Cablegate: Strong Economic Outlook

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

251849Z Oct 05

UNCLAS SECTION 01 OF 03 BOGOTA 010027

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN CO
SUBJECT: STRONG ECONOMIC OUTLOOK

1. Summary: Public support for the re-election of President
Uribe generally focuses on the administration's security
policy. The recent performance of the macro economy,
however, suggests the President's economic policies have
been likewise successful. While significant improvements in
macro indicators portend medium-term stability and growth,
some concerns, such as budget reform, remain. Continued
improvements in Colombia's security situation and the
successful completion of an FTA with the United States could
consolidate recent structural gains into long term positive
trends. End Summary.

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GDP Growth with Stability
-------------------------

2. In its first break-out quarter since the beginning of
the Uribe administration, Colombia's GDP grew at 5.3 percent
in the second quarter of 2005, according to the Central
Bank. The most robust sectors included commerce (10.2
percent growth), financial services (9.8 percent),
construction (7.7 percent) and personal & social services
(6.3 percent). Transportation & communications grew 5.6
percent, manufacturing 4.6 percent, and utilities
(electricity, gas and water) 4.2 percent. The sectors with
weakest growth rates were agriculture (2.8 percent) and
mining (1.7 percent). Inflation through August 2005 fell to
4.9 percent year-on-year. Exports have grown by 37 percent
through June, supported by high energy prices and growth in
non-traditional exports. Foreign investment is also strong
in many sectors, especially oil, coal, and
telecommunications. In a significant example, mega-brewer
SABMiller recently completed a USD 8 billion purchase of
Bavaria, a Colombian-owned multinational beverage company.
Phillip Morris' purchase of ColTobaco earlier in the year
was another sign of the faith foreign investors are gaining
in the Colombian economy.

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Improved Collections and Reduced Spending
-----------------------------------------

3. The Ministry of Finance plans to lower combined public
sector deficit target to 1.5 percent of GDP from a projected
target of 2.5 percent, reflecting a decline in central
government debt and higher oil prices. According to the
Central Bank (CB), total public revenues are expected to
rise to 31.9 percent of the higher GDP, a .7 percent
improvement over last year's projections for 2005. The CB
adds that as a result of improved tax administration, tax
revenues are projected to rise to 21 percent of GDP. The
GOC is set to exceed its tax collection by nearly one
billion USD (as of September 2005, tax receipts have
exceeded projections by 875 million USD). According to the
GOC, the number of income tax contributors increased by
300,000 in 2005 to a total of 1.1 million tax payers. An
estimated 400,000 new contributors are projected for 2006.
Between January and September 2005, tax collections
increased by 15 percent. Further strengthening the income
equation, high global oil prices will allow Ecopetrol, the
state-run oil company, to generate a significantly larger
operating surplus.

4. Lower interest payments, resulting from a decline in
domestic interest rates and a shift of public debt from
external to internal securities has contributed to a
significant reduction in government spending. So far in
2005, the GOC has prepaid approximately USD 2 billion of
external debt through the sale of reserves or replacement
with domestic bonds (known as TESs). According to GOC
analysts, the recently passed pension reform will cut the
actuarial deficit of the pension system by 19 percent of the
GDP, although this is only two-thirds of the savings the GOC
hoped to pass through Congress. Territorial governments,
projected to run a slight deficit in 2005, are instead
running a surplus estimated by the GOC at 0.7 percent of
GDP.

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Colombia's Securities Market
----------------------------

5. Capitalization of Colombia's stock market has increased
in recent years, from USD 9 billion in 1999 to a record-
breaking USD 24.5 billion in 2004. As of September, 2005,
market capitalization reached USD 38.9 billion. The number
of listed firms on the exchange, however, is relatively
light at 105 listings. According to the IMF, the average
number of listed firms in Latin American exchanges is 237.

