UPDATE 1-Colombia says war, Venezuela could hurt growth

reuters.com Mon March 3, 2003 08:01 PM ET (Updates with more quotes) By Ibon Villelabeitia

BOGOTA, Colombia, March 3 (Reuters) - Colombia is on track to meet its IMF targets and achieve growth of 2 percent in 2003, but a possible U.S. war in Iraq and fallout from Venezuela's crisis could threaten well-laid financial plans, the government's economic team said on Monday.

In an interview with Reuters -- the first with foreign media -- Finance Minister Roberto Junguito and two of his top aides said external shocks could derail efforts by Latin America's fifth-largest economy to hold back spending, narrow a budget deficit and boost investments.

"We have to guarantee conditions for a stable exchange rate, stable interest rates, a sustainable fiscal situation, but positive results depend on several factors, including the international climate. How fast the economy grows depends a lot on investors," Deputy Finance Minister Juan Ricardo Ortega said.

"If the U.S. economy slips and the Venezuelan economy slips, you are not going to grow and 2 percent growth is an optimistic figure," Ortega said.

The government is forecasting growth in gross domestic product of 2.0 percent in 2003, compared with 1.6 percent growth in 2002.

President Alvaro Uribe, who took office in August, has pushed key austerity reforms to taxation, pension and labor laws through Congress aimed at reducing the country's budget deficit and boosting investment to fight a four-decade guerrilla war and the poverty that feeds it.

DEBT ANXIETY EASING

Colombia is saddled with public debt accounting for 60 percent of the country's gross domestic product -- up from just 30 percent in 1996. But Uribe's austerity agenda, coupled with pledges to crack down on violence, have eased investor anxiety.

The government says Colombia's consolidated budget deficit should fall to 2.4 percent of GDP in 2003, compared with 4.0 percent in 2002. These figures have been set as targets under a $2.1 billion loan agreement Colombia signed with the International Monetary Fund in January.

After receiving good marks from Wall Street, the government has won almost $10 billion in loans from multilateral lenders including the World Bank, Inter-American Development Bank and the Andean Development Corp.

"This is proof we are doing our homework and that we are transmitting a sense of calm to the markets to the effect that the public debt is sustainable," Junguito said.

But Junguito said Colombia's economic performance is largely tied to that of the United States.

"For us the most important thing is that the United States has good growth. We don't do well if the United States does not have adequate growth. The reason we are not exaggerating our 2003 economic forecast is because it is coherent with a sluggish world economy and we are choosing to be extraordinarily conservative."

Andres Felipe Arias, director of macroeconomic policies, forecast that Colombia will lose $800 million in exports in 2002 and 2003 due to a political crisis in neighboring Venezuela, which is Colombia's No. 2 trading partner.

MORE SECURITY

Apart from easing the country's debt burden, Colombia is trying to improve security to lure foreign investment. The war claims the lives of thousands of people every year and spooks investors. Uribe, elected on pledges to crack down on leftist rebels, wants to boost military spending by $1 billion.

"There's a link between security, a fall in country risk and investment," Junguito said. "The issue of credibility has two fronts. Security and economic measures to stabilize debt create the confidence to attract foreign and domestic investment."

Colombian debt, classified as "junk", has gained in value under Uribe. Sovereign bonds rose 6 percent in December, according to the J.P. Morgan Emerging Market Bond Index Plus.

Uribe plans to hold a referendum by May in which he hopes voters will approve a freeze on public spending for two years and cut higher-than-average state pensions.

Junguito, who says a yes vote would save the government 0.7 percent of GDP in 2003, said he hoped Colombia returns to investment grade rating by international agencies by the end of Uribe's four-year term in 2006.

"I don't like to make projections but that is what we are hoping for," Junguito said.