US embassy cable - 04BOGOTA12901

UNCLAS BOGOTA 012901 
 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EPET, PGOV, PREL, CO 
SUBJECT: COLOMBIA INSTITUTES CAPITAL CONTROLS ON INVESTORS 
 
1.   (U) SUMMARY. President Uribe announced in an evening 
press conference on December 14 that Colombia would be 
instituting capital controls investments entering Colombia. 
This move comes after a year-long appreciation of the peso 
(14 percent over the past year) and a three day period just 
before the decision in which the peso appreciated 3 percent. 
While it is still too soon to determine what the long term 
effects of this move will be, investors agree that the 
controls will do little to change the positive macro 
environment in Colombia. END SUMMARY. 
 
2.    (U)  Decree 4210, signed by the Minister of the 
National Planning Department, the Minister of Finance, the 
Minister of Commerce and the President, forces investors to 
keep their money in Colombia for at least one year.  The 
decree comes after what one Central Banker says was intense 
pressure from the export lobby for the government to 
intervene.  Export lobbyists argue that up to 20,000 jobs 
have been lost in the past few months as a result of a fall 
in revenues from exports hurt by the strong peso.  This 
argument stands in stark contrast to Colombia's current 
unemployment rate of 12.5 percent, down from 17 percent at 
the beginning of 2004.  In addition, Colombian exports have 
risen dramatically this year, creating a USD 723 million 
trade surplus, which is up from a total year trade deficit of 
USD 192 million in 2003. 
 
3.   (U)  On the Presidential website, Uribe states, 
"Colombia wants to give a clear signal that Colombia is ready 
to receive serious capital that is established and for 
investment, but we can't permit that speculative capital in 
the short run comes into Colombia and endangers our exchange 
rate."  In the aftermath of this decision, multiple investors 
have told econoffs that the effects will be limited; however, 
many seem ready for more intervention in the future.  There 
is a general expectation that a Tobin tax, a tax on 
investments coming in and out of the country, is possible. 
While future reforms may cause some concerns to investors, a 
Deutsche Bank representative told econoff that investors 
looking at credit risk are more concerned about delays in the 
passage of pension and tax reforms than the appreciation of 
the peso. 
 
4.   (U)  While the peso has appreciated against the dollar, 
it has not greatly appreciated against other regional 
currencies. In addition, the peso did not appreciate in 2003, 
which leads many analysts to assume that it was undervalued 
as the year began.  A Citigroup report values the peso at 
just above its 12 year average and still very far below highs 
in 1997.  The peso continued to appreciate against the dollar 
the day after the decree was signed. 
 
5.   (U)  Experts have offered many reasons as to why dollar 
inflows and  Foreign Direct Investment (FDI) have increased 
since last year.  From January to June of 2004, FDI increased 
73 percent from 2003 numbers.  These increased dollar inflows 
are the likely outcome of improved security and an economy 
recovering from a recession.  Investors are more willing to 
invest in a politically and economically stable country. 
Remittances, which totaled USD 3 billion last year, have also 
put upward pressure on the peso.  The high price of oil 
(petroleum exports January to July in 2004 were USD 2.8 
billion vice petroleum exports for the same period of in 2003 
which were USD 1.9 billion) has also brought dollars into 
this oil exporting country.  Higher coffee prices are another 
factor pushing the peso upward. 
 
6.  (U) COMMENT. Colombia's capital control decree was issued 
in response to intense political pressure from exporters, 
including the sensitive agricultural sector.  Exporters may 
be concerned about the "double whammy" of a lower-priced 
dollar and the opening of Colombia's market to U.S. goods via 
the forthcoming Free Trade Agreement.  As we move closer to 
signing an FTA, Colombian exporters, especially in the 
agricultural sector, may view government intervention to 
weaken the peso as the only solution to this perceived 
threat.  END COMMENT 
WOOD