Cablegate: Goc Tightens Capital Controls As Peso Hits


DE RUEHBO #2053/01 1581409
R 061409Z JUN 08




E.O. 12958: N/A


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

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.

© Scoop Media

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