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Cablegate: 2003 Review of the Colombian Economy

This record is a partial extract of the original cable. The full text of the original cable is not available.

id: 13038
date: 1/5/2004 20:43
refid: 04BOGOTA66
origin: Embassy Bogota
classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
destination:
header:
This record is a partial extract of the original cable. The full text of the original cable is not available.


----------------- header ends ----------------

UNCLAS SECTION 01 OF 05 BOGOTA 000066

SIPDIS

SENSITIVE

USDOC FOR 4331/ITA/MAC/WH/OLAC/ACBD/JANGLIN
STATE PLEASE PASS TO USTR/BHARMAN
E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL CO
SUBJECT: 2003 REVIEW OF THE COLOMBIAN ECONOMY

1. (SBU) Summary: The Colombian economy performed well during
President Alvaro Uribe's first year in office and will end
2003 on a positive note. A significant increase in exports
to the United States helped stabilize an economy constrained
by the internal armed conflict and challenged by a
significant decrease in trade with Venezuela, the country's
second largest trading partner. GOC improvements in security
and restructuring of inefficient parastatals also helped keep
the economy on track, despite the failure of President
Uribe's reform referendum. Various indicators point to a
healthy economy in 2004, provided there is sustained private
investment and household consumption. However, alarming
social indicators, lingering fiscal problems, and a lack of
needed reforms may jeopardize future economic growth and
stability. End summary.

-------------------------------
The Colombian Economic Recovery
-------------------------------

2. (U) The Uribe administration is committed to attracting
foreign investment by improving the security environment and
opening Colombia's economy through liberal trade regimes and
free trade agreements. Uribe's first-year performance,
coupled with the prospects of negotiating for freer trade
with the United States, has improved business and consumer
confidence. The general reaction has been so favorable that
the first three quarters of 2003, which exhibited broad-based
growth, were some of the most stable in Colombia's history.
For example, according to the National Administrative
Department of Statistics (DANE), mining and fuels rose 12.4
percent year-on-year (led by Colombia's two largest exports,
oil and coal), and construction grew 9.8 percent. Other
sectors such as manufacturing, trade and tourism, transport,
communication, and agriculture grew approximately 4.5 percent
year-on-year. During the first half of 2003, the economy
grew 2.9 percent compared with 1.1 percent growth for the
same period last year. The third trimester ended on a high
note, registering approximately 4.17 percent growth. The GOC
expects 3.4 percent growth overall for 2003, and projects
that increases of 8.5 percent in private investments and 3.2
percent in household consumption will yield 3.3 percent
growth for 2004.

3. (U) Consumer spending, imports of capital goods, and home
purchases continue to fuel the economy. Several other
economic indicators point to improvement:

-- According to the National Federation of Businessmen
(FENALCO), 43 percent of retailers reported an increase in
sales. The Banking Association (ASOBANCARIA) reported that
credit card sales and advances have risen at a rate of more
than 20 percent, as have consumer loans in general. The
National Association of Industrialists' (ANDI) most recent
business poll indicated that the industrial sector recorded
growth of 2.7 percent in output and sales from January to
November compared to the same period last year.

-- Domestic spending, which affects both demand for credit
and the repayment capacity of non-tradable sectors, has
posted significant increases dating back to the second
quarter of last year.

-- The GOC raised the minimum wage 7.8 percent to USD 127 per
month -- the largest real increase in purchasing power of the
last 12 years. Approximately four million Colombians, or ten
percent of the population, earn minimum wage.

-- According to the Colombian Savings and Housing Institute
(ICAV), foreclosures are down and bank inventories are
getting smaller.

-- The Agriculture Ministry and the Association of Colombian
Farmers (SAC) predict that this year agricultural production
will grow 5 percent, an estimate based on 147,000 new
hectares that were planted this year, with palm oil, corn,
cacao, rubber, and rice leading the way. The most recent
National Agricultural Poll revealed that agriculture is now
the third most important sector of the economy, representing
14.2 percent of the GDP. (Note: SAC reports that although
the agricultural sector has been growing during this year, it
is not profitable. Despite higher prices and increased crop
cultivation for the first semester of the year, production
costs have increased significantly as a result of the
increased prices of fuel and fertilizers. End note.)

-- Employment is up. The DANE reported that the overall
unemployment rate stands at 14.3 percent. Through the third
quarter of this year approximately 900,000 new jobs were
created, representing an increase of 5.7 percent compared to
the same period in 2002.
-- For the period between January and September 2003, foreign
direct investment (FDI) from all countries totaled USD 1.5
billion. The stock of U.S. FDI in Colombia through September
2003 amounted to USD 8 billion.

