VZCZCXYZ0000
RR RUEHWEB

DE RUEHBO #2053/01 1581409
ZNR UUUUU ZZH
R 061409Z JUN 08
FM AMEMBASSY BOGOTA
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 3070
INFO RUEHBR/AMEMBASSY BRASILIA 8218
RUEHCV/AMEMBASSY CARACAS 0507
RUEHLP/AMEMBASSY LA PAZ JUN LIMA 6241
RUEHZP/AMEMBASSY PANAMA 1819
RUEHQT/AMEMBASSY QUITO 6913

UNCLAS BOGOTA 002053 
 
SENSITIVE 
SIPDIS 
 
WHA/EPSC FOR MROONEY; EEB/IFD/OMA FOR ASIROTIC; TREASURY 
FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CO
SUBJECT: GOC TIGHTENS CAPITAL CONTROLS AS PESO HITS 
NINE-YEAR HIGH 
 
REF: BOGOTA 1708 
 
¶1. (SBU) SUMMARY. For the second time in six weeks, the GOC 
has tightened capital controls in an attempt to stem the 
steady appreciation of the Colombian Peso against the U.S. 
dollar.  The peso's rise (14 percent since January 1) has 
significantly strained the competitiveness of Colombian 
non-energy exporters, ratcheting up pressure on the Uribe 
Administration to prevent job cuts.  GOC officials insist the 
latest measures are intended only to curb speculative 
portfolio investment they believe has fueled the peso's rise 
to a nine-year high and not foreign direct investment (FDI). 
Most private sector observers say the controls will have no 
lasting effect in curbing the peso's appreciation, which 
remains linked more to global dynamics, high commodity prices 
and Colombian interest rate and spending policies. 
International banks have warned that the tougher controls 
will likely delay Colombia achieving investment grade status 
for its sovereign debt thereby perpetuating high debt service 
costs in the near term. END SUMMARY 
 
If You Fail Twice, Try Again 
 
 
¶2. (U) Citing the need to protect jobs in export industries 
hurt by the strong peso, in May 2007 the GOC put in place 
deposit requirements to control incoming foreign portfolio 
investment it blamed for the peso's rise.  Following the 
continued steady appreciation of the peso over the last year, 
the Finance Ministry announced an expansion of the capital 
controls in late April 2008 as well as the launch of debt 
swaps in May 2008 to increase demand for U.S. dollars 
vis-a-vis the peso (reftel).  After the additional measures 
only stanched the peso's appreciation for a few days, the 
Finance Ministry surprised markets on May 30 with a further 
increase in capital controls. 
 
¶3. (SBU) Under the latest move, Colombia increased the 
six-month deposit requirement at the Central Bank on 
portfolio investment inflows from 40 percent of the 
investment value to 50 percent.  Additionally, the GOC 
expanded the focus of the controls from foreign portfolio 
investment flows to include a requirement that FDI capital 
remain in Colombia for two years from the date of investment. 
(NOTE: Investors will still have the right to remit profits 
from their FDI without restriction. END NOTE.)  Public Credit 
Director Viviana Lara told us that the latter move was 
intended to prevent foreign investors from masking portfolio 
investment as FDI in order to circumvent the controls. 
 
GOC: Controls Necessary to Avoid Catastrophe 
 
 
¶4. (U) In announcing the decision to a meeting of the 
Colombian Banking Association (Asobancaria), Finance Minister 
Zuluaga said the additional measures were necessary to 
protect employment and guarantee macroeconomic stability.  In 
a separate interview with economic daily La Republica June 3, 
Zuluaga characterized the peso's revaluation as the greatest 
threat to the Colombian economy and said further rises 
against the dollar would be a "catastrophe" for Colombian 
exporters.  While reaffirming GOC commitment to a free 
floating currency, Zuluaga stressed that the GOC is committed 
through capital controls, debt swaps and other mechanisms to 
mitigate the peso's climb.  In public comments June 4, 
President Uribe defended the controls as a key instrument in 
differentiating FDI from speculative capital investment and 
said the GOC's had to move to protect employment generating 
export sectors such as flowers, bananas, and textiles. 
 
Private Sector Increasingly Skeptical as Peso Climbs 
 
¶5. (SBU) Since March 2007, portfolio investment in stocks has 
increased 77 percent to USD 2.8 billion and bond purchases 
have risen 110 percent to USD 1.8 billion.  In the first four 
days of currency trading following the May 30 announcement 
the peso gained another 2.2 percent against the dollar 
underscoring the futility of the stronger controls. 
Asobancaria President Maria Mercedes Cuellar insisted to us 
that financial markets are too fluid for the measures to work 
effectively in Colombia.  Contacts from the stock firms 
 
Interbolsa and Corredores Asociados told us they recognize 
the political pressure behind the latest move, but said the 
decision will do nothing to address the peso's appreciation 
and only hurt Colombian competitiveness and send a negative 
message to international investors.  Camilo Perez, Chief of 
Financial Research at Banco de Bogota, called the impact of 
the two-year requirement for FDI purely "psychological" since 
few, if any, foreign firms making direct investment expect to 
liquidate their investment in less than two years. 
 
