US embassy cable - 05BOGOTA8814

UNCLAS SECTION 01 OF 03 BOGOTA 008814 
 
SIPDIS 
 
DEPT PLS PASS EXIM FOR MARCELO LEFLEUR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EPET, PREL, EFIN, EFIN, EPET, PGOV, PREL, CO 
SUBJECT: COLOMBIA: SECOND QUARTER PERFORMANCE BODES WELL 
FOR 2005 
 
UNCLASSIFIED 
 
SIPDIS 
PROG 8/22/05 
CHG: MKDRUCKER 
ECON:ADONNALLY 
ECON:FFERNANDEZ, ECON:MFERGUSON, USAID:PDAVIS 
 
 
AMEMBASSY BOGOTA 
SECSTATE WASHDC 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EFIN, EPET, PGOV, PREL, CO 
SUBJECT: Colombia: Second Quarter Performance Bodes Well for 
2005 
 
1.  Summary: The Colombian economy continues to grow 
steadily, fueled by increased exports, a strong peso, and a 
low, stable inflation rate. These factors in turn increased 
investor confidence leading to record levels for the stock 
exchange and a dramatic increase in private investment. 
While the government is optimistic about recent growth 
statistics, fiscal and budgetary reform legislation are still 
required to consolidate Colombia,s gains in the medium- to 
long-term.  The long-term outlook is bright despite the 
question of Uribe,s reelection. End summary 
 
The Good News Keeps Coming 
 
2.  Colombia,s economic indicators continue their positive 
trajectory.  Government estimates for GDP growth for 2005 
have been increased to 4 percent from 3.8.  Trade in the 
first semester grew 37 percent over last year, and Colombia 
is running a USD 1.7 billion USD trade surplus.  Exports to 
the US have grown by 17 percent according to the United 
States International Trade Commission (USITC), led by exports 
under the ATPDEA program.  Traditional exports have been 
helped by surging world prices, but non-traditional exports 
are also growing despite the peso,s revaluation (20 percent 
since early 2004).  Foreign Direct Investment continues to 
grow, and is up 33 percent over last year, reaching USD 822 
million in the first quarter.  Unemployment has also dropped 
from 13.4 percent in December to 11.4 percent by June. 
 
3.  The Colombian government also reached agreement with the 
International Monetary Fund (IMF) on a new stand-by program 
and expects to graduate from the IMF program in November 
2006.  IMF Mission Chief for Colombia, Robert Rennhack, is 
optimistic about Colombia,s current fiscal and economic 
situation.  During a meeting with Econoff and USAID 
Economist, Rennhack pointed to the growth of foreign 
investment in Colombia,s extractive sectors and higher than 
expected tax inflows as evidence of Colombia,s improved 
fiscal outlook.   Rennhack was also pleased with Colombia,s 
surprisingly strong export numbers, and added that the 
strength of the Colombian peso relative to the dollar was 
likely more permanent than originally projected.  Rennhack 
noted that fiscal reforms are needed to consolidate 
short-term gains in the macro economy, and said he hopes the 
GOC will maintain its clear and focused monetary policies in 
the run-up to the 2006 elections. 
 
4.  Colombia,s fiscal health also continues to improve.  The 
fiscal deficit for 2004 was only 1.6 percent of GDP, and 
thanks to growing revenues and export revenues from oil, the 
GOC has lowered its deficit target for 2005 to 1.6 percent of 
GDP from 2.5 percent.  2Q05 deficit is currently 1.8 percent 
of GDP and is likely to total 2 to 2.2 percent at year-end. 
The GOC has also continued its process of lowering its 
overall debt burden from a high of 58 percent of GDP in 2003 
to slightly over 50 percent of GDP.  At the end of 2004 
foreign currency debt equaled 41 percent of GDP and was two 
times annual exports.  Moreover, the GOC has taken advantage 
of liquidity in Colombian capital markets to change the 
composition of the debt from approximately 60 percent foreign 
debt/40 percent domestic to 60 percent domestic/ 40 percent 
foreign debt.  The GOC also prepaid USD 1.25 billion of IDB 
debt in early 2005 and is expecting to re-purchase another 
USD 700 million in debt in September 2005.  The Central Bank 
is also studying the use of USD 2 billion in reserves to buy 
back additional debt.  International reserves are at a record 
USD 15 billion, after the Central Bank purchased 
approximately USD 4 billion over the past 18 months in an 
attempt to slow the peso,s revaluation.  The sound fiscal 
policy has lowered interest rates to historically low levels 
(6.93 percent).  Inflation is also at historically low rates 
and the GOC expects to meet its 5 percent target this year. 
The Colombian stock market has also been a bright spot, 
growing 43.7 percent from January through August, making it 
the fourth most lucrative market in terms of net returns 
tracked by Bloomberg. 
 