--------------------------------------------
Exports, Boosted by ATPDEA, Have Led the Way
--------------------------------------------

4. (U) Total Colombian exports were eight percent higher than
last year, despite the halt in exports to Venezuela,
Colombia's second-largest export market. Exports to the
United States have more than made up the difference. The
U.S. market receives 44 percent of all Colombian exports,
more than two-thirds of which enter tariff-free. During
2003, total Colombian exports to the United States were USD
5.4 billion. Colombia exported USD 2.4 billion under the
Andean Trade Preferences and Drug Eradication Act (ATPDEA).
Considering just textiles, more than USD 158 million in
exports benefited under ATPDEA in 2003, an improvement of 48
percent over the previous year.

---------------------------
Increased Security Pays Off
---------------------------

5. (U) Uribe's proactive security strategy has delivered
important results: illegal armed groups have been weakened,
and terrorist attacks and overall violence have declined.
These improvements have facilitated increased production.
Businesses reported in a survey conducted by the Colombian
Association of Small Industries (ACOPI) that "lack of
security" decreased from representing 13 percent of their
concerns in 2002 to 5.4 percent in 2003. This improvement
has helped businesses to increase use of installed capacity
to 74.6 percent.

6. (U) Drummond Coal Company is an example of a firm that has
benefited from improved security: in its 12 years in
Colombia, the company has been successful in reducing attacks
on its infrastructure and in broadening local support for its
extractive operations. According to Drummond's local
President, Augusto Jimenez, future plans include investing
approximately USD 1.5 billion over the next five years to
develop new coal projects, creating almost 7,000 new jobs,
and exporting more than 30 million tons of coal.

7. (U) Road traffic has also risen as a result of improved
security. Alicia Naranjo, Director of the National Roads
Institute (INVIAS), reported that overall vehicular traffic
increased 7.3 percent. The increase in Colombians flocking
to rural areas during holidays and vacations has stimulated
new sectors of commerce in regions previously neglected.

--------------------------------------------- --
Restructuring Inefficient Parastatals Helps Too
--------------------------------------------- --

8. (U) President Uribe also undertook a major effort to cut
overall government expenditures and restructure inefficient
parastatal entities, which were operating at unsustainable
levels and putting significant strain on the economy. The
State Petroleum Company (Ecopetrol), Telecom, and the Social
Security Institute (ISS) were the largest entities affected.
In an effort to salvage the entities, thousands of unneeded
employees collecting inflated salaries and benefits were laid
off. The enterprises are now compelled to be more efficient
or destined to disappear in competition with the private
sector. Colombian unions responded with strikes, but
received scant public support. The GOC estimated it will
save over USD 9.2 billion, and believes that the changes have
brought about viability and governability.

-- Ecopetrol: Through decree 1760, the GOC converted
Ecopetrol, which remains a government-owned enterprise, into
a corporation that will handle field operations, and created
the National Hydrocarbons Agency, which will set petroleum
policy and handle royalties from new contracts. The
restructuring did not result in any significant layoffs,
changes in work contracts or the collective bargaining
process. The "new" Ecopetrol allows employees to become
shareholders, who can then appoint a board of directors
tasked with increasing accountability and fighting
corruption.

-- Telecom: Telecom was liquidated after operating at
unsustainable losses for several years. This decision
resulted in the firing of 5,260 Telecom employees and 1,651
employees from associated telecommunications enterprises.
The GOC created a new State-owned institution, Colombia
Telecomunicaciones, which permits the State to continue
providing service throughout the country, particularly in 750
areas where Telecom will be the sole provider.

-- Social Security: Presidential decree 1750 will split the
ISS, the largest government enterprise, into one insurer and
seven State Social Enterprises (ESE). The new ESEs, which
will be administratively autonomous with their own budgets,
will provide health services while the ISS will manage
pensions, worker's compensation, and social security.
Uribe's reform is long overdue, given that ISS is fast
exhausting its reserves, forcing the government to come up
with USD 596 million (1.7 trillion Colombian pesos) to pay
for benefits.

-----------------------------
As Does Sound Monetary Policy
-----------------------------

9. (U) The GOC strategy of keeping interest rates low and
maintaining a competitive exchange rate has spurred economic
recovery. In the first semester of 2003, interest rates
remained low, allowing for recovery of credit. Furthermore,
in response to inflationary pressures, the Central Bank
increased intervention rates twice, and held two actions of
international reserves for USD 200 million each. As a
result, interest rates have risen slightly, and foreign
exchange rates have stabilized. The 2003 target rate for
inflation is 6 percent, although inflation stood at 6.5
percent as of December 2003. The 2004 target rate is 5.5
percent.

10. (U) Near-term fiscal finances are under control. The
consolidated public sector deficits in 2003 and 2004 should
be just slightly above the 2.8 and 2.5 percent of GDP deficit
targets. The GOC has offset the shortfall resulting from the
referendum's defeat by raising taxes, reallocating transfers
to regional governments, and by cutting investment spending.

