Colombian peso falls after voters reject peace deal

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Colombian pesos
Colombian pesos

The Colombian peso fell in value today on news that a peace deal reached with FARC was rejected by a plebiscite on Sunday. The accord that negotiators forged over four years of talks in Cuba was narrowly struck down by the nation’s citizens. Now, the climate of uncertainty is having knock-on effects in the currency.

For those not involved in foreign markets currency trading, however, the real story may be the relatively minimal impact of the news. While there was a 2.8% drop in the peso immediately in the early morning hours, that has eased as the day has gone on. There was no crisis of confidence in the nation — and the fact that an outcome decided by just 57,000 votes was immediately and fully respected by the ruling party may actually highlight the underlying stability of the nation’s political institutions.

In effect, today’s weakening of the peso merely puts Colombia’s currency back to where it was last week before OPEC’s agreement to cut oil production. Colombia is not widely seen as a large oil-producing nation, but it averages an output of about one million barrels per day. Together with coal and gas, crude has accounted for nearly two-thirds of its exports in recent years, a reliance on fossil fuels that has left the peso rising and falling in line with oil prices. The currency’s real collapse began at the same time the per-barrel price started to plummet in the fall of 2014, and has generally remained linked to any change in the global market.

The peso jumped last week after OPEC announced it was taking 700,000 barrels per day out of the supply, for example. And now it has fallen back. But the Colombian peso remains as strong today as it was at the beginning of September — stronger even — and significantly above the disastrous stretch that led to a record weakness seen from November 2015 to March 2016.

Business Groups Hold Emergency Meeting

Several major trade unions and economic groups in Colombia, including the National Business Council (CGN) and Confecámaras, assembled today for an emergency meeting to discuss potential fallout to the economy. While the need for the gathering itself shows a level of concern, the participants came away feeling that there would be no crisis.

“Colombia has historically shown great responsibility in managing its economy and public finances,” CGN told El Tiempo. “We have certainty that, in the current situation, these values that have given us broad international recognition will be preserved.”

The organization added that, as long as FARC keeps to its word of preserving the ceasefire and working towards a new peace deal, the fallout should remain limited. “We hope that, as expressed by FARC’s leader and reiterated today, the group fulfills its promise that his only weapon in the fight will be words,” said CGN.

A Strong Foundation

Last week in Bogotá, U.S. Treasury Secretary Jack Lew shared similar sentiments about the strength of the Colombian economy after meeting with Colombian President Juan Manuel Santos and Finance Minister Mauricio Cárdenas. While his comments were made under the presumption that the peace deal would be ratified at the ballot box, his larger message was that the Colombian economy is well managed.

“Colombia has demonstrated that countries that navigate their fiscal, structural, and monetary policies well are better positioned to be able to carry them through both good times and bad,” said Lew.

He said that he and Cárdenas talked mostly about the longer-term future of the nation’s economy, and how it can get back to the rapid economic growth it was achieving year after year until the bottom fell out of oil prices. While returning to that level remains a large hurdle, the rejection of the peace process doesn’t materially change that reality.

“Colombia, like other emerging markets economies in the region, is facing the challenge of becoming less dependent on the export of primary commodities,” said Lew. “I was impressed by the energy and commitment with which Colombia is tackling this challenge.”

By and large, those investing in Colombia are not waking up to see an economy in chaos. The lack of clarity on the demobilization of FARC does taint the long-term expectations for security improvements in the country. But the end of a conflict with FARC — which has not been causing death and destruction for more than a year now — was never going to end the danger overnight from the nation’s drug trade, criminal enterprises, and other armed groups. Security concerns are a built-in cost of doing business in Colombia, and that remains the same with or without a ratified peace agreement with FARC.

Tax Reform Looms

The larger issue is tax reform. International ratings agencies, global banks, and other economic research groups are virtually unanimous in their call for changes in the code. The tax burden on companies is too high while citizens pay a shockingly low tax rate even compared to other nations in Latin America, let alone Europe and the United States. This is straining the national budget and putting account deficits out of whack.

The fiscal technocrats in Bogotá agree with the need for change and were — as of last week — working on a tax reform package to send to the legislature at some point this fall. Getting that passed now will be less tenable, with the Santos administration losing even more political capital after his embarrassing debacle.

The president has staked his career on this peace and now his people have rejected his work. It will be a hard sell to now tell them that their taxes are going up — in a year when inflation hit a 16-year high — because the World Bank, IMF, and Fitch Ratings say its time for change. And if tax reform doesn’t pass, a national budget that already has a big hole it in from the lack of oil revenue will remain vulnerable to the whim of the price of crude.

The International Community Is Watching

Fitch Ratings, which put the nation on a negative watch in July, today said that it is still expects the government to work towards a tax reform that it sees as essential to long-term economic stability.

“Fitch’s expectation is that the government will continue to implement a consistent and credible policy response to address economic challenges in terms of high current account deficits, high — albeit declining — inflation, and the negative impact of lower oil prices on fiscal accounts,” said Erich Arispe, the agency’s Colombia analyst.

Fitch’s recommendations are in line with what the business community is expecting to happen. The next few months — especially if guerrillas walk away from the table in favor of a return to their drug-dealing and extortion rackets — could change that. A halt to tax reform progress could create even more instability. And markets do hate uncertainly.

Some are not concerned. “Ignoring this fiscal reform is a luxury Colombia can’t afford, and congress knows that,” Bruce Mac Master, president of Colombia’s National Business Association, told the Wall Street Journal. “And with this reform and macro-economic stability, Colombian business will remain strong. There’s no one who thinks we won’t eventually achieve peace.”

But until there is more clarity on new round of peace talks and tax reform, the peso will likely continue to flutter up and down in the days and weeks to come — as it has daily for years now — while a generally strong and stable economy churns on with the same fits and starts as normal. As with everything in the nation now, Colombia’s economy is in somewhat of a holding pattern until its leaders figure out what comes next.

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