VZCZCXYZ0000
RR RUEHWEB

DE RUEHBO #1708/01 1301610
ZNR UUUUU ZZH
R 091610Z MAY 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 2687
INFO RUEHLP/AMEMBASSY LA PAZ MAY LIMA 6189
RUEHQT/AMEMBASSY QUITO 6841
RUEHZP/AMEMBASSY PANAMA 1659
RUEHCV/AMEMBASSY CARACAS 0386
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 001708 
 
SENSITIVE 
SIPDIS 
 
WHA/EPSC FOR PMAIER; EEB/IFD/OMA FOR ASIROTIC; TREASURY FOR 
MEWENS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV CO
SUBJECT: COLOMBIA TIGHTENS CAPITAL CONTROLS -- MORE HARM 
THAN GOOD? 
 
REF: BOGOTA 609 
 
¶1. (SBU) SUMMARY: One year after Colombia's Central Bank 
implemented controls on inflows of foreign capital in an 
attempt to stem the appreciation of the Colombian peso, the 
U.S. dollar has fallen a further 16 percent and reached a 
nine-year low against the peso due to external and domestic 
pressures.  The appreciation has strained the competitiveness 
of Colombia's export industries, spurred job losses in the 
textile and agricultural sectors, and undercut the buying 
power of Colombian families dependent on remittances. 
Despite their failure to date, the GOC has taken steps to 
tighten the capital controls and announced debt swaps to 
staunch an even greater rise in the peso.  Local economic 
analysts are increasingly concerned short-term GOC remedies 
could cause more economic damage than the peso's 
appreciation.  END SUMMARY 
 
Fighting Windmills 
------------------ 
 
¶2. (U) Since January 2007, the Colombian peso has appreciated 
almost 21 percent against the U.S. dollar and 7 percent 
against the Euro.  Analysts agree that a series of factors, 
many external, have driven the peso higher including the 
global slide of the U.S. dollar and record prices for key 
export commodities such as oil, coal, and nickel. 
Internally, a historic inflow of Foreign Direct Investment in 
2007 (USD 9 billion), continuing GOC fiscal deficits and the 
increasing gap (7 percent) between interest rates in Colombia 
and the U.S. have exacerbated the peso's appreciation. 
 
¶3. (SBU) Under pressure from Colombia's export industries to 
protect price competitiveness, the GOC announced a set of 
capital controls in May 2007 that require foreign currency 
investments to deposit 40 percent of their investment's value 
with the Central Bank for six months or face stiff withdrawal 
penalties.  A year later, GOC officials acknowledge the 
controls have failed to prevent the peso's rise, but argue 
that without the controls the appreciation would have been 
worse.  The GOC insists not only on the need to maintain the 
controls, but in late April announced measures to tighten 
them further.  The new restrictions apply the existing 
deposit requirement to any credits Colombian firms receive 
overseas and to firms that finance imports for more than six 
months. 
 
Economic Headache #1 
-------------------- 
 
¶4. (SBU) Finance Minister Zuluaga has publicly referred to 
the peso's appreciation as Colombia's "biggest economic 
headache".  Despite 7.5 percent GDP growth in 2007 and a 
falling overall unemployment rate, the peso's rise has 
reduced the volume of Colombian exports and led to job cuts 
in export-related industries including textiles, footwear, 
and agricultural products.  Colombian Textile Association 
President Ivan Amaya estimates the industry could shed as 
many as 8,000 jobs in 2008 due to a loss in price 
competitiveness for its exports.  According to Colombia's 
economic statistics agency, DANE, imports of finished apparel 
grew 80 percent in 2007 while imports of fabric to produce 
textiles in Colombia for re-export grew only 6 percent. 
Overall, textile exports to the U.S. fell 26 percent and 
footwear fell 54 percent. 
 
