Cablegate: Slower Colombian Economy in 2008 Amid Inflation


DE RUEHBO #2918/01 2241238
R 111238Z AUG 08




E.O. 12958: N/A

REF: A. (A) BOGOTA 2558
B. (B) BOGOTA 2053

1. (SBU) SUMMARY: A slowing global economy, rising inflation
and currency appreciation are now expected to drag Colombia's
economy down from its average of over 7 percent in 2006-07 to
less than 5 percent in 2008. Many business leaders and GOC
officials including President Uribe blame the Central Bank's
interest rate policy for much of the slowdown, though more
nuanced observers acknowledge broader economic forces at play
and contend that Colombia is returning to a more sustainable
growth rate for the longer term. While questionable
solutions to address rising prices and slowing growth, such
as price controls, export subsidies, and dollarization of
Colombia's economy, have surfaced, the GOC remains committed
to increasing investment, liberalizing trade relations, and
continuing sound macro-economic policies. END SUMMARY.

Signs of Slowdown Growing...

2. (SBU) According to the Colombian Business Climate poll of
1,232 Colombian businesspeople conducted by Datexco in early
July, for the first time in eight years the majority of those
polled said the GOC should focus on the economy as its top
priority above security and other issues. The results echo a
broader Gallup poll of Colombian citizens (ref A) and signal
not only the Uribe Administration's success in improving
security, but also growing worry about a weakening economy.
Businesspeople that participated in the Datexco poll cited
decreases in industrial capacity utilization (77 percent
compared to 82 percent in same period of 2007), slower growth
in consumer demand (4 percent versus 7.5 percent in 2007),
and increasing debt as worrisome signs of a slowdown in the
Colombian economy.

3. (SBU) Beyond falling confidence levels, Colombia
registered a meager 1.2 percent growth in production in the
first half of 2008 according to the National Association of
Industries (ANDI) and GDP growth of 4.1 percent during the
same period. Meanwhile, new construction starts in Bogota
(Colombia's largest construction market) fell 46 percent
compared to 2007, with declines in most other major markets
around the country as well. Beatriz Uribe, President of
Colombia's Construction Chamber (Camacol) told us a
saturation of the market from years of strong construction
growth and higher interest rates were to blame.

...As Central Bank Fights Inflation, but Fuels Peso
--------------------------------------------- ------

4, (SBU) In spite of the slowing economy, steady increases in
food and fuel costs continue to spur inflation well beyond
the Central Bank's 2008 target of 4 percent. Following
months of rising inflation figures, on July 25, the Central
Bank raised its benchmark interest rate 25 basis points to a
seven-year high of 10 percent in an effort to control
creeping inflation. Nevertheless, most local economists
believe that inflation will reach 7.5 percent for
2008--almost double the target and one percent higher than

5. (SBU) Meanwhile, the rate increases have widened the gap
between Colombian rates and U.S. rates attracting foreign
portfolio investment and pushing the Colombian peso higher
against the U.S. dollar. The inflow of foreign currency has
led to the introduction of capital controls (ref B) and
propelled a 13 percent appreciation of the Colombian Peso
against the U.S. dollar in 2008. The peso's rise has
significantly harmed the price competitiveness of the
Colombian export sector employing thousands of workers,
including the banana, cut flower, coffee and textile

Growth Estimates Slide

6. (U) Optimists began the year predicting GDP growth above 6
percent, but Colombian banks, economic thinktanks and the
government have now begun revising 2008 GDP growth estimates
downward to between 4 and 5 percent. While the GOC official

estimate has only come down from 5.3 percent to 5 percent,
the independent Central Bank lowered its estimate to 4.3
percent, blaming the economic slowdown on strikes in various
sectors, a reduction in infrastructure projects, and higher
prices for raw materials, rather than high interest rates.

7. (SBU) Jorge Londono, President of Bancolombia, Colombia's
largest bank, told us he expects GDP growth to total 4.5
percent for 2008 and said that the GOC has been "too
emotional" about the peso's fluctuation while ignoring the
keys to sustaining long term growth such as infrastructure
investment. Londono dismissed concerns of a significant
downturn in the economy and said that the 2008 growth rate
actually was returning to a more sustainable level than the
frothy expansionary rates of 2006-07. Sergio Clavijo,
President of the National Association of Financial
Institutions (ANIF), echoed Londono's analyis, telling us
that he believes Colombian economy's growth rate cannot
exceed 5 percent for more than short bursts, such as 2006-07,
until structural reforms are made on taxes, pensions, and
labor law.

Both Frustration and Ideas Welling Up

8. (U) Much of the private sector and GOC, nevertheless, have
focused blame on the Central Bank as Colombia's high-flying
economy has begun to cool. In public remarks the day after
the July 25 rate hike, President Uribe accused the Central
Bank of "throwing gasoline" on Colombia's economic challenges
by reducing consumption, job creation, and growth.
Similarly, export industry associations such as bananas and
flowers criticized the rate increase and resulting peso
appreciation as a further erosion of their competitiveness.
Finally, Colombian Members of Congress have scheduled
hearings in the Senate for Central Bank President Jose Dario
Uribe to explain why the Bank has not met inflation targets
the last three years and to justify the latest rate increase.

9. (SBU) In an effort to respond to concerns about the
economy, politicians and business leaders have offered up an
increasing number of ideas to limit the impact of inflation
and the peso's appreciation. For example, Senator Gabriel
Zapata, a member of the pro-Uribe Administration legislative
coalition, has introduced legislation to substitute the
Colombian Peso with the U.S. dollar as the national currency.
Pointing to lower inflation and interest rates in Panama, El
Salvador and Ecuador where dollarization has taken place,
Zapata says his proposal would avoid the exchange rate
fluctuations that have hurt Colombian exporters.
Nevertheless, Central Bank President Uribe and business
leaders such as Juan Pablo Cordoba, President of the
Colombian Stock Exchange (BVC), have publicly dismissed the
idea of dollarization as a solution to the current dilemma.

10. (SBU) President Uribe dedicated the majority of his July
20 address to Congress to concerns about the economy,
suggesting increased subsidies for export industries and
public investment despite a persistent fiscal deficit that
has bolstered inflation. Likewise, Agriculture Minister
Arias has suggested that the GOC implement price controls for
food and other products, which would mark a significant step
away from the Uribe Administration's steady efforts to
liberalize the Colombian economy since 2002. Bancolombia
President Londono expressed concern to us about such populist
economic ideas that the GOC had floated in recent months, but
said he remained confident that the Uribe Administration
would not do serious harm to Colombia's market economy.

A Bright Side Still Remains

11. (SBU) Despite facing external and policy challenges, the
Colombian economy remains well positioned to continue growing
between 4 and 5 percent into 2009. Trade Minister Plata
announced August 7 at the ANDI national assembly that foreign
direct investment was on pace to reach USD 11 billion in
2008, a record for Colombia. Likewise, the GOC recently
trimmed over 1 percent (approximately USD 800 million) of its
2008 budget which should help contain its fiscal deficit and

reduce inflationary pressures. Finally, the GOC's gains in
security, its steps to open the economy to foreign trade, and
its increasing public investment all serve to reinforce the
Colombian economy's competitiveness and ability to weather
immediate challenges such as the peso's appreciation and

© Scoop Media

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