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Viewing cable 09BOGOTA7, COLOMBIAN ECONOMIC OUTLOOK: WHAT A DIFFERENCE A

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Reference ID Created Released Classification Origin
09BOGOTA7 2009-01-05 18:35 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bogota
VZCZCXYZ0008
RR RUEHWEB

DE RUEHBO #0007/01 0051835
ZNR UUUUU ZZH
R 051835Z JAN 09
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 6348
INFO RUEHBR/AMEMBASSY BRASILIA 8578
RUEHPE/AMEMBASSY LIMA 6862
RUEHCV/AMEMBASSY CARACAS 1474
RUEHQT/AMEMBASSY QUITO 7559
RUEHZP/AMEMBASSY PANAMA 2827
RUEHLP/AMEMBASSY LA PAZ 9854
UNCLAS BOGOTA 000007 
 
SIPDIS 
SENSITIVE 
 
WHA/EPSC FOR MROONEY; EEB/OMA ASIROTIC; TREASURY FOR AJEWELL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CO
SUBJECT: COLOMBIAN ECONOMIC OUTLOOK: WHAT A DIFFERENCE A 
YEAR MAKES 
 
REF: A. 08 STATE 134459 
     B. 08 BOGOTA 3076 
     C. 08 BOGOTA 3289 
     D. 08 BOGOTA 4263 
 
1. SUMMARY.  After four years of averaging over 5 percent 
growth capped by a record 7.5 percent expansion in 2007, 
Colombia's economy slowed significantly in 2008 under the 
combined pressure of currency appreciation and high interest 
rates in the first semester, and the cratering of commodity 
prices, international credit and global demand in the second. 
 Turmoil in the economies of Colombia's two largest trade 
partners, the United States and Venezuela, have further 
darkened the outlook for 2009 with current growth estimates 
ranging from 1-3 percent and worries of recession growing. 
As a result, the GOC has postponed some 2009 administrative 
outlays, accelerated infrastructure spending, and sought out 
new trade and investment flows.  Rising pressure to free up 
monetary policy has also led the Central Bank to cut its 
benchmark rate for the first time in almost three years. 
Many local analysts say, however, more interest rate cuts and 
greater emphasis on diversification and competitiveness will 
be necessary to return Colombia's economy to high sustained 
growth in the long term.  END SUMMARY. 
 
2008: Good Times Winding Down 
----------------------------- 
 
2. (U) While the GOC began 2008 aiming for a soft landing of 
5 percent GDP growth, the Colombian economy steadily 
decelerated over the year along with GOC forecasts.  After 
reducing the growth forecast to 4 percent in October, on 
December 22, Finance Minister Zuluaga announced that the GOC 
was lowering its final 2008 GDP growth estimate to 3.5 
percent.  At the same time, according to Colombia's National 
Statistics Department (DANE), unemployment rose to 10.8 
percent in November compared to 9.4 percent in November 2007. 
 The increase represents 2.1 million Colombians unable to 
find work (236,000 more than last year) and a significant 
step backwards from the Uribe Administration's public goal to 
maintain unemployment in the single digits.  The GOC, 
likewise, missed its inflation target of 4 percent with DANE 
announcing January 2 final 2008 inflation of 7.7 percent.  On 
the trade side, Colombia ended the year with an anticipated 
trade deficit of USD 1.1 billion after the strong Colombian 
peso fueled record imports projected to total USD 42.9 
billion--a 40 percent increase over 2007.  At the same time, 
high prices for oil, coal and other commodities boosted 
Colombia's export revenues to USD 41.8 billion, according to 
preliminary DANE calculations, but export volumes declined 
and are expected to fall further in 2009 amid slackening 
world demand; 
 
