Colombian peso slides after Petro questions monetary policy

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After two months in which Colombia’s energy sector has been pummeled by announcements from the national government that it will halt all new oil and gas exploration, impose a total ban on pilot fracking projects and replace the country’s dependency on hydrocarbons with “carbohydrates” (in the words of the Minister of Mines Irene Vélez), this week it was the nation’s currency that came under pressure.

The impact was immediate, with the Colombian peso breaking a new record to the US dollar, ending the trading day on Thursday at $4,627.

The sell-off was triggered after a series of posts on social media by President Petro in which he questioned the independence of the Central Bank, and proposed a series of controls to monetary policy, including a cap and temporary tax on capital outflows. In one of many Tweets referencing inflation and recent interest rate hikes by the Banco de la República, Petro affirmed that the bank’s “real intention” to increase the lending rate is to stop the flow of hot money, and claimed that with a 14-year-high in interest rates, the bank risked plunging the economy in recession.

President Petro’s questioning of the Central Bank’s reasons to tighten monetary policy, without concrete plans to tackle inflation, led the peso to slide against the greenback, depreciating 0.7% in a single day. The Colombian peso has lost close to 16% of its value this year, and is among the worst performing currencies in emerging markets. The fall continued in the early hours of Friday. To calm investor jitters Finance Minister José Antonio Ocampo ruled out capital controls or taxes on capital outflows.

Ocampo’s statement came hours after Congressional lawmakers approved the first set of articles in the government’s COP$25 billion tax reform, and that include a capital gains tax of 15%, and raising the general tax collection level for businesses to 35%.  The peso sell-off was accompanied by local bonds. By early Friday, the peso was trading below 4,600 to the USD, and skirting the real possibility that a new historic record could be broken by the week’s end.

A research paper released Friday by investment bankers J.P Morgan, noted that “Petro’s recent tweets, first undermining the existing fiscal rule and then advocating for capital controls, have added significant volatility to Colombian markets. The paper titled “Colombia: Markets react to Petro’s itchy Twitter finger” highlights that the country’s “challenging macro situation leaves it vulnerable to concerns of policy missteps, especially at a time of building global risks. We believe this warrants re-entering some bearish positions.”