¶6. (SBU) Nevertheless, contacts such as National Association 
of Financial Institutions (ANIF) President Sergio Clavijo 
told us that he considered the stronger controls prudent in 
light of the threat posed by the peso's rise and the inflow 
of speculative capital.  Clavijo asserted that without the 
measures in place over the last year the U.S. dollar would 
have fallen even further from the current rate of 1710 pesos 
to as low as 1500 pesos to a dollar. 
 
External Factors Moving Market More than Controls 
 
¶7. (SBU) All of our private sector contacts agree, however, 
that high Colombian interest rates, developments in the U.S. 
economy, high commodity prices, strong FDI inflows, and 
public spending policy in Colombia will continue to influence 
the peso more than the capital controls or announced debt 
swaps.   For example, the May 27 announcement that the U.S. 
economy grew faster than expected in the first quarter of 
2008 pushed the peso up 2 percent to a nine-year high against 
the dollar on expectations of stronger commodity exports to 
the U.S. market.  Strong investment in the energy sector and 
high prices for oil, gas, coal, and coffee are also pushing 
up the peso.  Meanwhile, Colombia recorded its second-highest 
FDI intake ever in 2007 (USD 9 billion).  According to 
Proexport and National Hydrocarbon Agency (ANH) figures, 2008 
announced FDI projects are expected to reach close to USD 10 
billion--flooding the economy with more dollars.  Finally, 
local economists have increasingly pointed to the GOC's 
elevated public deficit as a source peso appreciation.  In 
the short term, most local analysts we talked to expect the 
dollar to fall below 1700 pesos.  Central Bank Board Member 
Juan Mario Laserna told us he expects the peso to settle near 
1800 pesos by the end of 2008--33 percent higher than in 
¶2006. 
 
Inflationary Pressures Putting Central Bank at Cross Purposes 
 
¶8. (SBU) Coupled with the peso's appreciation, the GOC 
continues to struggle with stubbornly rising inflation. 
Consumer prices, driven by rising food and fuel costs, rose 
0.93 percent in May--up from 0.71 percent in April and more 
than double analysts' previous consensus estimate for the 
month.  The spike raised the 12-month inflation rate from 5.7 
percent to 6.4 percent and likely dashes hopes of Colombia 
meeting its already revised inflation target of 4.9 percent 
for 2008 or even analysts' previous consensus estimate of 5.3 
percent.  The Central Bank has already raised its benchmark 
interest rate 375 basis points since April 2006 to 9.75 
percent in an attempt to control inflation while the U.S. 
Federal Reserve and other central banks have cut rates to 
avert recessions.  Laserna told us that prior to the May 23 
Central Bank Board meeting, President Uribe contacted Board 
chair Jose Dario Uribe (no relation) to state the case for 
lower rates to spur the export sector, echoing private sector 
leader Luis Carlos Villegas' public call for lower rates. The 
Board maintained rates stable at the meeting -- Laserna 
commenting that Board staff models continue to show worrisome 
inflationary trends. 
 
¶9. (SBU)  Jorge Cortes Nieto, analyst at brokerage firm 
Corficolombia, underscored this interest rate differential as 
the primary reason for Colombia' investment inflow and 
consequent appreciation of the peso.  He expressed pessimism 
about prospects for controlling the peso's rise until that 
margin closes.  In light of higher than expected inflation 
figures for the first five months of 2008, local analysts 
increasingly expect the Central Bank to raise the rates on 
June 22 and, in effect, undercut the portfolio investment 
disincentive of the capital controls. 
 
Likely to Delay Investment Grade as International Equity 
 
 
Investors Sour 
 
¶10. (U) Citigroup, Banco Santander and other international 
banks criticized the May 30 tightening and said it 
jeopardizes investment flows, risks liquidity in Colombian 
capital markets, and will delay investment grade status 
consideration (lost nine years ago).  (NOTE: In early May, 
Citigroup had identified Colombia as the next country in 
Latin America to likely to receive investment grade. END 
NOTE.)  Santander went further suggesting that international 
investor's interest may shift to Colombian firms with shares 
listed internationally.  At the moment, only Colombia's 
largest bank, Bancolombia, is listed on the New York Stock 
Exchange.  Partially privatized state-owned oil company 
Ecopetrol hopes to list by the end of 2008 and other major 
firms could follow suit if international investment flows 
into Colombia taper off. 
 
¶11. (SBU) On June 3, Trade Minister Plata acknowledged 
publicly that the new controls could hurt Colombia's chances 
to achieve investment grade status on its sovereign debt this 
year.  Minister Plata said the GOC would evaluate the impact 
of the new controls closely and lift them if they do not 
succeed in controlling the peso's appreciation.  He did not, 
however, specify how long the GOC would take to review the 
controls.  The GOC is keenly aware that the failure to 
achieve investment grade places Colombia at a disadvantage in 
competing for international financing with investment 
grade-neighbors Brazil, Chile, Mexico and Peru. 
BROWNFIELD