VZCZCXYZ0026
RR RUEHWEB

DE RUEHBO #2918/01 2241238
ZNR UUUUU ZZH
R 111238Z AUG 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 4108
INFO RUEHPE/AMEMBASSY LIMA 6433
RUEHLP/AMEMBASSY LA PAZ AUG CARACAS 0826
RUEHZP/AMEMBASSY PANAMA 2134
RUEHBR/AMEMBASSY BRASILIA 8307
RUEHQT/AMEMBASSY QUITO 7134
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 002918 
 
SIPDIS 
SENSITIVE 
 
EEB/IFD/OMA FOR ASIROTIC, WHA/EPSC FOR MROONEY, TREASURY 
FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV CO
SUBJECT: SLOWER COLOMBIAN ECONOMY IN 2008 AMID INFLATION 
AND PESO PRESSURES 
 
REF: A. (A) BOGOTA 2558 
     ¶B. (B) BOGOTA 2053 
 
¶1. (SBU) SUMMARY: A slowing global economy, rising inflation 
and currency appreciation are now expected to drag Colombia's 
economy down from its average of over 7 percent in 2006-07 to 
less than 5 percent in 2008.  Many business leaders and GOC 
officials including President Uribe blame the Central Bank's 
interest rate policy for much of the slowdown, though more 
nuanced observers acknowledge broader economic forces at play 
and contend that Colombia is returning to a more sustainable 
growth rate for the longer term.  While questionable 
solutions to address rising prices and slowing growth, such 
as price controls, export subsidies, and dollarization of 
Colombia's economy, have surfaced, the GOC remains committed 
to increasing investment, liberalizing trade relations, and 
continuing sound macro-economic policies. END SUMMARY. 
 
Signs of Slowdown Growing... 
---------------------------- 
 
¶2. (SBU) According to the Colombian Business Climate poll of 
1,232 Colombian businesspeople conducted by Datexco in early 
July, for the first time in eight years the majority of those 
polled said the GOC should focus on the economy as its top 
priority above security and other issues.  The results echo a 
broader Gallup poll of Colombian citizens (ref A) and signal 
not only the Uribe Administration's success in improving 
security, but also growing worry about a weakening economy. 
Businesspeople that participated in the Datexco poll cited 
decreases in industrial capacity utilization (77 percent 
compared to 82 percent in same period of 2007), slower growth 
in consumer demand (4 percent versus 7.5 percent in 2007), 
and increasing debt as worrisome signs of a slowdown in the 
Colombian economy. 
 
¶3. (SBU) Beyond falling confidence levels, Colombia 
registered a meager 1.2 percent growth in production in the 
first half of 2008 according to the National Association of 
Industries (ANDI) and GDP growth of 4.1 percent during the 
same period.  Meanwhile, new construction starts in Bogota 
(Colombia's largest construction market) fell 46 percent 
compared to 2007, with declines in most other major markets 
around the country as well.  Beatriz Uribe, President of 
Colombia's Construction Chamber (Camacol) told us a 
saturation of the market from years of strong construction 
growth and higher interest rates were to blame. 
 
...As Central Bank Fights Inflation, but Fuels Peso 
--------------------------------------------- ------ 
 
4, (SBU) In spite of the slowing economy, steady increases in 
food and fuel costs continue to spur inflation well beyond 
the Central Bank's 2008 target of 4 percent.  Following 
months of rising inflation figures, on July 25, the Central 
Bank raised its benchmark interest rate 25 basis points to a 
seven-year high of 10 percent in an effort to control 
creeping inflation.  Nevertheless, most local economists 
believe that inflation will reach 7.5 percent for 
2008--almost double the target and one percent higher than 
¶2007. 
 
¶5. (SBU) Meanwhile, the rate increases have widened the gap 
between Colombian rates and U.S. rates attracting foreign 
portfolio investment and pushing the Colombian peso higher 
against the U.S. dollar.  The inflow of foreign currency has 
led to the introduction of capital controls (ref B) and 
propelled a 13 percent appreciation of the Colombian Peso 
against the U.S. dollar in 2008.  The peso's rise has 
significantly harmed the price competitiveness of the 
Colombian export sector employing thousands of workers, 
including the banana, cut flower, coffee and textile 
industries. 
 
