on Sep 16, 2013 • by Richard Emblin

Home » Business, Homepage Featured » The peso: with trepidation

In 2011 the Colombian peso began gaining so much ground against the U.S dollar that it joined the ranks of the world’s best performing currencies. For many in this country, accustomed to decades of devaluation and exchange rate speculation, a re-valuation was a welcome sign of healthy economic growth, and the possibility to getting more value on the dollar.

This translated for Colombians into budgeting for that second trip to Miami, more time at the mall, and a favorable rate when buying on credit. The peso advanced so steadily against the dollar, that by August 2012, it settled near $1,740 pesos to the greenback.

While for importers, a strong peso is good for business, for exporters, the last several years have been especially rough. The country’s flower growers already burdened by high labor costs and production overheads have had to slash sales and business forecasts. The strong peso hit incomes from U.S sales so hard, that many companies were forced to open up new markets in Russia, Asia and the Middle East.

In May 2013, the Colombian peso began its retreat, losing in four months some 100 pesos to the dollar, to where it it now – fluctuating at $1,940. Finance Minister Mauricio Cardenas believes the peso’s “equilibrium” is  $1,900 to  $1,950.

While governments across the region have been propping up their own currencies, in Colombia, the central bank has been out buying millions in greenbacks. From May to September the target set for dollar purchases is $2.5 billion. So far this year, the Banco de la República has bought $5.8 billion in the spot market.

Growing instability in the Middle East, a slow down of the Chinese economic engine and India’s rupee free-falling against the dollar since the start of May, have many brokerage firms believing the “hot money” of emerging markets is evaporating; and the gushes of cash, which once crossed borders, stumped by global tumult.

On May 22, U.S Federal Reserve chairman Ben Bernanke made bond investors nervous as well when he stated that the Fed would scale back buying. His remarks began a sell-off in US Treasuries, and which contributed to big ructions in many emerging markets.

But positive numbers on Wall Street, and strong indicators of a U.S economic “come back” are also contributing factors to the Colombian peso’s less than strong performance. In an interview with Bloomberg Monday, President Juan Manuel Santos stated that his conviction is that the Banco de la República stop its daily dollar buying scheme.

As the Colombian economy maintains its projected growth of 4.1 percent for the year, the central bank may decide to lower the prime lending rate – currently set at 3.25 percent – in order to ease liquidity in both banks and households. Although the economy has been hedged thanks to a high demand for commodities such coal, mining, oil and gas extraction, the nation’s natural resource sector was affected by the violent farmers’ strike during the summer, and which forced security and investment sector analysts to reassess Colombia’s ‘risk’ ranking.

With the peso hovering within the “equilibrium,” the government hopes to lighten the load of exporters, while keeping foreign-made goods and services attractive to Colombians. At a time when free trade agreements signed with the United States, Canada, and the European Union are beginning to be felt on the ground, the focus of the Santos administration is to strengthen the nation’s agricultural base, offering farmers greater incentives and subsidies so that they can compete on a better footing in global markets.

Even though it is doubtful that we will return to the days when the peso broke through the $2,100 benchmark, it is also unlikely that the Colombian currency regains its momentum with the early excitement over emerging markets. Global economic growth remains weak and Colombia’s monetary policy is conservative. Managed overall quite carefully, especially when we have to proceed with trepidation.

 

 


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