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------------------232DAB 271934Z /38

P 271927Z JAN 09
FM AMEMBASSY BOGOTA
TO SECSTATE WASHDC PRIORITY 6706
INFO DEPT OF TREASURY WASHDC
AMEMBASSY BRASILIA
AMEMBASSY CARACAS
AMEMBASSY LA PAZ
AMEMBASSY LIMA
AMEMBASSY PANAMA
AMEMBASSY QUITO
USDOC WASHDC

UNCLAS BOGOTA 000262 
 
STATE FOR EEB/IFD/OIA; TREASURY FOR AJEWELL 
 
SENSITIVE 
 
E.O. 12958:N/A 
TAGS: EINV ECON EFIN PGOV OPIC USTR CO
SUBJECT: INVESTMENT HITS NEW HIGH IN 2008, BUT 2009 OUTLOOK 
UNCERTAIN. 
 
REF: (A) 07 BOGOTA 4157; (B) 07 BOGOTA 2120; (C) 07 BOGOTA 4234 
 
¶1. (SBU) SUMMARY: Colombia's success in improving security 
conditions and its investment climate has attracted record levels of 
Foreign Direct Investment (FDI) over the last six years. According 
to preliminary data, FDI reached a new high of USD 10.5 billion in 
2008 based on flows spread across various sectors. The outlook for 
2009 is not promising due to the global crisis. Nonetheless, 
Colombia will continue to incentivize FDI through instruments such 
as Free Trade Zones, bilateral investment agreements, and Legal 
Stability Contracts. END SUMMARY. 
 
You Reap What You Sow 
--------------------- 
¶2. (U) Under President Uribe, the GOC has placed top priority on 
attracting FDI to fuel sustained economic growth and job creation. 
In the 2006 National Development Plan, the GOC set a goal of 
averaging USD 4 billion per year in FDI through 2010--slightly above 
the previous 10-year average of USD 3.3 billion. However, continued 
improvements in security conditions, strong commodity prices and GOC 
steps to foster a business-friendly environment have spurred 
investment to levels consistently higher than the official target. 
 
Companies Continue to Invest and Reinvest 
----------------------------------------- 
¶3. (SBU) Following strong FDI inflows in 2006 (USD 6.7 billion) and 
2007 (USD 7.5 billion), preliminary estimates from the Colombian 
Central Bank indicate 2008 inflows will approach or slightly exceed 
USD 10.5 billion. This would amount to a record level, exceeding 
the USD 10.25 billion received in 2005 but considered an outlier 
because of the USD 7.8 billion purchase of beverage giant Bavaria by 
South African conglomerate SAB Miller. Significantly, the 2008 
total is not the result of a single large deal, but rather strong 
investment across multiple sectors. Driven by high oil prices in 
the first semester of 2008, the hydrocarbons sector captured 21 
percent of all FDI, with USD 2.7 billion in inflows-a 5 percent 
increase over 2007. The mining sector ranked second with USD 1.7 
billion, followed by the financial, manufacturing, retail and 
communications sectors, all of which registered increased flows. 
 
¶4. (SBU) While 2007 ushered in a number of new international 
companies to the Colombian market, much of the FDI in 2008 stemmed 
from existing companies seeking to expand their current operations. 
Examples include Alabama-based Drummond Coal, which announced plans 
to invest USD 1.5 billion over three years to develop coal deposits 
in northern Cesar Department; Spanish CEPSA, which acquired an oil 
production block for USD 920 million; and Brazilian steelmaker 
Gerdau which invested USD 59 million in the acquisition of a 
Colombian coke company. Also noteworthy, Colombian Central Bank 
figures indicate that foreign companies reinvested USD 1.2 billion 
in 2008 profits in Colombia, almost double the 2002-2006 average of 
USD 655 million, though lower than the record USD 1.8 billion in 
¶2007. 
 
New Tools for New Challenges 
---------------------------- 
¶5. (SBU) While rising commodity prices and the more secure and 
stable business environment were the primary contributing factors 
for new FDI over the last six years, many local experts fear that 
deteriorating global economic conditions will bring investment gains 
to a halt. According to Juan Carlos Gonzalez, Vice-President for 
Foreign Investment at Colombia's export and investment promotion 
agency, ProExport, the GOC is preparing to more aggressively promote 
a series of on-going programs, legal mechanisms and negotiations to 
offset potential reductions in foreign capital investments. 
 
¶6. (SBU) The first of these tools are the modernized and one-company 
Free Trade Zones (FTZs), which Minister of Commerce Luis Guillermo 
Plata has characterized as "the starting point to consolidate the 
rebirth of investment in the country". The FTZs offer a series of 
significant tax incentives for new investors (ref A) that have 
attracted USD 5.2 billion in investment commitments over the next 
five years. As one recent example of the FTZs' magnetic pull for 
investors, PepsiCo was granted FTZ status for its new production 
facility in exchange for USD 42 million in investment and a 
commitment to create approximately 200 new jobs. 
 
¶7. (SBU) The two other mechanisms through which Colombia expects to 
maintain FDI are the negotiation of Bilateral Investment Treaties 
(BITs) and investment chapters in its pending free trade agreements 
as well as the promotion of 'Legal Stability Contracts' (LSC) which 
guarantee the continuation of existing investment terms for foreign 
companies. In 2008 Colombia negotiated investment chapters in the 
free trade agreements it signed with Canada (ref B) and the European 
Free Trade Association (ref C), while signing individual BITs with 
Chile, Peru, Switzerland, Spain and China. The GOC concluded a 
record eight LSCs in 2008, surpassing the six total agreements 
signed since the mechanism's creation in 2006. 
 
Comment: 2009 and Beyond 
------------------------ 
¶8. (SBU) According to Gonzalez, the GOC remains committed to its 
goal of attracting USD 12 billion in FDI by 2012. To do so, he says 
the GOC will aggressively market its FTZs, investment agreements, 
and LSCs, as well as promote specific sectors, chosen from the 
Ministry of Commerce's 'Productive Transformation Strategy', 
including software and business Process Outsourcing, cosmetics, 
'healthcare tourism', hygiene, auto parts, energy, textiles and 
graphic industries. While attempting to pick "winning industries" 
is often counter-productive, effective promotion of investment 
incentives as part of a cohesive public strategy will be key to 
limiting the drop-of in FDI amid lower commodity prices and tougher 
global economic conditions. 
 
 
BROWNFIELD 
 
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