Cablegate: Colombia: Second Quarter Performance Bodes Well

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

UNCLAS SECTION 01 OF 03 BOGOTA 008814

SIPDIS

DEPT PLS PASS EXIM FOR MARCELO LEFLEUR

E.O. 12958: N/A
TAGS: ECON EFIN EPET PREL EFIN EFIN EPET PGOV PREL CO
SUBJECT: COLOMBIA: SECOND QUARTER PERFORMANCE BODES WELL
FOR 2005

UNCLASSIFIED

SIPDIS
PROG 8/22/05
CHG: MKDRUCKER
ECON:ADONNALLY
ECON:FFERNANDEZ, ECON:MFERGUSON, USAID:PDAVIS

AMEMBASSY BOGOTA
SECSTATE WASHDC

E.O. 12958: N/A
TAGS: ECON EFIN EPET PREL EFIN EFIN EPET PGOV PREL CO
SUBJECT: Colombia: Second Quarter Performance Bodes Well for
2005

1. Summary: The Colombian economy continues to grow
steadily, fueled by increased exports, a strong peso, and a
low, stable inflation rate. These factors in turn increased
investor confidence leading to record levels for the stock
exchange and a dramatic increase in private investment.
While the government is optimistic about recent growth
statistics, fiscal and budgetary reform legislation are still
required to consolidate Colombia,s gains in the medium- to
long-term. The long-term outlook is bright despite the
question of Uribe,s reelection. End summary

The Good News Keeps Coming

2. Colombia,s economic indicators continue their positive
trajectory. Government estimates for GDP growth for 2005
have been increased to 4 percent from 3.8. Trade in the
first semester grew 37 percent over last year, and Colombia
is running a USD 1.7 billion USD trade surplus. Exports to
the US have grown by 17 percent according to the United
States International Trade Commission (USITC), led by exports
under the ATPDEA program. Traditional exports have been
helped by surging world prices, but non-traditional exports
are also growing despite the peso,s revaluation (20 percent
since early 2004). Foreign Direct Investment continues to
grow, and is up 33 percent over last year, reaching USD 822
million in the first quarter. Unemployment has also dropped
from 13.4 percent in December to 11.4 percent by June.

3. The Colombian government also reached agreement with the
International Monetary Fund (IMF) on a new stand-by program
and expects to graduate from the IMF program in November
2006. IMF Mission Chief for Colombia, Robert Rennhack, is
optimistic about Colombia,s current fiscal and economic
situation. During a meeting with Econoff and USAID
Economist, Rennhack pointed to the growth of foreign
investment in Colombia,s extractive sectors and higher than
expected tax inflows as evidence of Colombia,s improved
fiscal outlook. Rennhack was also pleased with Colombia,s
surprisingly strong export numbers, and added that the
strength of the Colombian peso relative to the dollar was
likely more permanent than originally projected. Rennhack
noted that fiscal reforms are needed to consolidate
short-term gains in the macro economy, and said he hopes the
GOC will maintain its clear and focused monetary policies in
the run-up to the 2006 elections.

4. Colombia,s fiscal health also continues to improve. The
fiscal deficit for 2004 was only 1.6 percent of GDP, and
thanks to growing revenues and export revenues from oil, the
GOC has lowered its deficit target for 2005 to 1.6 percent of
GDP from 2.5 percent. 2Q05 deficit is currently 1.8 percent
of GDP and is likely to total 2 to 2.2 percent at year-end.
The GOC has also continued its process of lowering its
overall debt burden from a high of 58 percent of GDP in 2003
to slightly over 50 percent of GDP. At the end of 2004
foreign currency debt equaled 41 percent of GDP and was two
times annual exports. Moreover, the GOC has taken advantage
of liquidity in Colombian capital markets to change the
composition of the debt from approximately 60 percent foreign
debt/40 percent domestic to 60 percent domestic/ 40 percent
foreign debt. The GOC also prepaid USD 1.25 billion of IDB
debt in early 2005 and is expecting to re-purchase another
USD 700 million in debt in September 2005. The Central Bank
is also studying the use of USD 2 billion in reserves to buy
back additional debt. International reserves are at a record
USD 15 billion, after the Central Bank purchased
approximately USD 4 billion over the past 18 months in an
attempt to slow the peso,s revaluation. The sound fiscal
policy has lowered interest rates to historically low levels
(6.93 percent). Inflation is also at historically low rates
and the GOC expects to meet its 5 percent target this year.
The Colombian stock market has also been a bright spot,
growing 43.7 percent from January through August, making it
the fourth most lucrative market in terms of net returns
tracked by Bloomberg.

