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Viewing cable 08BOGOTA3588, WEATHERING THE STORM: COLOMBIA'S EXPOSURE TO THE

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Reference ID Created Released Classification Origin
08BOGOTA3588 2008-09-25 16:06 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bogota
VZCZCXYZ0000
RR RUEHWEB

DE RUEHBO #3588/01 2691606
ZNR UUUUU ZZH
R 251606Z SEP 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 4913
INFO RUEHBR/AMEMBASSY BRASILIA 8408
RUEHCV/AMEMBASSY CARACAS 1063
RUEHPE/AMEMBASSY LIMA 6594
RUEHLP/AMEMBASSY LA PAZ SEP PANAMA 2386
RUEHQT/AMEMBASSY QUITO 7271
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS BOGOTA 003588 
 
SIPDIS 
SENSITIVE 
 
EEB/OMA FOR ASIROTIC; WHA/EPSC FOR MROONEY; WHA/AND FOR 
RMERRIN; TREASURY FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV CO
SUBJECT: WEATHERING THE STORM: COLOMBIA'S EXPOSURE TO THE 
GLOBAL MARKET TURMOIL 
 
REF: BOGOTA 3076 
 
1. (SBU) SUMMARY. Amid ongoing turmoil in U.S. and global 
financial markets, Colombia's financial sector appears at low 
susceptibility to a contagion and its macro-economic 
foundation significantly more stable than during the 1998 
international financial crisis.  Nevertheless, local experts 
predict that Colombia's already slowing growth rate could 
downshift further as demand for Colombia exports, investment 
inflows, and sources of international financing dry up. 
Consequent reductions in GOC tax revenues may also force a 
round fiscal tightening even while the GOC struggles to fund 
its social and security priorities.  Finally, fewer foreign 
capital inflows are likely to curb the peso's appreciation, 
helping competitiveness of long-suffering Colombian 
exporters, but risking an uptick in inflation.  END SUMMARY. 
 
The Strengths 
------------- 
 
2. (SBU) Despite nervousness regarding recent global economic 
events, Colombian officials and private sector experts  agree 
that Colombia's exposure is limited and the economy remains 
well-positioned to ride out the crisis.  According to the 
Office of the Financial Superintendent, the Colombian banking 
sector's direct exposure to the international sub-prime 
market is minimal.  Of the financial sector's USD 15.6 
billion in assets, only USD 36 million is invested in 
international banking institutions.  Likewise, Colombia's 
pension funds have limited investment exposure in the U.S. 
sub-prime mortgage market.  According to the Superintendent, 
only one-third of one percent of combined pension fund assets 
are in structured investment vehicles.  Nevertheless, 
Colombian bankers recognize that they cannot completely 
escape the pressure on global financial industry, pointing 
out that the American Depository Receipts (ADRs) of 
Colombia's largest bank, Bancolombia, have lost almost 12 
percent of their value in New York trading since the 
beginning of the year. 
 
3. (SBU) Beyond asset exposure, experts insist that 
Colombia's financial sector and economy are on a much more 
solid footing than during the last economic crisis of the 
late 1990s.  National Association of Financial Institutions 
(ANIF) President Sergio Clavijo cited to us Colombia's record 
high international reserves (USD 24 billion), lower public 
and private debt levels (as a percentage of GDP), lower 
current and fiscal account deficits (as a percentage of GDP) 
and the local financial sector's strong profitability as key 
insulators from the crisis.  Juan Pablo Cordoba, President of 
the Colombian Stock Exchange (BVC), echoed the sentiment that 
Colombia's exposure is limited, even while the BVC market 
index (IGBC) remains down 14 percent for the year. 
 
The Weaknesses 
-------------- 
 
4.  (SBU) Clavijo, Cordoba and other analysts, such as the 
brokerage firm Correval, acknowledge that reduced global 
growth in 2008 will translate into sluggish Colombian growth 
in the medium term as demand for raw material exports such as 
oil, nickel, and coal, falls.  In particular, a slower U.S. 
economy, which represents Colombia's largest export market 
(36 percent of total exports in 2007) and source of foreign 
direct investment (21 percent of total inflows in 2007), will 
hurt Colombian export industries.  Likewise, if oil prices 
fall as a result of reduced global demand, the purchasing 
power of Colombia's second most important trading partner, 
Venezuela (14 percent of Colombian exports in 2007), could 
drop in correlation and exacerbate the pressure on Colombian 
exporters. 
 
5. (SBU) On the fiscal and debt service side, lower raw 
material prices would also trim Colombia's revenues from 
state-owned hydrocarbons company Ecopetrol and the royalties 
that international mining and hydrocarbons firms pay the GOC. 
 Any reduction in resource revenues would generate pressure 
on the GOC to implement commensurate cuts in government 
expenditures in order to stay within GOC fiscal targets. 
Meanwhile, the international financial market turbulence 
could raise Colombia's cost to finance public and private 
 
debt on world markets. 
 
End of the Good Times? 
--------------------- 
 
6. (SBU) Concern has spread that the Colombian economy is 
entering a prolonged period of slower growth. After averaging 
over five percent annual GDP growth since 2002 and reaching 
eight percent in 2007, the GOC reported that growth in the 
first half of 2008 totaled only 4.1 percent.  Taken together 
with the international market turmoil, several local 
financial institutions and analysts subsequently lowered 2008 
growth estimates from five percent to as low as 3.8 percent, 
and 2009 projections to below five percent.  ANIF President 
Clavijo told us he estimates the overall economy will grow 
3.7 percent in 2008 (down from ANIF's estimate of 4.7 percent 
three months ago) and only 3.5 percent in 2009 (down from the 
previous ANIF estimate of 4.3 percent).  Nevertheless, 
Clavijo downplayed concerns of a Colombian recession and said 
he considers this a "natural, soft landing" for the economy 
after its rapid clip in 2006-07. 
 
7. (SBU) Central Bank President Jose Dario Uribe and Finance 
Minister Oscar Ivan Zuluaga have publicly acknowledged that 
the international financial crisis could bleed growth from 
the Colombian economy, but emphasize that Colombia remains 
well-positioned to weather the storm.  Zuluaga added that the 
GOC must reinforce its position by adjusting public 
expenditures in the 2009 budget, which was calculated based 
on an expected GDP growth rate of 5 percent.  The Ministry 
estimates that every one percentage point reduction in annual 
GDP costs the government USD 300 million in lost tax revenue. 
 Such a reduction in spending will significantly complicate 
GOC efforts to fulfill its poverty reduction and democratic 
security priorities. 
 
One Silver Lining? 
------------------ 
 
8. (U) On the bright side, several Colombian economists have 
said that due to a slower U.S. and global economy they expect 
fewer U.S. dollars and other foreign currency to enter the 
Colombian economy, thereby reducing appreciation pressure on 
the Colombian peso.  The rise of the peso against foreign 
currencies, especially the U.S. dollar, since the beginning 
of 2007 significantly eroded the price competitiveness of 
many non-mineral Colombian exports such as textiles, cut 
flowers, and bananas (reftel).  After appreciating 28 percent 
against the U.S. dollar between January 2007 and June 2008, 
the peso has now devalued 19 percent in the past three 
months.  Our contacts attribute this shift to the combination 
of overall developing country jitters in currency markets 
with the consensus that the peso's rise was excessive.  They 
caution, however, that a weaker peso would augment 
inflationary pressures.  Estimates for 2008 inflation 
currently stand at 7.5-8 percent, double that of beginning of 
year targets. 
NICHOLS