At the posh, rich, academic and risibly ignorant Davos conference in January, President Juan Manuel Santos announced that as a result of recent devaluations in the Colombian peso, the government would consider ending its open-market purchases of dollars until further notice.
After years of pushing against the foreign inflow of money, Santos and his Finance Minister Mauricio Cardenas, finally had a moment of respite. But in a world where nations are interconnected in ways good and bad, the movement of the Colombian peso has revealed the extent to which the Colombian people control their fate.
The current emerging market crisis, like all crises, was unexpected. Analysts the world over had declared death to the thirty year king of Wall Street: the bond. Leading the regicide were equities (the S&P was up almost 40 percent in 2012), which led by US Federal Chairman Ben Bernanke and his wellness and recuperation team of heavyweights had been injected with a needle full of unprecedented open-market purchases and historically low interest rates known as Quantitative Easing, now in its third round (QE3). Those corporations closest to the printing of money benefited the most – banks, construction companies, car companies, those closest to the easy credit.
While corporations were doing the easy money dance, institutional investors were scrambling in search of yield. Near-zero interest rates meant that investments such as the 30-year US treasury were returning cents on the dollar, pushing investors to pour billions into emerging market stocks and bonds. Suddenly, the doors to the party in the US had been opened to the world. In layman’s terms, absolute chaos.
Then the US sneezed, and the world caught a cold. In the middle of 2012, Bernanke revealed that the FED was considering ending QE3, and a process known as the taper. The party ended and everyone rushed to the doors hoping not to be the last one out. Panicked investors pulled their money out of emerging markets as quickly as they had put it in, and the Nile of cheap credit dried up.
“La gripa” of 2012 lasted a number of months before the markets calmed and inflows increased. Volatility never disappeared, and investors and advisors the world over argued for hours in the media whether the recovery, and the state of the world markets in general, was built on any sense of fundamentals or simply on the availability of dollars. But going into 2014, most agreed that the equity markets would be up, bond markets would be down and that the rumba would continue.
At risk of oversimplifying the complexities of the transaction and how Joe Smith at Goldman Sachs directly affects everything in Colombia from the ubiquitous cafetero to the Diálogos de la paz is as follows: Joe, as a result of the FED printing billions of dollars, has far more money than he knows how to spend. The fad of the times is emerging markets, but without any experience in emerging mar- kets, Joe drops his money in an Electronic Funds Transfer (EFT) and by Rick who spreads those dollars around the world. Included within Rick’s fund is our “tierra querida,” Colombia. However, for Rick to obtain Ecopetrol or Nutresa shares, he must exchange those dollars he received from Joe into pesos. Simply supply and demand tells us that the value of the peso will rise and the dollar will fall.
And rise the Colombian peso did. Since 2008, the peso has risen more than any other emerging market currency in the world. Investors wanted “anything Colombia.” While the money poured in, especially into oil, gas, coal and mining, everyone else in Colombia suffered – a more expensive peso hurt farmers and manufacturers in a classic case of the Dutch disease.
Then President Santos and the Central Bank tried responding by repurchasing dollars in order to increase the value of dollars and thus depreciate the peso. There seemed nothing they could do to start or stop the flow of money across their borders short of manipulating the markets, which has clearly done wonders
for Argentina and Venezuela. Political and social unrest bubbled as farmers around the country, most famously the coffee growers in late 2013, took to the streets, forcing Santos to craft new policy that spurred a new round of dissent and conversation in the streets over his presidency. Joe Smith and his buddy Rick, with the click of a button, had altered the course of Colombian history.
The current round of outflows, while terrible for emerging markets, may ultimately benefit this country in both the short and long term. The most immediate effect of the current devaluation of the peso is that it should relieve pressure on manufacturers and farmers. Growers have the added benefit of an impending poor harvest from Brazil that has caused a rapid rise in coffee prices. The cooling of social tensions could have corollary effects on everything from the elections to the peace talks by re-convincing middle to lower class Colombians that their country is, as politicians insist, entering a new stage in the nation’s history.
The long-term effect could be the vindication for a country that has insisted during the last decade that Colombia is in a different league apart from many of its LATAM neighbors, and fellow emerging markets. While we are seeing many of the similar blanket outflows from every emerging market as occurred in 1997 to 98 and in the recent hiccup in 2012, international investors are now differentiating between “good” and “bad” emerging markets.
This time around, the contagion has come largely from Turkey and Argentina, and while Colombia has been affected negatively, investors now see it as a positive case apart, a country with a sound fiscal policy, stable political structure and immense economic potential.