VZCZCXYZ0000
RR RUEHWEB
DE RUEHBO #0273 0222126
ZNR UUUUU ZZH
R 222126Z JAN 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 1051
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHCV/AMEMBASSY CARACAS 9802
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 5803
RUEHZP/AMEMBASSY PANAMA 1107
RUEHQT/AMEMBASSY QUITO 6510
UNCLAS BOGOTA 000273
SIPDIS
SENSITIVE
SIPDIS
WHA/EPSC FOR PMAIER; EEB/OMA:ASIROTIC; TREASURY FOR MEWENS
E.O. 12958: N/A
TAGS: ECON EFIN PGOV CO
SUBJECT: INTERNATIONAL FINANCIAL TURMOIL ROILS COLOMBIAN
MARKET
REF: BOGOTA 2
1. (SBU) SUMMARY: Amid recent turmoil in global markets and
fears of a recession in the United States, the Colombian
stock market suffered its fourth-worst drop ever on January
21. Despite regaining some ground on January 22, the market
remains in negative territory for 2008 and concern has grown
in the Colombian private sector that a U.S. economic downturn
could slow Colombia's economic expansion (reftel). While
most analysts believe Colombia is well-positioned to weather
turbulence in international markets, many local investors
worry the Banco de la Republica will keep Colombia's interest
rates high, putting further short-term negative pressure on
the Colombian economy. END SUMMARY.
2. (SBU) Colombia's stock index (IGBC) fell 7.65 percent
after all listed stocks, including index powerhouse
Ecopetrol, declined January 21. The Colombian market
rebounded moderately following the Federal Reserve's January
22 three-quarter point interest rate cut, but remains down
over 15 percent for 2008. Since the beginning of the year
fears have grown among the local private sector that a U.S.
recession could impede Colombia's 2008 growth outlook of 5.3
percent.
3. (SBU) Colombia's close economic relationship with the
U.S.--the U.S. remains Colombia's largest trading partner and
source of foreign direct investment--amplifies the impact of
economic downturns in the U.S. on the Colombian economy.
Exports to the U.S. slowed in 2007 while imports increased
due to the Colombian Peso's 11 percent appreciation against
the dollar. The currency appreciation not only hurt key
Colombian export sectors such as textiles and cut flowers,
but the consequent shift in trade has increased pressure on
Colombia's current account deficit. Colombian exporters
increasingly fear that a recession in the U.S. could
exacerbate the slowdown in demand and worry the Banco de la
Republica will maintain high interest rates (9.5 percent) to
control inflation while other central banks cut rates to
stimulate growth, thereby driving the Colombian peso still
higher against the dollar and further harming export
competitiveness.
4. (SBU) According to German Verdugo, Economic Research
Director for the local brokerage firm Correval S.A., in the
last 40 years when the U.S. economy has grown less than one
percent per annum, the Colombian economy shed as much as two
percent off GDP growth in the same year. However, Verdugo
said that, due strong global demand for Colombian hydrocarbon
and mineral commodities at the moment, he expected the
negative effects of a potential U.S. recession to register
less than in previous cases. Finance Ministry Public Credit
Director Julio Torres similarly noted Colombia's strong
growth fundamentals, rising international reserves, and
improving debt picture as evidence Colombia can absorb this
round of international market turmoil.
5. (SBU) Conversely, Anwar Rodriguez, Economic Researcher at
Colombia's prominent economic thinktank Fedesarrollo, said
the deceleration of the U.S. economy has traditionally
lowered demand for Colombian products in the U.S. and slowed
inflows of investment capital. Rodriguez told us that, if
turmoil in international markets continued to persist or the
U.S. slipped into recession, the impact on the investment
side may be more acute because of capital controls the GOC
instituted in May 2007 to bridle speculative capital inflows.
Rodriguez believes that the controls could dissuade foreign
investors from parking capital in Colombia just when the
economy needs it the most.
Brownfield