Potential Problems on the Horizon 
--------------------------------- 
 
5.  While the current trend is positive, there are some 
structural issues, which need to be addressed if Colombia,s 
economic recovery is to continue. Chief among these are 
budgetary, tax, and further pension reform.  With Colombian 
elections taking place during the first quarter of 2006, 
analysts expect these reforms will be considered during the 
latter half of that year at the earliest. 
 
6. Economists agree that the budgetary reform is a priority 
for Colombia.  Colombia,s global competitiveness depends on 
freeing major portions of government spending from 
constitutionally mandated ear-marks, such as pensions and 
transfers.  Additionally, focusing on tax reform will 
contribute to Colombia,s future business development and 
growth.  According to Embassy data, Colombia has the highest 
income and corporate tax rates in Latin America (38.5 percent 
personal and corporate rate) 
 
6. Colombia,s debt continues to be of concern to economists. 
Although the GOC is taking full advantage of the strong peso 
to swap its debt out of dollar- or Euro-denominations, 
concerns exist about a possible crowding-out effect of local 
debt (known as TES,s) tightening access to credit or placing 
inflationary pressure on the currency, despite historically 
low level inflation.  Colombia,s debt is also currently 
sustainable as a result of high commodity prices, especially 
oil, coal and coffee.  If the prices or export volume of 
these commodities rapidly decline, the government will have 
to tighten fiscal spending to meet its bottom line. 
 
Statistical Tables 
------------------ 
 
Real GDP Growth 
            BILL CP           BIL USD           GDP Growth 
1999        72,250            86.2              --- 
2000        74,363            83.7              2.9 
2001        75,393            81.7              1.5 
2002        76,637            80.9              1.8 
2003        79,820            83.8              3.9 
2004        83,369            97.3              4.1 
1Q05        21,261            25.7              3.6 
 
Source: National Planning Department 
 
GDP Percentage Growth-Sector 
 
SECTOR                  2002    2003      2004    IQ-2005 
Agriculture       00.6    03.1      02.09  03.36 
Mining                   4.3    12.1      02.82  05.08 
Utilities               03.0    03.3      02.91  00.41 
Manufacturing           01.1    04.2      04.77  -00.99 
Construction            12.7    12.4      10.65  10.60 
Hotel/Rest.       01.4    05.1      05.62  07.27 
Transport/Commun. 03.0    04.5      05.05  03.53 
Financial               02.4    04.6      04.33  -02.69 
Social Services   00.9    01.2      02.76  02.44 
Bank Services           -----  13.9 12.16  -14.15 
Subtotal                01.8    03.9      03.82  03.09 
Taxes w/o IVA           -2.3    -1.9      05.96  10.99 
GDP                     01.8    03.9      03.96  03.61 
 
Source: National Planning Department 
 
CPI Index Inflation 
 
1998  16.7 
1999   9.23 
2000   8.75 
2001   7.65 
2002   6.99 
2003   6.48 
2004   5.50 
 
2005 Jan    0.82 
      Feb   1.02 
      Mar   0.77 
      Apr   0.44 
      May   0.41 
      June  0.40 
      July  0.05 
      Aug   0.00 
 
Source: Central Bank (Banco de la Repblica) 
Unemployment (Percent) 
 
1997        12.0 
1998        15.6 
1999        18.1 
2000        19.7 
2001        13.8 
2002        15.1 
2003        13.1 
2004        12.1 
JAN 05      13.2 
FEB 05      14.0 
MAR 05      13.1 
APR 05      12.0 
MAY 05      12.5 
JUN 05      11.4 
 
Source: DANE (National Statistics Directorate) 
 
            Imports           Exports (USD million) 
1998        14,635            10,822 
1999        10,659            11,596 
2000        11,800            12,700 
2001        11,996            12,329 
2002        11,897            11,975 
2003        13,022            13,127 
2004        15,626            16,729 
1Q05         4,400             4,536 
 
Source: ProExport (Colombian Trade Promotion Agency) 
 
8. Now is the time for Colombia to take advantage of good 
economic conditions to get its financial house in order. 
Colombia,s President in the 2006 ) 2010 period will need to 
get Congressional support for fiscal and budgetary reforms. 
With those reforms and a benign international economic 
environment, Colombia can continue to grow at moderate rates 
indefinitely.  With an improving security situation, 
Colombia,s growth rate could improve significantly. 
WOOD