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Cablegate: Strength of the Colombian Peso: How Heavy Is The

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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
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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

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