VZCZCXYZ0001
RR RUEHWEB

DE RUEHBO #3076/01 2322233
ZNR UUUUU ZZH
R 192233Z AUG 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 4257
INFO RUEHCV/AMEMBASSY CARACAS 0904
RUEHLP/AMEMBASSY LA PAZ AUG LIMA 6474
RUEHZP/AMEMBASSY PANAMA 2188
RUEHQT/AMEMBASSY QUITO 7157
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 003076 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD CO
SUBJECT: STRENGTH OF THE COLOMBIAN PESO: HOW HEAVY IS THE 
EXPORTERS' ALBATROSS? 
 
REF: A. BOGOTA 2918 
     ¶B. BOGOTA 2053 
 
¶1. (SBU) SUMMARY.  Since 2003, the Colombian peso has 
averaged about nine percent annual nominal appreciation 
against the dollar.  The revaluation, a product of global 
economic pressures and Colombia's improved economic and 
security situation, has been more pronounced in the last two 
years and is taking a toll on exporters, who see their 
products becoming less competitive.  The short-term policy 
tools available to the GOC in the current inflationary 
environment are limited and only marginally effective. 
Nonetheless, exports continue to grow, as sectors consolidate 
and re-orient toward higher value-added activities.  In the 
future, the export sector's ability to increase productivity, 
not the benefits of a cheap peso, will determine its 
competitiveness.  END SUMMARY. 
 
AN APPRECIATION EXPORTERS DO NOT APPRECIATE 
------------------------------------------- 
 
¶2. (SBU)  The peso has appreciated steadily in nominal terms 
since early 2003, when a dollar bought almost 3000 pesos. 
From its weakest point in 2006 of 2634 pesos/dollar (June 
29), to its strongest point so far in 2008 of 1652 
pesos/dollar (June 19), the peso appreciated by 59.4 percent 
(in nominal dollars-per-peso terms).  Add to that the fact 
that Colombia's annual inflation rates over the last several 
years have totaled around 4-6 percent, while U.S. figures for 
the same period reached only 2-3 percent, and the real 
appreciation of the peso is even more pronounced.  Export 
sectors, including coffee, cut flowers, and textiles, are 
complaining that the strong peso threatens to put their 
companies out of business and could drag down the overall 
economy (Ref A). 
 
A PRODUCT OF GLOBAL PRESSURES AND COLOMBIA'S OWN SUCCESS 
--------------------------------------------- ----------- 
 
¶3. (SBU) Deputy Minister of Commerce Eduardo Munoz offered 
four principal causes of the peso's appreciation.  First, and 
most important, are global pressures toward a weak dollar, 
over which Colombia has no control.  Second, Colombia's 
success in its economic goals of increasing exports, 
attracting more greenfield investment, and increasing 
tourism.  Third, the relatively large interest rate 
differentials between the U.S. and Colombia as a result of 
the Colombian Central Bank trying to fight inflation put 
further pressure on the peso to appreciate.  Finally, 
expectations of the peso's further appreciation in foreign 
exchange markets creates speculative pressure toward 
appreciation. 
 
THE PSYCHOLOGY OF 2000 PESOS 
---------------------------- 
 
¶4. (SBU)  When asked what they would consider an appropriate 
exchange rate, most exporters offer figures ranging from 2000 
to 2200 pesos/dollar.  Juan Lucas Restrepo, Commercial 
Manager of the National Federation of Coffee Growers, said 
that any rate greater than 2000 pesos was manageable, but 
that spot rates of less than 1700 (as was the case for 
several days in June) are not sustainable for many growers. 
Roy Azout, Managing partner of Lafayette textile factory 
picked 2100-2200 pesos as an appropriate level, but admitted 
that what passed for a "comfortable" exchange rate today 
would have seemed dangerously strong just two years ago. 
Munoz said he sensed relief from exporters on news that the 
peso had sustained an exchange rate of more than 1800 pesos 
for the entire second week of August. 
 
