
highest nominal tax rates, as high as 38.5 percent for income 
tax and 16 percent for VAT taxes, and with the marginal tax 
rate approaching 50 percent in the manufacturing sector, 
further reforms are needed.  The GOC also needs to increase 
its discretion.   The government,s tax revenue (about 20 
percent of GDP) cover four earmarked expenses: 
constitutionally mandated transfers to the regions, at 6 
percent of GDP (REFTEL B); another 4 percent for security 
related expenses; 5 percent for social security and pensions; 
and another 5 percent for debt servicing. 
 
WHAT MAY COME: 2006 
------------------- 
 
8. Economists and experts in Colombia predict that the 
economy will grow around 4 percent in 2006.  The projected 
slowdown is attributable Colombia's susceptibility to an 
estimated worldwide slowdown.  Inflation is expected to 
remain low at 4.86 percent while interest rates are expected 
to move up slightly to 7.38 percent.  Most economists agree 
that the peso will begin to devalue, perhaps as much as 3 
percent compared to the US dollar.  Experts worry that 
Colombia's ability to cheaply finance its fiscal deficit will 
weaken because U.S. and European interest rates are climbing. 
 The Finance Ministry indicated that it plans to take 
preemptive action by issuing new government paper, close to 1 
billion USD in 2006, to finance what may not be so readily 
available later.  With conclusion of negotiations on a Free 
Trade Agreement with the U.S., we expect ratification, 
adoption of implementing legislation, and reforms to increase 
market competitiveness to play a big role in 2006. 
WOOD