Potential Problems on the Horizon
---------------------------------

5. While the current trend is positive, there are some
structural issues, which need to be addressed if Colombia,s
economic recovery is to continue. Chief among these are
budgetary, tax, and further pension reform. With Colombian
elections taking place during the first quarter of 2006,
analysts expect these reforms will be considered during the
latter half of that year at the earliest.

6. Economists agree that the budgetary reform is a priority
for Colombia. Colombia,s global competitiveness depends on
freeing major portions of government spending from
constitutionally mandated ear-marks, such as pensions and
transfers. Additionally, focusing on tax reform will
contribute to Colombia,s future business development and
growth. According to Embassy data, Colombia has the highest
income and corporate tax rates in Latin America (38.5 percent
personal and corporate rate)

6. Colombia,s debt continues to be of concern to economists.
Although the GOC is taking full advantage of the strong peso
to swap its debt out of dollar- or Euro-denominations,
concerns exist about a possible crowding-out effect of local
debt (known as TES,s) tightening access to credit or placing
inflationary pressure on the currency, despite historically
low level inflation. Colombia,s debt is also currently
sustainable as a result of high commodity prices, especially
oil, coal and coffee. If the prices or export volume of
these commodities rapidly decline, the government will have
to tighten fiscal spending to meet its bottom line.

Statistical Tables
------------------

Real GDP Growth
BILL CP BIL USD GDP Growth
1999 72,250 86.2 ---
2000 74,363 83.7 2.9
2001 75,393 81.7 1.5
2002 76,637 80.9 1.8
2003 79,820 83.8 3.9
2004 83,369 97.3 4.1
1Q05 21,261 25.7 3.6

Source: National Planning Department

GDP Percentage Growth-Sector

SECTOR 2002 2003 2004 IQ-2005
Agriculture 00.6 03.1 02.09 03.36
Mining 4.3 12.1 02.82 05.08
Utilities 03.0 03.3 02.91 00.41
Manufacturing 01.1 04.2 04.77 -00.99
Construction 12.7 12.4 10.65 10.60
Hotel/Rest. 01.4 05.1 05.62 07.27
Transport/Commun. 03.0 04.5 05.05 03.53
Financial 02.4 04.6 04.33 -02.69
Social Services 00.9 01.2 02.76 02.44
Bank Services ----- 13.9 12.16 -14.15
Subtotal 01.8 03.9 03.82 03.09
Taxes w/o IVA -2.3 -1.9 05.96 10.99
GDP 01.8 03.9 03.96 03.61

Source: National Planning Department

CPI Index Inflation

1998 16.7
1999 9.23
2000 8.75
2001 7.65
2002 6.99
2003 6.48
2004 5.50

2005 Jan 0.82
Feb 1.02
Mar 0.77
Apr 0.44
May 0.41
June 0.40
July 0.05
Aug 0.00

Source: Central Bank (Banco de la Repblica)
Unemployment (Percent)

1997 12.0
1998 15.6
1999 18.1
2000 19.7
2001 13.8
2002 15.1
2003 13.1
2004 12.1
JAN 05 13.2
FEB 05 14.0
MAR 05 13.1
APR 05 12.0
MAY 05 12.5
JUN 05 11.4

Source: DANE (National Statistics Directorate)

Imports Exports (USD million)
1998 14,635 10,822
1999 10,659 11,596
2000 11,800 12,700
2001 11,996 12,329
2002 11,897 11,975
2003 13,022 13,127
2004 15,626 16,729
1Q05 4,400 4,536

Source: ProExport (Colombian Trade Promotion Agency)

8. Now is the time for Colombia to take advantage of good
economic conditions to get its financial house in order.
Colombia,s President in the 2006 ) 2010 period will need to
get Congressional support for fiscal and budgetary reforms.
With those reforms and a benign international economic
environment, Colombia can continue to grow at moderate rates
indefinitely. With an improving security situation,
Colombia,s growth rate could improve significantly.
WOOD

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