Growth Estimates Slide 
---------------------- 
 
¶6. (U) Optimists began the year predicting GDP growth above 6 
percent, but Colombian banks, economic thinktanks and the 
government have now begun revising 2008 GDP growth estimates 
downward to between 4 and 5 percent.  While the GOC official 
 
estimate has only come down from 5.3 percent to 5 percent, 
the independent Central Bank lowered its estimate to 4.3 
percent, blaming the economic slowdown on strikes in various 
sectors, a reduction in infrastructure projects, and higher 
prices for raw materials, rather than high interest rates. 
 
¶7. (SBU) Jorge Londono, President of Bancolombia, Colombia's 
largest bank, told us he expects GDP growth to total 4.5 
percent for 2008 and said that the GOC has been "too 
emotional" about the peso's fluctuation while ignoring the 
keys to sustaining long term growth such as infrastructure 
investment.  Londono dismissed concerns of a significant 
downturn in the economy and said that the 2008 growth rate 
actually was returning to a more sustainable level than the 
frothy expansionary rates of 2006-07.  Sergio Clavijo, 
President of the National Association of Financial 
Institutions (ANIF), echoed Londono's analyis, telling us 
that he believes Colombian economy's growth rate cannot 
exceed 5 percent for more than short bursts, such as 2006-07, 
until structural reforms are made on taxes, pensions, and 
labor law. 
 
Both Frustration and Ideas Welling Up 
------------------------------------- 
 
¶8. (U) Much of the private sector and GOC, nevertheless, have 
focused blame on the Central Bank as Colombia's high-flying 
economy has begun to cool.  In public remarks the day after 
the July 25 rate hike, President Uribe accused the Central 
Bank of "throwing gasoline" on Colombia's economic challenges 
by reducing consumption, job creation, and growth. 
Similarly, export industry associations such as bananas and 
flowers criticized the rate increase and resulting peso 
appreciation as a further erosion of their competitiveness. 
Finally, Colombian Members of Congress have scheduled 
hearings in the Senate for Central Bank President Jose Dario 
Uribe to explain why the Bank has not met inflation targets 
the last three years and to justify the latest rate increase. 
 
 
¶9. (SBU) In an effort to respond to concerns about the 
economy, politicians and business leaders have offered up an 
increasing number of ideas to limit the impact of inflation 
and the peso's appreciation. For example, Senator Gabriel 
Zapata, a member of the pro-Uribe Administration legislative 
coalition, has introduced legislation to substitute the 
Colombian Peso with the U.S. dollar as the national currency. 
 Pointing to lower inflation and interest rates in Panama, El 
Salvador and Ecuador where dollarization has taken place, 
Zapata says his proposal would avoid the exchange rate 
fluctuations that have hurt Colombian exporters. 
Nevertheless, Central Bank President Uribe and business 
leaders such as Juan Pablo Cordoba, President of the 
Colombian Stock Exchange (BVC), have publicly dismissed the 
idea of dollarization as a solution to the current dilemma. 
 
¶10. (SBU) President Uribe dedicated the majority of his July 
20 address to Congress to concerns about the economy, 
suggesting increased subsidies for export industries and 
public investment despite a persistent fiscal deficit that 
has bolstered inflation.  Likewise, Agriculture Minister 
Arias has suggested that the GOC implement price controls for 
food and other products, which would mark a significant step 
away from the Uribe Administration's steady efforts to 
liberalize the Colombian economy since 2002.  Bancolombia 
President Londono expressed concern to us about such populist 
economic ideas that the GOC had floated in recent months, but 
said he remained confident that the Uribe Administration 
would not do serious harm to Colombia's market economy. 
 
A Bright Side Still Remains 
--------------------------- 
 
¶11. (SBU) Despite facing external and policy challenges, the 
Colombian economy remains well positioned to continue growing 
between 4 and 5 percent into 2009. Trade Minister Plata 
announced August 7 at the ANDI national assembly that foreign 
direct investment was on pace to reach USD 11 billion in 
2008, a record for Colombia.  Likewise, the GOC recently 
trimmed over 1 percent (approximately USD 800 million) of its 
2008 budget which should help contain its fiscal deficit and 
 
reduce inflationary pressures.  Finally, the GOC's gains in 
security, its steps to open the economy to foreign trade, and 
its increasing public investment all serve to reinforce the 
Colombian economy's  competitiveness and ability to weather 
immediate challenges such as the peso's appreciation and 
inflation. 
BROWNFIELD