¶5. (SBU) The peso's appreciation has had a similarly 
pronounced effect on agricultural exports. Agriculture 
Minister Arias has stated that for every 100 pesos of 
appreciation against the U.S. dollar, Colombian agricultural 
exporters lose USD 175 million.  According to him the flower, 
coffee, banana, and sugar sectors are the most vulnerable. 
The Colombian Banana Growers' Association (Augura) told us 
the banana sector has lost over 1,000 jobs this year due to 
the peso's appreciation and 17 percent drop in exports to the 
U.S. in 2007.  Meanwhile, the Colombian Sugar Association 
(Asocana) announced May 8 that the sugar industry experienced 
a 44 percent drop in profits in 2007, mostly due to the 
peso's appreciation.  Despite record world coffee prices and 
increasing productivity, Colombian coffee growers estimate 
the sector lost over USD 200 million last year due to the 
strength of the peso. 
 
 
¶6. (U) The appreciation has also hurt the value of 
remittances from overseas, impacting millions of poor 
Colombians that depend money sent home by Colombian 
expatriates.  According to Colombia's 2005 census 3.3 million 
Colombians live overseas, with 1.2 million of those 
expatriates in the U.S.  In 2007 remittances totaled an 
estimated USD 4.4 billion, or approximately 3.7 percent of 
Colombian GDP (reftel).  According to press reports, the drop 
in the local buying power of remittances has led to drop in 
sales and business activity in rural areas that receive the 
bulk of the funds. 
 
Treatment Worse than the Disease? 
--------------------------------- 
¶7. (SBU) Notwithstanding the pressure on exporters and 
remittance beneficiaries, most investors and local economic 
analysts agree that the GOC's capital controls have caused 
more damage than good.  They assert that the controls limit 
the number of participants in the local stock market and 
thereby distort share prices downward.  Brokerage firm 
Corredores Asociados concluded that without the capital 
controls instituted in 2007 the value of shares traded on the 
Colombian Stock Exchange (BVC) would now total USD 27 billion 
more than their current valuation. 
 
¶8. (SBU) The controls have also limited the amount of foreign 
investment in Colombian public debt, maintaining interest 
rates artificially high and raising the cost of issuing debt 
on the domestic market.  Corredores Asociados analyst Ricardo 
Duran insists that easing conditions on foreign capital would 
lower interest rate and borrowing costs for exporters, 
offsetting any further appreciation of the peso following 
removal of the capital controls.  Mauricio Cardenas, Director 
of Colombia's prominent economic think-tank Fedesarrollo, 
told us that it is obvious the controls are not working, but 
said the measures were politically difficult to lift given 
that the number of exporters, workers and consumers impacted 
by the peso's appreciation. 
 
Time for a New Approach 
----------------------- 
 
¶9. (SBU) Recognizing the political pressure to restrain the 
peso's rise and the capital controls' lackluster results, the 
GOC has begun seeking a new approach.  On May 6 Finance 
Minister Zuluaga announced the GOC would convert USD 2 
billion in outstanding foreign-currency denominated debt to 
peso-denominated debt through a series of currency swaps and 
hedge operations with local banks.  The plan intends to 
increase demand for dollars as local banks buy dollars on 
behalf of the GOC to pay international creditors and thereby 
cool the appreciation of the peso.  Over the longer term, the 
operation will decrease the currency risk exposure on 
Colombia's overall debt stock.  Minister Zuluaga indicated 
that once the initial installment of USD 2 billion was 
complete, the GOC would consider expanding the effort to 
cover all USD 20 billion of its foreign currency-denominated 
debt.  He also encouraged private sector debtors to explore 
similar steps to shift their debt from dollars to pesos. 
 
¶10. (SBU) Analysts have had mixed reactions to the 
announcement with some suggesting the move could help 
facilitate Colombia gaining investment grade status for its 
debt and others expressing concern that the swaps will lock 
in the peso's value at a high rate.  Echoing a recent article 
in newsweekly Cambio written by former Finance Minister Jose 
Antonio Ocampo, Cardenas told us that Colombia could more 
effectively address the structural issues pushing the peso 
higher by actually pre-paying its public debt and reducing 
government spending, instead of simply switching the 
denomination of the debt. 
BROWNFIELD