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Cablegate: Colombia's 2010 Economic Forecast: Positive Growth, but Slow

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DE RUEHBO #0231/01 0431445
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R 121445Z FEB 10
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 2775
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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UNCLAS BOGOTA 000231

SENSITIVE
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E.O. 12958: N/A
TAGS: ECON EINT PGOV CO
SUBJECT: COLOMBIA'S 2010 ECONOMIC FORECAST: POSITIVE GROWTH, BUT SLOW
RECOVERY

REF: A) BOGOTA 177; B) BOGOTA 139; C) 09 BOGOTA 3576
D) 09 BOGOTA 4120; E) 09 BOGOTA 3878; F) BOGOTA 163
G) 09 BOGOTA 3309; H) 09 BOGOTA 3359

1. (SBU) Colombian Finance Minister Oscar Zuluaga projects a 2.5
percent GDP growth rate for 2010, which is supported by both local
and international analysts. Zuluaga, however, told us that
Colombia's economic recovery will be slow and behind those of
Brazil, Chile, and Peru on account of Colombia's high dependency on
the U.S. and Venezuelan export markets. Inflation for 2010 is
expected to be around 4 percent, but unemployment will have a hard
time breaking into single digits. Construction, mining, petroleum,
and financial sectors will be the strong performers in 2010 due to
large infrastructure projects, high demand for coal, increased oil
production, and 126 million acres of oil and gas blocks up for
sale. End Summary.

2.5 Percent GDP Growth for 2010: Behind its Neighbors and the
Global Average

--------------------------------------------- ----------------------
---------

2. (SBU) GOC's Finance Minister Oscar Zuluaga told EconCouns that
economic growth for Colombia in 2010 will be positive, but around
2.5 percent, which falls below the International Monetary Fund's
world growth projection of 3.9 percent. Zuluaga added that
Colombia will not experience growth rates like Brazil, Chile, and
Peru, which are expected to be above 5 percent, because Colombia's
economy relies too heavily on the U.S. and Venezuela. He noted the
slow U.S. recovery has adversely affected Colombia's economy and
that Brazil, Chile, and Peru are more diverse in their export
markets, particularly with Asia. Exacerbating the issue are
Chavez' actions to halt the flow of Colombian exports to Venezuela,
which has reduced trade by 33 percent in 2009 compared to 2008 (Ref
A).

3. (SBU) Inflation for 2009 was roughly 2 percent, a record-low
rate that Colombia had not seen since 1955. Colombia's Central
Bank has set a goal of 3 to 4 percent for inflation in 2010, while
the private sector projects a 3.9 percent inflation rate. Analysts
note the following factors will increase inflation: low central
bank rates, currently at 3.5 percent, the 2010 increase in minimum
wage, which is 1.64 percent over inflation (Ref B), and an increase
in government spending (Ref C).

Increased GOC Spending and More Oil & Gas Exploration

--------------------------------------------- --------

4. (SBU) Colombia plans to spend billions in new infrastructure
projects with the goals of creating more jobs and bringing goods to
markets more quickly and cheaply (Ref D). Additionally, the GOC is
offering 168 oil and gas blocks, both on and off shore, that cover
over 126 million acres. In October 2009, Colombia began producing
over 700,000 barrels per day (bpd), the highest in over a decade,
and expects to hit 800,000 bpd in 2010, according to Alejandro
Martinez, President of the Colombian Association of Petroleum
producers, (Ref E). These statistics coupled with Colombia's
investment climate for oil and gas should attract several bids.
The mining sector is also growing with gold at record high prices
and an increase in demand for cleaner coal.


5. (SBU) The potential for job creation is significant in the
construction, mining, and energy sectors, but it will not make a
notable dent in the unemployment rate, where 2.5 million Colombians
are out of work. A prominent think-tank, Fedesrollo, predicts a
double digit unemployment rate for 2010 and highlights the cost of
hiring formal sector workers is too high to see significant drops
in unemployment (Ref F).

Selling State Assets to Maintain Fiscal Discipline

--------------------------------------------- -----

6. (SBU) The GOC's 2010 budget reflects a 7 percent increase from
2009, but already Zuluaga is looking to cut the budget by about
US$3 billion, or 4 percent of the budget, to reach a fiscal deficit
target of 4.5 percent of GDP (Ref C). Additionally, he expects
that the GOC will sell its 59 percent stake in the third largest
power generation company, IsaGen, by June. This sale will provide
the GOC US$1.5 billion. However, Presidential elections are in May
and the former Director of the National Planning Department, Juan
Carlos Echeverry, notes that the sale of such a large asset will
take at least six months, when a new government could be forming
that may or may not agree with the sale.

Diversify, Diversify, Diversify

-------------------------------

7. (SBU) Colombia's over reliance on the Venezuelan market coupled
with the lack of a U.S.-Colombia Free Trade Agreement (FTA) have
energized the GOC to seek other markets through FTAs. Currently,
the GOC is awaiting ratification of FTAs with the U.S., Canada,
Norway, and Iceland (Ref G). On the negotiating table are its FTAs
with the EU and South Korea. Looking ahead, the GOC is planning a
quick FTA with Panama as well as trade agreements with the
Dominican Republic and Uruguay. The GOC also has embarked on an
aggressive trade agenda with Asia in the pursuit of new markets
(Ref H). If the pending FTAs are ratified, Colombia has the
potential to see growth rates of at least 5 percent, according to
Luis Villegas, President of the National Association of Industries
(ANDI).

Comment: 2009 - A Bumpy, But Less Rocky Road

--------------------------------------------

8. (SBU) Colombia weathered the global economic crisis in 2009
better than others in the region, largely because of its
conservative lending habits and sound fiscal policy. While the
World Bank predicts GDP growth for Latin America in 2009 to be -2.2
percent, Colombia's economic growth in 2009 is projected at zero
percent, with the possibility of achieving slight positive growth,
according to GOC officials. Foreign direct investment for the year
reached US$9.5 billion, only a billion off its record performance
in 2008. Trade, however, dropped 14 percent through November
compared to 2008 due to the economic slowdown, Ecuador's temporary
tariff hike on Colombian exports, and Venezuela's actions to halt
Colombian exports. GOC officials are happy to see 2009 pass, but
realize that many challenges lie ahead.
BROWNFIELD

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