Colombia’s government and central bank announced new measures to stem a rally in the peso after President Juan Manuel Santos expressed concern its appreciation is hurting exporters and job growth.
The Finance Ministry will avoid bringing in $1.5 billion from abroad through the first months of 2011 to reduce demand for the local currency. The government will make changes to its 2011 external finance plan to keep $384 million out of Colombia, and will hedge as much as $3.7 billion in debt payments.
“This represents a substantial alleviation in dollars in the exchange market, so there’s less pressure to strengthen the peso,” Finance Minister Juan Carlos Echeverry said today.
The peso is the biggest gainer this year among Latin American countries as foreign investors flood the country with capital amid near-zero interest rates in the U.S., Japan and other developed economies. Currency volatility can make it difficult for businesses to plan, and a stronger peso hurts exporters by making their goods more expensive in dollar terms, damping profits and potentially putting jobs at risk.
The Trade Ministry also announced plans to reduce some tariffs for raw materials and capital goods in a bid to help companies, especially small- and medium-sized businesses, obtain equipment and other goods more cheaply. The tariff reductions will boost economic growth by 0.22 percentage point and generate 150,000 jobs, the government said.
Central bank moves
Colombia’s central bank said today it will extend the period during which it will purchase dollars in the spot currency market as policy makers kept the benchmark interest rate at a record low 3 percent for a sixth straight month.
The monetary authority will continue to buy “at least” $20 million a day through March 15, two months longer than previously planned, bank chief Jose Dario Uribe said. He said the purchases may continue after March 15 if needed.
The peso fell 0.1 percent to 1,838.75 per dollar today, before the measures were announced, putting its 2010 gain at 11.2 percent. That’s the second-best performance among the 31 most-traded currencies tracked by Bloomberg, following the Japanese yen. The peso hit a 26-month high on Oct. 7.
Colombian business associations said in a letter this month to the government and central bank that the strong peso threatens jobs and “jeopardizes the Colombian economy’s positive outlook.”
Policy makers and the government had already taken measures aimed at slowing the peso’s appreciation.
Echeverry on Oct. 13 said the government would keep two dividend payments worth $1.4 billion from state oil company Ecopetrol SA abroad instead of converting the dollars into local currency.
Economic outlook
The central bank has been purchasing at least $20 million daily in the spot market since Sept. 15.
Santos expects the economy to grow 6 percent annually within two years after a 0.4 percent expansion last year. He intends to create 2.4 million jobs to bring the jobless rate down to single digits from 11.5 percent in September.
The central bank today forecast economic growth of close to 4.5 percent for next year.
Steps taken in Brazil, where the real has gained 36 percent since 2008, boosted speculation Colombia may follow suit and restrict capital inflows to ease pressure on the currency. The central bank’s Uribe has maintained that capital controls would only be justified if and when the benefits outweigh the costs. (Helen Murphy / Bloomberg)