US embassy cable - 05BOGOTA10027

UNCLAS SECTION 01 OF 03 BOGOTA 010027 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, CO 
SUBJECT: STRONG ECONOMIC OUTLOOK 
 
 
1.  Summary: Public support for the re-election of President 
Uribe generally focuses on the administration's security 
policy.  The recent performance of the macro economy, 
however, suggests the President's economic policies have 
been likewise successful.  While significant improvements in 
macro indicators portend medium-term stability and growth, 
some concerns, such as budget reform, remain.  Continued 
improvements in Colombia's security situation and the 
successful completion of an FTA with the United States could 
consolidate recent structural gains into long term positive 
trends. End Summary. 
 
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GDP Growth with Stability 
------------------------- 
 
2.  In its first break-out quarter since the beginning of 
the Uribe administration, Colombia's GDP grew at 5.3 percent 
in the second quarter of 2005, according to the Central 
Bank.  The most robust sectors included commerce (10.2 
percent growth), financial services (9.8 percent), 
construction (7.7 percent) and personal & social services 
(6.3 percent).  Transportation & communications grew 5.6 
percent, manufacturing 4.6 percent, and utilities 
(electricity, gas and water) 4.2 percent.  The sectors with 
weakest growth rates were agriculture (2.8 percent) and 
mining (1.7 percent).  Inflation through August 2005 fell to 
4.9 percent year-on-year.  Exports have grown by 37 percent 
through June, supported by high energy prices and growth in 
non-traditional exports.  Foreign investment is also strong 
in many sectors, especially oil, coal, and 
telecommunications.  In a significant example, mega-brewer 
SABMiller recently completed a USD 8 billion purchase of 
Bavaria, a Colombian-owned multinational beverage company. 
Phillip Morris' purchase of ColTobaco earlier in the year 
was another sign of the faith foreign investors are gaining 
in the Colombian economy. 
 
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Improved Collections and Reduced Spending 
----------------------------------------- 
 
3.  The Ministry of Finance plans to lower combined public 
sector deficit target to 1.5 percent of GDP from a projected 
target of 2.5 percent, reflecting a decline in central 
government debt and higher oil prices.  According to the 
Central Bank (CB), total public revenues are expected to 
rise to 31.9 percent of the higher GDP, a .7 percent 
improvement over last year's projections for 2005.  The CB 
adds that as a result of improved tax administration, tax 
revenues are projected to rise to 21 percent of GDP.  The 
GOC is set to exceed its tax collection by nearly one 
billion USD (as of September 2005, tax receipts have 
exceeded projections by 875 million USD).  According to the 
GOC, the number of income tax contributors increased by 
300,000 in 2005 to a total of 1.1 million tax payers.  An 
estimated 400,000 new contributors are projected for 2006. 
Between January and September 2005, tax collections 
increased by 15 percent.  Further strengthening the income 
equation, high global oil prices will allow Ecopetrol, the 
state-run oil company, to generate a significantly larger 
operating surplus. 
 
4.  Lower interest payments, resulting from a decline in 
domestic interest rates and a shift of public debt from 
external to internal securities has contributed to a 
significant reduction in government spending.  So far in 
2005, the GOC has prepaid approximately USD 2 billion of 
external debt through the sale of reserves or replacement 
with domestic bonds (known as TESs).  According to GOC 
analysts, the recently passed pension reform will cut the 
actuarial deficit of the pension system by 19 percent of the 
GDP, although this is only two-thirds of the savings the GOC 
hoped to pass through Congress.  Territorial governments, 
projected to run a slight deficit in 2005, are instead 
running a surplus estimated by the GOC at 0.7 percent of 
GDP. 
 
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Colombia's Securities Market 
---------------------------- 
 
5.  Capitalization of Colombia's stock market has increased 
in recent years, from USD 9 billion in 1999 to a record- 
breaking USD 24.5 billion in 2004.  As of September, 2005, 
market capitalization reached USD 38.9 billion.  The number 
of listed firms on the exchange, however, is relatively 
light at 105 listings.  According to the IMF, the average 
number of listed firms in Latin American exchanges is 237. 
 