3. (SBU) Minister Zuluaga and other GOC officials publicly 
attribute the slowdown to the global downturn, citing 
tightened international credit and reduced demand for 
Colombian commodities in the U.S., Europe and Asia.  Local 
analysts from Colombia's largest foreign bank BBVA, Citibank, 
and the National Association of Industries (ANDI), however, 
say blaming the global crisis oversimplifies Colombia's 
slowdown, which they date back to interest rate and capital 
control decisions (ref B) in late 2007 and the negative trade 
impact of the peso's appreciation (ref C).  Rather, they have 
told us the slowdown simply became more evident following the 
broader downturn in developed economies in 2008.  Many 
observers also blame the high cost of food and fuel, two 
extended strikes in the transport sector, labor stoppages in 
the mining sector, and the slow pace of public investment in 
the first year of new municipal and departmental governments, 
as further bridles on 2008 performance. 
 
Gloomy 2009 Ahead 
----------------- 
 
4. (SBU) Based on the weak 2008 exit, the GOC has lowered its 
2009 GDP public forecast to 3 percent, citing decreased 
consumer confidence, lower anticipated public revenues from 
mining, and higher import costs due to the weakening peso. 
Most local financial institutions and analysts, such as 
Fedesarrollo and ANDI, estimate growth closer to 2 percent 
while Central Bank President Juan Dario Uribe has warned 
growth could fall to 1 percent.  In a private meeting with us 
on December 17, Minister Zuluaga said he expected 2009 growth 
 
to fall between 1 and 2 percent and identified increased 
public investment as key to keeping the economy out of 
recession.  Zuluaga admitted that GOC predictions of 2008 
soft landing did not foresee the sudden decline in commodity 
prices, the tightening of international credit markets, or 
decrease in external demand, and policymakers were now in 
catch-up mode. 
 
5. (SBU) Although a December poll of leading Colombian 
economists concluded that inflation would cool to 5.3 percent 
in 2009, Fedesarrollo estimates that unemployment could reach 
13 percent in 2009 as the industrial sector contracts 
slightly (0.3 percent) and export revenues fall to as low as 
USD 32 billion based on declining sales to U.S. and Venezuela 
and lower commodity prices.  Representatives of three of 
Colombia's largest export-driven employment sectors, cut 
flowers, coffee, and textiles, told us they are expecting 
decreased demand for their products in the U.S. and Europe, 
but expect the recent depreciation of the peso to help offset 
declines in demand.  The three sectors have not yet 
experienced significant reductions in employment.  However, 
most analysts anticipate decreases in remittances from 
expatriate Colombians in 2009, lower foreign direct 
investment (FDI) from overstretched multinationals, and 
mounting consumer losses (estimated to reach as high as USD 1 
billion) from the collapse of numerous illegal pyramid 
schemes (ref D) to further exacerbate Colombia's economic 
ailments. 
 
Belt-tightening Underway 
------------------------ 
 
6. (SBU) Doubts are also growing that Colombia can maintain 
its fiscal deficit targets, already straining under competing 
security and social spending demands.  Minister Zuluaga told 
us oil prices need to stabilize at USD 60 per barrel to avoid 
significant revenue declines from lower oil royalties and 
taxes.  As a preemptive step, the GOC has already delayed USD 
1.4 billion in 2009 spending, or 2.2 percent of the USD 67 
billion budget, to avoid ballooning the fiscal deficit in the 
slowing economy.  The GOC plans to limit most of the 
"postponed" spending to administrative costs such as official 
travel, communications, new hiring, etc.  Minister Zuluaga 
said spending on social programs, infrastructure, and 
security will not be affected.  Nevertheless, military, 
police and counternarcotics officials have told Embassy 
MilGroup and NAS contacts that they expect tighter 2009 
budgets and slower disbursements.  The GOC will reevaluate 
whether to make the cuts permanent in mid-2009 after more 
revenue data is available. In the meantime, the budget, which 
allocates USD 35 billion to operations, USD 18 billion to 
debt service and USD 14 billion to investment, still 
represents a 13 percent increase from 2008. 
 