-------------------------------------
Moving on After the Referendum Defeat
-------------------------------------

11. (SBU) The GOC promoted a referendum to reform
constitutional norms that have impeded important spending
cuts. Although voter turnout was just short of the 25
percent threshold required for approval, voters
overwhelmingly supported the reform agenda. The referendum's
failure does not appear to have hurt private confidence,
which remains strong due to important gains on the security
front. The popularity of President Uribe remains in the high
70s.

12. (U) In order to make up for the loss of several
cost-cutting measures in the referendum, the Uribe
administration introduced new economic austerity legislation
that faced opposition in Congress. Changes to the VAT and
income tax regimes, which were at the heart of Uribe's tax
reform proposal, were severely watered-down. The tax bill,
which passed in an extraordinary congressional session,
provides USD 817 million, but leaves a USD 286 million gap to
be bridged by spending cuts. Measures include taxes on
wealth, personal income, financial transactions, anti-evasion
policies, and an expansion of the tax base.

13. (U) The GOC has loan commitments from international
financial institutions (IFIs) of USD 7.2 billion for the
2004-2005 period, including USD 2 billion in contingent
credit from the IMF. Many of these loans require continued
structural reforms, further strengthening the link between
the Uribe administration's ability to carry out reform and a
healthy economy. Pending reforms include a reform to the
budget code, a third-generation reform to social security,
and second-generation reform to inter-governmental
(territorial) transfer arrangements.

-----------------------------------
There is Still Room for Improvement
-----------------------------------

14. (SBU) The National Council for Economic and Social Policy
(CONPES) reported that economic growth for 2004 would rest on
sectors such as construction, industry, transportation, and
finance. Although the economic environment is generally
positive, Uribe still faces considerable challenges.

15. (SBU) The gaping budget shortfall is the most pressing.
Many Colombians have spoken out against the reform efforts.
On the one hand, critics feel that legislation passed so far
is only a temporary bandage masking the need for substantial
reform. On the other hand, some in the business community
expressed fear that a cascade of new taxes and other fiscal
belt-tightening could adversely affect consumption and
investment and undermine the nascent economic recovery. The
GOC has proposed a USD 28 billion budget for 2004. Due to
the fiscal crisis, public spending will have little influence
on jump starting the economy. The GOC may use a modest
amount of reserves for liability management operations in
2004, which, at the margin, could support bond prices.

16. (SBU) Debt continues to be a problem. Comptroller
General Antonio Hernandez stated in a report to congress that
the GOC's debt level compromises the economy's external
sustainability. Worse yet, projections to 2006 show a more
marked vulnerability. Hernandez predicted a balance of
payments crisis in the future unless the government takes
corrective action. He reported the non-financial public
sector's net debt last year stood at 51.5 percent of GDP (USD
39 billion), or 7.5 percent higher than 2002. Foreign debt
accounts for 48.2 percent of this total. (Note: Analysts who
evaluate the actual cost of foreign debt suggest that the
government should resort to borrowing from multinational
banks to a greater extent and start minimizing costly
financing avenues such as issuance of foreign bonds.
Increasing reliance on the latter has led to the adoption of
new ways to finance infrastructure projects -- concessions,
joint venture contracts, and power purchasing agreements --
that have become financially onerous for the nation. End
note.)

17. (SBU) Social indicators continue to alarm. Faster
population growth and a devalued peso contributed to a fall
in the dollar value of per capita GDP from USD 2,110 in 2001
to USD 1,852 in 2003. The percentage of the population
living in poverty remains at 60 percent, extreme poverty
exceeds 35 percent, and the underemployed represent 34
percent of the labor force. Though unemployment has declined
in the past two years, it remains relatively high and is one
of the factors weighing on domestic sentiment. The plight of
1.5 million jobless Colombians in the country's 13 largest
metropolitan areas is dramatic. This worries Uribe as well
as private sector leaders, who insist on the urgent need to
adopt "shock" measures to deal with unemployment.

-------------------
Outlook for 2004...
-------------------
18. (SBU) Comment: The outlook for the near future is
promising, but some key questions must be answered if
economic growth at relatively high levels is to be sustained:
-- Can the GOC stem the growth of the international debt?
The corollary question of whether the GOC can tame its fiscal
deficit must also be answered affirmatively.

-- Can the fiscal deficit be brought under control in what is
effectively a wartime budget without reducing security or
social expenditures below politically acceptable minimums?

-- Will Colombia's export prices hold and will the U.S.
economy continue to be a strong market for Colombian exports?

-- Will the opposition to Uribe continue to support sound
economic policy for the latter part of his term?

If the answers to the above questions are affirmative,
Colombia's near and medium-term prospects are bright. End
comment.
WOOD

=======================CABLE ENDS============================

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