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Viewing cable 08BOGOTA2, COLOMBIA'S 2008 MACROECONOMIC OUTLOOK-AIMING FOR A

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Reference ID Created Released Classification Origin
08BOGOTA2 2008-01-02 16:50 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bogota
VZCZCXYZ0008
RR RUEHWEB

DE RUEHBO #0002/01 0021650
ZNR UUUUU ZZH
R 021650Z JAN 08
FM AMEMBASSY BOGOTA
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 0743
INFO RUEHCV/AMEMBASSY CARACAS 9722
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 5758
RUEHZP/AMEMBASSY PANAMA 1025
RUEHQT/AMEMBASSY QUITO 6463
UNCLAS BOGOTA 000002 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
WHA/EPSC FOR PMAIER; TREASURY FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV AADP CO
SUBJECT: COLOMBIA'S 2008 MACROECONOMIC OUTLOOK-AIMING FOR A 
SOFT LANDING 
 
REF: BOGOTA 7772 
 
1. (SBU) SUMMARY: As Colombia completes one of its best 
economic years in recent history with growth approaching 
seven percent, the outlook for 2008 foreshadows slower growth 
closer to the five percent average registered since 2003. 
Buoyed by an improving security situation, strong inflows of 
foreign direct investment and sound macroeconomic policy, 
unemployment continues to fall gradually while inflationary 
pressures remain moderate.  Colombia's currency appreciation, 
high real interest rates and expanding current account 
deficit could threaten GOC efforts to engineer an economic 
"soft landing". END SUMMARY. 
 
2007-Out with a Bang 
-------------------- 
 
2. (U) Although final data has not been announced, by 
virtually all accounts Colombia's private sector and public 
policymakers regard 2007 as one of the best economic years in 
recent memory.  Continued improvements in the domestic 
security situation, high commodity prices, strong consumer 
demand from Venezuela, and record foreign direct investment 
(septel) fueled growth above 7 percent for much of the year. 
According to preliminary figures, foreign investment in 2007 
reached USD 7.6 billion--Colombia's second highest total ever 
and almost 20 percent higher than in 2006. 
 
3. Most experts predict that final year-end GDP growth will 
fall between 6.5 and 7 percent.  Inflation spiked early in 
2007, causing the GOC to miss its 4.5 percent target, but 
moderated in the second half of the year to settle near 6 
percent.  Unemployment remained stubbornly fixed for much of 
2007, but according to preliminary data released December 28, 
dipped to close the year at 9.4 percent--the first 
single-digit rate since 1997. 
 
4. (U) On the public sector side, Colombia's gross public 
sector debt fell to 42 percent of GDP in 2007 (from 52 
percent in 2002) and the portion of debt denominated in 
foreign currency dropped to 30 percent (from 49 percent in 
2002).  Meanwhile, Colombia's international reserves 
increased over USD 5 billion to almost USD 21 billion, or the 
equivalent of more than nine months of total imports.  The 
GOC took advantage of increased investor confidence from 
Colombia's improved security situation and its improving 
sovereign credit rating to refinance much of its debt during 
the year.  Through restructuring debt at longer maturities 
and lower interest rates, the GOC expects to lower its 
overall debt service costs by 1 percent of GDP in 2008. 
 
2008-In with Slower Growth 
-------------------------- 
 
5. (U) Local analysts, citing a slowing U.S. and global 
economy, conservative monetary policy by Colombia's central 
bank, a weak U.S. dollar, and rising imports, predict the 
Colombian economy will expand at a slower pace in 2008. 
Recent polls of local financial institutions forecast an 
average growth rate of 5.5 percent, the Central Bank's 
benchmark interest rate remaining above 9 percent, and the 
Colombian peso depreciating moderately (5 percent) to around 
2100 pesos per 1 USD.  GOC Finance Minister Zuluaga, Central 
Bank Governor Uribe and Director of Public Credit Julio 
Torres have all emphasized the Colombian economy's overall 
strong fundamentals and pointed out the government's 
commitment to fostering long-term sustainable growth rather 
than periods of rapid expansion that risk overheating the 
economy. 
 
6. (U) At a December 6 conference hosted by the Good 
Government Foundation, private sector experts including 
former Colombian Representative to the International Monetary 
Fund Guillermo Perry and National Association of Financial 
Institutions (ANIF) President Sergio Clavijo led credence to 
GOC assurances.  Both Perry and Clavijo said that, without 
systemic changes in fiscal, labor, and tax policies, 
Colombia's maximum sustainable growth ceiling was around 5 
percent. 
 
Clouds on the Horizon 
--------------------- 
 
 
7. (U) Fiscal constraints on public investment, rigid labor 
practices, and onerous tax rates will continue to restrain 
long-term growth.  However, over the next year, most analysts 
point to the peso's appreciation, high interest rates, and a 
growing current account deficit fueled by rising imports, as 
the major threats to the Colombian economy.  The peso's 
nearly 15 percent rise against the U.S. dollar in 2007 has 
crimped Colombian exports to the U.S., particularly in 
textiles, while making imports cheaper.  Rising imports 
paired with the GOC's chronic fiscal deficit have raised 
concern that Colombia's current account deficit could reach 
destabilizing levels.  High interest rates also worry the 
private sector, which has increasingly criticized GOC 
monetary policy for stifling business credit and investment 
with the region's second-highest real rates. 
 
Comment 
------- 
 
8. (SBU) Despite some vulnerabilities, including sensitivity 
to a recession in the U.S., Colombia's economic outlook for 
2008 remains solid.  The consensus forecast growth rate of 
5.5 percent tracks with GOC estimates included in the 2008 
budget (ref B) and poverty reduction program and should not 
derail the Uribe Administration's plans to consolidate its 
economic gains and reduce poverty to 35 percent by 2010. 
Likewise, holding the benchmark interest rate near 9 percent 
in 2008 will bridle the Colombian economy, but should help 
the GOC meet its inflation target of 4.5 percent, moderate 
private sector demand for imports, and maintain the economy 
in a sustainable expansion. 
Nichols