Colombian peso to sink under weight of Venezuelan slowdown

For five years, Mario Hernandez’s
Bogota-based, leather goods-company sent record shipments of
designer wallets, purses and shoes over the border to Venezuela.
Demand got so hot, Hernandez says with a laugh, that he started
signing autographs at stores and restaurants in Caracas.

That boom, part of a seven-fold surge in Colombian exports
to its northern neighbor that helped drive the peso to a nine-
year high in June, is coming to an end as Venezuela’s oil-driven
economic expansion careens toward a bust.

“Time to tighten the belt,” says Hernandez, whose company,
Marroquinera SA, has been exporting to Venezuela since 1985.

The looming slowdown in trade will deepen the peso’s 30
percent slide against the dollar since mid-June and make it the
worst-performing currency in Latin America over the next year,
Morgan Stanley and Goldman Sachs Group Inc. say. When Venezuela
last fell into a recession, in 2002, Colombian shipments to its
second-biggest trading partner sank 38 percent, helping spark a
21 percent rout in the peso.

There’s going to be “a major drop in Venezuelan demand for
Colombian products,” said Boris Segura, a Latin America
economist at Morgan Stanley in New York. “That’s a clear and
imminent risk.”

Morgan Stanley predicts the peso will weaken 11 percent by
the end of 2009 to 2,600 from 2,316 today. Goldman Sachs
forecasts it will depreciate 9 percent over the next 12 months,
more than any other currency in the region except the Argentine
peso, whose exchange rate is managed by the government.
Colombia’s peso will drop to 2,377 next year, according to the
median of nine forecasts in a Bloomberg survey.

Even at those rates, the peso won’t get near the record low
of 2,986.8 reached in January 2003, when an increase in
kidnappings by guerrillas curbed investment in the country. The
currency strengthened since then, reaching a high to the dollar
of 1,633 on June 18, as President Alvaro Uribe restored rule of
law, cutting homicides and kidnappings more than 40 percent,
according to Defense Ministry figures.

The peso is falling now in part because Colombia sends 17
percent of its $30 billion in annual exports to its neighbor.

Venezuela relies on oil for more than 90 percent of its
international sales, making the country more dependent on
commodities than any other in the region, said Alberto Ramos, an
economist with Goldman in New York. Colombia also gets 24 percent
of its exports from crude, which plunged 67 percent from a July
record of $147.27 a barrel.

For Colombia, it’s a “double whammy of negative shocks,”
Ramos said.

Hernandez, 67, says he may cut advertising and inventories
and borrow less to offset the slump in Venezuela, where
Marroquinera gets 30 percent of its sales.

Venezuela will post “marginal” economic growth next year
after expanding 11.8 percent on average since 2003, said Pedro
Palma, an economics professor at the IESA business school in
Caracas. President Hugo Chavez will be forced to reduce
government spending after tripling it over the past four years,
Palma said.

Chavez, 54, may also devalue the government-set 2.15
bolivar-per-dollar exchange rate, crimping demand for Colombian
exports, Palma said. The bolivar trades at 5.15 per dollar in an
unregulated, parallel market, a sign investors are anticipating
the government will devalue the official rate.

“We have seen this movie several times,” said Palma, a
University of Pennsylvania-trained economist who’s tracked
Venezuela’s boom-and-bust cycle for three decades. “Every time
we see the movie, we expect that this time it’s going to end
differently: ‘This time oil prices are not going to drop.’ We’re
just making the same mistakes.”

The economy shrank 1.7 percent on average per year from 1980
to 1984 after expanding at an annual rate of 5.1 percent during
the oil boom of the 1970s. Economists predict growth will slow to
2.6 percent next year, according to the median of eight forecasts
in a Bloomberg survey. VenEconomia, a Caracas-based research
firm, is more bearish, predicting a 2 percent contraction.

The country can still dominate Colombia because Venezuela’s
gross domestic product totaled $228 billion last year, 33 percent
more than its neighbor’s $172 billion.

“Under current oil prices, not even a miracle can save
Venezuela from a crisis,” said Juan Pablo Fuentes, a Latin
America analyst at Moody’s in West Chester,
Pennsylvania. “Colombia is already beginning to feel the

Fuentes forecasts the peso will weaken to 2,627 by the end
of 2009 as Venezuela’s slump helps trim Colombian growth to 3.6
percent from an average of 6.4 percent over the past three years.

Exports to Venezuela may drop below $4 billion from a record
$5.4 billion this year, said Roberto Cajamarca, head of research
at the Colombian-Venezuelan Chamber in Bogota.

The trade boom forged an unlikely bond between Chavez and
Uribe, who feuded for much of the past six years. When Colombian
soldiers crossed into Ecuador to attack a guerrilla camp in
March, Chavez sent 10 tank battalions to the border in protest
and lashed out at Uribe, 56, calling him a Mafioso, a liar and a
“lackey” of the U.S.

“The politics were very hostile, very complex and yet
people on both sides of the border were engaging in a lot of
cross-border investment and commerce,” said Alvaro Vargas Llosa,
a senior fellow at the Independent Institute, a Washington-based
policy research group. “Of course all this oil money coming into
Venezuela had a lot to do with it.”

As oil revenue dries up, Hernandez, the designer-goods maker
in Bogota, prepares for the slowdown. After posting five straight
years of sales growth of more than 20 percent in Venezuela, he
predicts the rate will slip to about 10 percent this year before
collapsing to zero in 2009.

“The pie may shrink on us,” said Hernandez. “But we have
to hang on to our slice.” (Bloomberg)

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