POLICY TOOLBOX IS LIMITED 
------------------------- 
 
¶5. (SBU) Colombia has maintained a floating exchange rate 
regime since 1999.  While the Central Bank has the authority 
to intervene in the exchange market, and has done so in the 
past, its primary focus on inflation limits its ability to 
bring down the peso's value through open market operations. 
The GOC has had capital controls in place since May 2007 (ref 
B), but most experts agree they have done little to stem the 
peso's appreciation.  President Uribe stated recently that 
 
his administration continues to study options to ease or 
eliminate the controls.  Javier Diaz Molina, President of the 
National Association of Foreign Trade (Analdex), noted the 
importance of GOC action on the macro and micro level to help 
exporters weather a period of revaluation.  On the macro 
side, he recommended reducing public spending so as to ease 
inflationary pressures, which would allow interest rates to 
come down.  On the micro side, he endorsed GOC tax benefits 
to exporters when the exchange rate was fewer than 2,000 
pesos per dollars and targeted subsidized lines of credit. 
 
¶6. (SBU) In addition to the peso's overall appreciation, 
AmCham Executive Director Miguel Gomez noted the recent 
volatility that had characterized the peso-dollar exchange 
rate and frustrated exporters.  In the ten-day period from 
June 24 to July 4, the peso moved from 1714 pesos/dollar to 
1923 and then back down to 1748.  While Gomez acknowledged 
that many exporters use futures contracts and other 
derivatives to hedge against volatility, he said that 
Colombia's shallow peso-dollar market left it vulnerable to 
extreme fluctuations when multinational corporations made 
large transactions. 
 
GROWING EXPORTS BELIE CHORUS OF WOE 
----------------------------------- 
 
¶7. (U) Colombia's total exports are on pace to increase by 27 
percent in 2008, after increases of 23 percent in 2007, and 
15 percent in 2006.  Exports increased by 128 percent between 
2003 (when the sustained peso appreciation started) and 2007. 
 Even sectors mentioned as being hit hardest by the peso 
appreciation -- cut flowers and textiles -- have posted 
positive export growth (in both peso and dollar terms). 
 
¶8. (SBU) The U.S. and Venezuela (whose official exchange rate 
is pegged to the dollar) are Colombia's two principal export 
markets and account for over half of Colombia's total 
exports.  Exports to each of these countries grew in the face 
of the peso's appreciation in 2007 -- by 6 percent to the 
U.S. and by 96 percent to Venezuela.  While many attribute 
part of the large increase in exports to Venezuela to 
overinvoicing, Munoz noted that Venezuelan demand for imports 
has grown tremendously due to the inability of domestic 
producers to satisfy consumer desires, coupled with huge 
inflows of petro-dollars.  With the euro-peso nominal 
exchange rate largely stable, Colombian exports to Euro-zone 
countries increased in 2007, but still accounted for only 
about 13 percent of the total. 
 
RENEWED FOCUS ON PRODUCTIVITY: REVALUATION'S SILVER LINING? 
--------------------------------------------- -------------- 
 
¶9. (SBU) According to Munoz, many companies entered certain 
export sectors due to an undervalued exchange rate, but had 
made no efforts to increase productivity, and therefore would 
go out of business with the appreciation of the peso.  On the 
other hand, the revaluation had prompted many export-oriented 
companies to re-orient their production toward activities and 
product-lines with the highest value-added.  According to 
Munoz, the GOC focuses on creating jobs by promoting 
increased productivity and developing a handful of 
world-class sectors, in areas such as business process 
outsourcing, cosmetics, pharmaceuticals, and biotechnology. 
 
COMMENT: LEARNING TO LIVE WITH A STRONG PESO 
-------------------------------------------- 
 
¶10. (SBU) Undoubtedly, the revaluation over the last several 
years has spurred consolidation in export sectors and taken 
the less competitive actors out of the market.  Nonetheless, 
savvy policy-makers realize, first, that there is little they 
can do about the revaluation of the peso, and second, that 
there can be benefits to a stronger peso, such as cheaper 
capital imports and a renewed focus on efficiency.  Gone are 
the days when exporters could lean on an exchange rate crutch 
to be competitive.  Colombia's export sector's success in the 
medium and long term will depend on its ability to adapt to, 
and take advantage of a stronger peso. 
BROWNFIELD