6. The volume of TESs placed in the market went from
approximately USD 8.7 billion in 1997 to USD 25.2 billion in
March 2005, and are expected to reach approximately USD 30
billion by year-end 2005. More than 90 percent of fixed
income transactions involve government securities. This
enhanced performance has contributed to a deepening of the
secondary market. The volume of transactions in the
secondary debt markets went from daily averages of
approximately USD 434.7 million in the first half of 2001 to
daily averages of between USD 3.5 and 4.3 billion in the
first quarter of 2005.

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Long Term Stability
-------------------
7. In 2004, the Central Bank purchased USD 2.9 billion in
foreign exchange to control the appreciation of the peso.
Between January and September 2005, the Bank purchased an
additional USD 4 billion. As a result, the level of
accumulated international reserves is currently close to USD
16 billion, far exceeding the International Monetary Fund's
USD 12.2 billion target for the GOC under its stand-by
agreement. The exchange rate has stabilized at roughly CP
2200-2300 per USD 1 (from 2700 per USD 1 at the end of
2003). Confidence of Colombians in the economy has lead to
a return of overseas assets according to anecdotal evidence.
In paying down foreign debt early, the government is taking
advantage of the moment. By maintaining tight rein on
spending and broadening the tax base, even without the
desirable tax reform, the GOC is laying the base for low
government deficits in the future. The financial sector
which helped precipitate the recession of the pre-Uribe
years has strengthened considerably and loan loss reserves
now fully cover the non-performing loans (about 3 percent of
total loans).

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Looking Ahead
-------------

8. The GOC now recognizes that impressive as the 5.3
percent GDP growth rate in 2Q2005 is, the actual growth is
probably higher. Many observers agree the GDP data series
is badly out of date and underestimates growth. The GOC
plans to address the problem in the medium term.

9. As macro-economic conditions have improved, unemployment
has fallen from 13.1 percent in August 2004 to 11.3 percent
in August 2005. Positive structural adjustments, such as
improved tax collection, fiscal austerity, and a successful
monetary policy that keeps interest rates low, inflation in
check, and the peso strong, have resulted in an increased
optimism among economists. Concerns, however, do remain.
The International Monetary Fund, in its past two stand-by
loan agreements with the GOC, required that the GOC pass
meaningful budget reform. The GOC has been unable to do so
over several Congressional sessions, and reform is now
unlikely to be passed until after Colombia's election season
ends in 3Q2006.

10. President Uribe's policies have produced steady, if not
dramatic improvements in most indicators over the course of
his administration. Progress in institutional reforms such
as state-funded pensions, tax administration, and monetary
policy appear to have generated a strong basis for
sustainable economic growth over the medium-term. A global
economy favorable for Colombia has meant increased prices
for oil, coal, and coffee, three key exports. Colombia has
increased exports of all three commodities in volume as well
as price. Further advances in the security situation in
Colombia and the successful completion of the U.S.-Andean
Free Trade Agreement could consolidate these gains into long-
term increases in investment and sustainable economic
growth.

11. Gains in security as well as improved fiscal
performance auger well for Colombia to make badly needed
road, rail, and other infrastructure improvements, the lack
of which would severely hamper economic development and
growth.

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Comment
-------

12. The battle against narco-terrorists forces the
government to spend 4.5 percent of its GDP on defense (16.3
percent of the national budget). A downturn in key
commodity prices (three basic commodities accounted for
almost two thirds of Colombia's exports in the first half of
2005) would have a dramatic effect on the economic outlook.
The Colombian economy, however, is diversifying and growth
of manufactured goods, exports, and increasing agricultural
diversification away from coffee (now only the fourth
largest export category) are reducing Colombia's dependence
on global commodity markets. A free trade agreement with
the U.S. can only enhance that trend increasing Colombia's
reliability as a trading partner, making it a better market
for U.S. exports and increasing economic stability. Driven
by increased economic opportunities, the continuing
urbanization of Colombia offers the best chance for young
workers to leave the coca and poppy fields behind.

Wood

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