6.  The volume of TESs placed in the market went from 
approximately USD 8.7 billion in 1997 to USD 25.2 billion in 
March 2005, and are expected to reach approximately USD 30 
billion by year-end 2005.  More than 90 percent of fixed 
income transactions involve government securities.  This 
enhanced performance has contributed to a deepening of the 
secondary market.  The volume of transactions in the 
secondary debt markets went from daily averages of 
approximately USD 434.7 million in the first half of 2001 to 
daily averages of between USD 3.5 and 4.3 billion in the 
first quarter of 2005. 
 
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Long Term Stability 
------------------- 
7.  In 2004, the Central Bank purchased USD 2.9 billion in 
foreign exchange to control the appreciation of the peso. 
Between January and September 2005, the Bank purchased an 
additional USD 4 billion.  As a result, the level of 
accumulated international reserves is currently close to USD 
16 billion, far exceeding the International Monetary Fund's 
USD 12.2 billion target for the GOC under its stand-by 
agreement.   The exchange rate has stabilized at roughly CP 
2200-2300 per USD 1 (from 2700 per USD 1 at the end of 
2003).  Confidence of Colombians in the economy has lead to 
a return of overseas assets according to anecdotal evidence. 
In paying down foreign debt early, the government is taking 
advantage of the moment.  By maintaining tight rein on 
spending and broadening the tax base, even without the 
desirable tax reform, the GOC is laying the base for low 
government deficits in the future.  The financial sector 
which helped precipitate the recession of the pre-Uribe 
years has strengthened considerably and loan loss reserves 
now fully cover the non-performing loans (about 3 percent of 
total loans). 
 
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Looking Ahead 
------------- 
 
8.  The GOC now recognizes that impressive as the 5.3 
percent GDP growth rate in 2Q2005 is, the actual growth is 
probably higher.  Many observers agree the GDP data series 
is badly out of date and underestimates growth.  The GOC 
plans to address the problem in the medium term. 
 
9.  As macro-economic conditions have improved, unemployment 
has fallen from 13.1 percent in August 2004 to 11.3 percent 
in August 2005.  Positive structural adjustments, such as 
improved tax collection, fiscal austerity, and a successful 
monetary policy that keeps interest rates low, inflation in 
check, and the peso strong, have resulted in an increased 
optimism among economists.  Concerns, however, do remain. 
The International Monetary Fund, in its past two stand-by 
loan agreements with the GOC, required that the GOC pass 
meaningful budget reform.  The GOC has been unable to do so 
over several Congressional sessions, and reform is now 
unlikely to be passed until after Colombia's election season 
ends in 3Q2006. 
 
10.  President Uribe's policies have produced steady, if not 
dramatic improvements in most indicators over the course of 
his administration.  Progress in institutional reforms such 
as state-funded pensions, tax administration, and monetary 
policy appear to have generated a strong basis for 
sustainable economic growth over the medium-term.  A global 
economy favorable for Colombia has meant increased prices 
for oil, coal, and coffee, three key exports.  Colombia has 
increased exports of all three commodities in volume as well 
as price. Further advances in the security situation in 
Colombia and the successful completion of the U.S.-Andean 
Free Trade Agreement could consolidate these gains into long- 
term increases in investment and sustainable economic 
growth. 
 
11.  Gains in security as well as improved fiscal 
performance auger well for Colombia to make badly needed 
road, rail, and other infrastructure improvements, the lack 
of which would severely hamper economic development and 
growth. 
 
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Comment 
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12.  The battle against narco-terrorists forces the 
government to spend 4.5 percent of its GDP on defense (16.3 
percent of the national budget).  A downturn in key 
commodity prices (three basic commodities accounted for 
almost two thirds of Colombia's exports in the first half of 
2005) would have a dramatic effect on the economic outlook. 
The Colombian economy, however, is diversifying and growth 
of manufactured goods, exports, and increasing agricultural 
diversification away from coffee (now only the fourth 
largest export category) are reducing Colombia's dependence 
on global commodity markets.  A free trade agreement with 
the U.S. can only enhance that trend increasing Colombia's 
reliability as a trading partner, making it a better market 
for U.S. exports and increasing economic stability.  Driven 
by increased economic opportunities, the continuing 
urbanization of Colombia offers the best chance for young 
workers to leave the coca and poppy fields behind. 
 
Wood