Cablegate: Colombia Loosens Capital Controls As Peso Falls

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DE RUEHBO #3289 2481156
ZNR UUUUU ZZH
R 041156Z SEP 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 4483
INFO RUEHBR/AMEMBASSY BRASILIA 8357
RUEHCV/AMEMBASSY CARACAS 0972
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 6529
RUEHZP/AMEMBASSY PANAMA 2263
RUEHQT/AMEMBASSY QUITO 7205

UNCLAS BOGOTA 003289

SENSITIVE
SIPDIS

WHA/EPSC FOR MROONEY; EEB/IFD/OMA FOR ASIROTIC; WHA/AND:
RMERRIN

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CO
SUBJECT: COLOMBIA LOOSENS CAPITAL CONTROLS AS PESO FALLS

REF: BOGOTA 2053

1. (SBU) SUMMARY: Less than three months after tightening
capital controls on portfolio investment (reftel), the
Colombian Finance Ministry announced September 1 that it
would eliminate deposit requirements on foreign capital
inflows into Colombian stocks. The move represents the first
loosening of Colombia's controversial capital controls since
their implementation in May 2007 to combat the steady
appreciation of the Colombian Peso and follows the Peso's 14
percent slide against the U.S. dollar since July 2008.
Colombia's business community praised the decision and
expressed hope that it would pave the way to achieving
investment grade status for Colombian debt. END SUMMARY.

Change of Course
----------------

2. (SBU) Beginning in May 2007 Colombia announced a series of
measures to restrict the inflow of foreign portfolio
investment, which the GOC blamed for driving the Peso to
record highs against the U.S. dollar and hurting the price
competitiveness of Colombian exporters. The measures placed
deposit requirements up to 50 percent of the investment for
periods extending to two years. The capital controls were
criticized by international investors and significant
portions of the Colombian financial community as contrary to
Colombia's progressive steps to liberalize the economy under
President Uribe's administration.

3. (SBU) Amid continuing criticism that the controls
prevented Colombia from recuperating investment grade status
for its sovereign debt and the recovery of the U.S. dollar
against the Peso since July, the Finance Ministry decided
September 1 to partially lift the 50 percent deposit
requirement on foreign investment in Colombian stocks and the
two-year minimum investment period for foreign direct
investment. However, deposit requirements continue for
foreign investment in Colombian bonds and other financial
instruments.

About Time
----------

4. (SBU) Financial sector representatives praised the move
by the GOC as a return to pro-market policies by the GOC.
Mauricio Santamaria, Deputy Director of Colombia's leading
economic thinktank Fedesarrollo, told us the partial lifting
was overdue step since the controls have had little effect in
preventing Peso fluctuations and the removal of restrictions
on stock investments from abroad would add much needed depth
to Colombia's small stock market.

5. (SBU) German Verdugo of Colombian brokerage firm Correval
said the decision should encourage international investors
such as Goldman Sachs and Morgan Stanley to take a closer
look at investing in Colombia and will help speed up
Colombia's recuperation of investment grade status for its
sovereign debt. Finally, National Association of Financial
Institutions (ANIF) Vice President Carlos Rojas told us that
his members did not expect to see a large immediate inflow of
portfolio investment due to the current tightness in
international markets, but that over the longer term the
loosening of the controls should bolster Colombia's image as
a destination for foreign capital investment.
BROWNFIELD

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