Colombia’s government delayed its sale of $600 million in over-seas bonds with the expectation that the peso will weaken past 1,900 pesos to the dollar, Bloomberg reported on Sunday.
“We want to make sure that the exchange rate is at a good level,” Michel Janna told Bloomberg reporters in a July 19th interview. Finance Minister Mauricio Cardenas has nailed down the rate of 1,900 pesos to the dollar as a relatively ideal exchange rate to keep exports competitive and borrowing costs down.
The Ministry of Finance was unavailable for immediate comment on the matter.
Colombia’s fiscal policy depends on keeping financing costs low, and a low peso is one of Cardenas’ key ingredients for achieving that macroeconomic stability. But it is also, to some extent, Colombia’s curse.
Earlier this year, Cardenas referred to the peso as “the mother of all problems” for Colombia.
Though Colombia has managed to keep its government finances in tight order relative to other LatAm countries, there are two big challenges that face the emerging economy’s fiscal and monetary policy game as it navigates global uncertainty.
First, a global sell-off of emerging market assets caused investment in Colombia to wane in the wake of the US central bank’s likely tapering of stimulus measures. In other words, when liquidity dries up in capital markets, investors become more anxious about taking emerging market risks.
In turn, Colombia’s Finance Minister has pulled back the reins on selling local debt in the face of rising domestic borrowing costs, reported Bloomberg.
The other challenge is a choppy peso. The strength of the peso has damaged some industries that rely heavily on exports. Manufacturing and agriculture saw sales fall as the peso rallied through the end of 2012 and early 2013. And even though Bogota’s monetary policy has largely stabilized the peso at a more competitive rate, it is still, says the Ministry of Finance, not as weak as it could be.