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Cablegate: Colombia's 2008 Macroeconomic Outlook-Aiming for A

VZCZCXYZ0008
RR RUEHWEB

DE RUEHBO #0002/01 0021650
ZNR UUUUU ZZH
R 021650Z JAN 08
FM AMEMBASSY BOGOTA
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 0743
INFO RUEHCV/AMEMBASSY CARACAS 9722
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 5758
RUEHZP/AMEMBASSY PANAMA 1025
RUEHQT/AMEMBASSY QUITO 6463

UNCLAS BOGOTA 000002

SIPDIS

SENSITIVE
SIPDIS

WHA/EPSC FOR PMAIER; TREASURY FOR MEWENS

E.O. 12958: N/A
TAGS: ECON EFIN EINV AADP CO
SUBJECT: COLOMBIA'S 2008 MACROECONOMIC OUTLOOK-AIMING FOR A
SOFT LANDING

REF: BOGOTA 7772

1. (SBU) SUMMARY: As Colombia completes one of its best
economic years in recent history with growth approaching
seven percent, the outlook for 2008 foreshadows slower growth
closer to the five percent average registered since 2003.
Buoyed by an improving security situation, strong inflows of
foreign direct investment and sound macroeconomic policy,
unemployment continues to fall gradually while inflationary
pressures remain moderate. Colombia's currency appreciation,
high real interest rates and expanding current account
deficit could threaten GOC efforts to engineer an economic
"soft landing". END SUMMARY.

2007-Out with a Bang
--------------------

2. (U) Although final data has not been announced, by
virtually all accounts Colombia's private sector and public
policymakers regard 2007 as one of the best economic years in
recent memory. Continued improvements in the domestic
security situation, high commodity prices, strong consumer
demand from Venezuela, and record foreign direct investment
(septel) fueled growth above 7 percent for much of the year.
According to preliminary figures, foreign investment in 2007
reached USD 7.6 billion--Colombia's second highest total ever
and almost 20 percent higher than in 2006.

3. Most experts predict that final year-end GDP growth will
fall between 6.5 and 7 percent. Inflation spiked early in
2007, causing the GOC to miss its 4.5 percent target, but
moderated in the second half of the year to settle near 6
percent. Unemployment remained stubbornly fixed for much of
2007, but according to preliminary data released December 28,
dipped to close the year at 9.4 percent--the first
single-digit rate since 1997.

4. (U) On the public sector side, Colombia's gross public
sector debt fell to 42 percent of GDP in 2007 (from 52
percent in 2002) and the portion of debt denominated in
foreign currency dropped to 30 percent (from 49 percent in
2002). Meanwhile, Colombia's international reserves
increased over USD 5 billion to almost USD 21 billion, or the
equivalent of more than nine months of total imports. The
GOC took advantage of increased investor confidence from
Colombia's improved security situation and its improving
sovereign credit rating to refinance much of its debt during
the year. Through restructuring debt at longer maturities
and lower interest rates, the GOC expects to lower its
overall debt service costs by 1 percent of GDP in 2008.

2008-In with Slower Growth
--------------------------

5. (U) Local analysts, citing a slowing U.S. and global
economy, conservative monetary policy by Colombia's central
bank, a weak U.S. dollar, and rising imports, predict the
Colombian economy will expand at a slower pace in 2008.
Recent polls of local financial institutions forecast an
average growth rate of 5.5 percent, the Central Bank's
benchmark interest rate remaining above 9 percent, and the
Colombian peso depreciating moderately (5 percent) to around
2100 pesos per 1 USD. GOC Finance Minister Zuluaga, Central
Bank Governor Uribe and Director of Public Credit Julio
Torres have all emphasized the Colombian economy's overall
strong fundamentals and pointed out the government's
commitment to fostering long-term sustainable growth rather
than periods of rapid expansion that risk overheating the
economy.

6. (U) At a December 6 conference hosted by the Good
Government Foundation, private sector experts including
former Colombian Representative to the International Monetary
Fund Guillermo Perry and National Association of Financial
Institutions (ANIF) President Sergio Clavijo led credence to
GOC assurances. Both Perry and Clavijo said that, without
systemic changes in fiscal, labor, and tax policies,
Colombia's maximum sustainable growth ceiling was around 5
percent.

Clouds on the Horizon
---------------------


7. (U) Fiscal constraints on public investment, rigid labor
practices, and onerous tax rates will continue to restrain
long-term growth. However, over the next year, most analysts
point to the peso's appreciation, high interest rates, and a
growing current account deficit fueled by rising imports, as
the major threats to the Colombian economy. The peso's
nearly 15 percent rise against the U.S. dollar in 2007 has
crimped Colombian exports to the U.S., particularly in
textiles, while making imports cheaper. Rising imports
paired with the GOC's chronic fiscal deficit have raised
concern that Colombia's current account deficit could reach
destabilizing levels. High interest rates also worry the
private sector, which has increasingly criticized GOC
monetary policy for stifling business credit and investment
with the region's second-highest real rates.

Comment
-------

8. (SBU) Despite some vulnerabilities, including sensitivity
to a recession in the U.S., Colombia's economic outlook for
2008 remains solid. The consensus forecast growth rate of
5.5 percent tracks with GOC estimates included in the 2008
budget (ref B) and poverty reduction program and should not
derail the Uribe Administration's plans to consolidate its
economic gains and reduce poverty to 35 percent by 2010.
Likewise, holding the benchmark interest rate near 9 percent
in 2008 will bridle the Colombian economy, but should help
the GOC meet its inflation target of 4.5 percent, moderate
private sector demand for imports, and maintain the economy
in a sustainable expansion.
Nichols

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