Cablegate: Colombia Institutes Capital Controls On Investors

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




E.O. 12958: N/A

1. (U) SUMMARY. President Uribe announced in an evening
press conference on December 14 that Colombia would be
instituting capital controls investments entering Colombia.
This move comes after a year-long appreciation of the peso
(14 percent over the past year) and a three day period just
before the decision in which the peso appreciated 3 percent.
While it is still too soon to determine what the long term
effects of this move will be, investors agree that the
controls will do little to change the positive macro
environment in Colombia. END SUMMARY.

2. (U) Decree 4210, signed by the Minister of the
National Planning Department, the Minister of Finance, the
Minister of Commerce and the President, forces investors to
keep their money in Colombia for at least one year. The
decree comes after what one Central Banker says was intense
pressure from the export lobby for the government to
intervene. Export lobbyists argue that up to 20,000 jobs
have been lost in the past few months as a result of a fall
in revenues from exports hurt by the strong peso. This
argument stands in stark contrast to Colombia's current
unemployment rate of 12.5 percent, down from 17 percent at
the beginning of 2004. In addition, Colombian exports have
risen dramatically this year, creating a USD 723 million
trade surplus, which is up from a total year trade deficit of
USD 192 million in 2003.

3. (U) On the Presidential website, Uribe states,
"Colombia wants to give a clear signal that Colombia is ready
to receive serious capital that is established and for
investment, but we can't permit that speculative capital in
the short run comes into Colombia and endangers our exchange
rate." In the aftermath of this decision, multiple investors
have told econoffs that the effects will be limited; however,
many seem ready for more intervention in the future. There
is a general expectation that a Tobin tax, a tax on
investments coming in and out of the country, is possible.
While future reforms may cause some concerns to investors, a
Deutsche Bank representative told econoff that investors
looking at credit risk are more concerned about delays in the
passage of pension and tax reforms than the appreciation of
the peso.

4. (U) While the peso has appreciated against the dollar,
it has not greatly appreciated against other regional
currencies. In addition, the peso did not appreciate in 2003,
which leads many analysts to assume that it was undervalued
as the year began. A Citigroup report values the peso at
just above its 12 year average and still very far below highs
in 1997. The peso continued to appreciate against the dollar
the day after the decree was signed.

5. (U) Experts have offered many reasons as to why dollar
inflows and Foreign Direct Investment (FDI) have increased
since last year. From January to June of 2004, FDI increased
73 percent from 2003 numbers. These increased dollar inflows
are the likely outcome of improved security and an economy
recovering from a recession. Investors are more willing to
invest in a politically and economically stable country.
Remittances, which totaled USD 3 billion last year, have also
put upward pressure on the peso. The high price of oil
(petroleum exports January to July in 2004 were USD 2.8
billion vice petroleum exports for the same period of in 2003
which were USD 1.9 billion) has also brought dollars into
this oil exporting country. Higher coffee prices are another
factor pushing the peso upward.

6. (U) COMMENT. Colombia's capital control decree was issued
in response to intense political pressure from exporters,
including the sensitive agricultural sector. Exporters may
be concerned about the "double whammy" of a lower-priced
dollar and the opening of Colombia's market to U.S. goods via
the forthcoming Free Trade Agreement. As we move closer to
signing an FTA, Colombian exporters, especially in the
agricultural sector, may view government intervention to
weaken the peso as the only solution to this perceived

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