7. (SBU) Besides budget cuts, Zuluaga said the GOC will 
complete the sale of state-owned electrical generator Isagen 
to help replace anticipated revenue shortfalls.  In October 
GOC also arranged USD 2.4 billion in supplemental financing 
from the International Monetary Fund (IMF) and World Bank. 
Nevertheless, the GOC expects the recent declines Colombia's 
national debt (USD 45.8 billion) as a percentage of GDP to 
reverse from 21.7 percent in 2008 to 22.2 percent in 2009 due 
to more expensive financing costs.  As a broader sign of 
belt-tightening, the GOC raised the 2009 minimum wage by only 
7.7 percent (staying constant with inflation), despite 
labor's request for a 12.5 percent increase and DANE's own 
calculation that the cost of living for lowest income 
Colombians rose 8.8 percent in 2008. 
 
How Do We Get Out of this Mess? 
------------------------------- 
 
8. (SBU) According to Gallup, 50 percent of polled Colombians 
now say the economy is their top concern, up from 20 percent 
in May and more than double the 22 percent who cite public 
security.  Meanwhile, President Uribe's popularity has slid 
from 75 percent in October to 70 percent in December, 
according to the same polling, and tension has grown in the 
GOC economic team after the resignations of Senior Advisor 
Cecelia Alvarez and Financial Superintendent Cesar Prado in 
the wake of the pyramid scandals, as well as the departure of 
long-time Tax Director Oscar Franco and rumors about Minister 
Zuluaga's potential exit, 
 
 
9. (SBU) Amid this backdrop, GOC policymakers are busily 
searching for levers to stimulate the economy, but declining 
revenues, a lack of available international finance, and a 
large existing national debt burden leave little room for 
short-term fiscal stimulus.  Most observers see monetary 
policy as the most practical recession-fighting tool left to 
the GOC.  To this end, the Central Bank Board unanimously 
agreed December 19 to cut its benchmark interest rate from 10 
percent to 9.5 percent.  The cut represents the first rate 
reduction since 2006, and follows a growing chorus, led by 
President Uribe, to loosen monetary policy in an effort to 
head off recession.  Ricardo Duran, Chief Analyst at 
brokerage firm Corredores Asociados, told us that the 
December 19 rate reduction was welcome, but must be followed 
by several more cuts to at least 8 percent to stave off 
recession. 
 
10. (SBU) GOC officials have also announced plans to 
accelerate already-planned infrastructure investment, with 
USD 4.5 billion appropriated for the sector in 2009.  GOC 
officials hope rising oil production, from 511,000 barrels 
per day (bpd) to 623,000 bpd over the last year, a profitable 
domestic banking sector, the removal of capital controls on 
foreign investment, USD 8 billion in FDI inflows in the first 
9 months of 2008, high international reserves (USD 23.6 
billion), and the stabilization of the Colombian peso will 
further cushion the Colombian economy from the worst effects 
of the global financial turmoil. 
 
11. (SBU) ANDI President Luis Carlos Villegas told us that 
for Colombia to recover to the sustainable growth levels 
above 5 percent necessary for lasting poverty reduction, 
Colombia must innovate, look to new export markets (including 
Canada, Asia, and Central America), and seek new FDI sources 
such as China and the Middle East.  Villegas recounted 
accompanying President Uribe at the November Asia-Pacific 
Economic Cooperation (APEC) meetings in Peru where Uribe met 
with 14 Asian heads of state to discuss investment in 
Colombia--including postponing his return to Bogota until the 
middle of the night in order to meet with the Sultan of 
Brunei--as part of a growing GOC focus on diversifying 
economic partners.  Nevertheless, Villegas emphasized that, 
as Colombia's largest trade and investment partner, it is 
very important for Colombia's long-term economic development 
to avoid letting the U.S.-Colombia Trade Promotion Agreement 
slide past 2009 without U.S. congressional ratification. 
NICHOLS