Colombia’s central bank appears to be expanding its arsenal to combat the appreciation of the peso, potentially making it more difficult for investors to assess the scope of the bank’s presence in the currency market.
The central bank and Finance Minister Juan Carlos Echeverry have made it known to the market that the monetary authority has an array of tools at its disposal to rein in the peso’s 13% surge against the dollar so far this year. It remains to be seen, however, whether these additional weapons are sufficient to stop the peso’s advance.
The central bank has traditionally purchased dollars in the spot market and then tried to neutralize the inflationary effect of putting more pesos in circulation by selling government-issued bonds, known as TES, in the secondary market to mop up liquidity. The central bank’s TES portfolio served as an indicator of how long the central bank could continue buying dollars and selling TES to limit inflation, Echeverry said.
The TES held by the central bank “indicated how much fuel it had” to intervene, Echeverry said. “Some investors would see this and say that the central bank can only buy dollars for three months, so they would wait, (and) after that they would come back to the market.”
“We’ve made that calculation very difficult,” he added.
Among the possible new tools the central bank has available is the issuance of its own bonds, which along with the TES could serve to damp any excess liquidity created by the sale of pesos for dollar purchases in the spot market. Another possibility is the use of currency options or discretionary purchases in the spot market.
Echeverry, however, has declined to specify which specific tools the central bank could use.
The central bank carried out daily dollar purchases in the spot market to the tune of $1.6 billion for the first six months of 2009. That strategy will likely not be enough to stop the peso, which continues to gain against the dollar on massive inflows of direct investment into Colombia.
“The bank’s intervention needs to be very smart to have any real effect on the market,” said Julian Cardenas, a currency analyst with local brokerage firm Corredores Asociados. “It appears that they are examining a combination of mechanisms” to curb the peso, he added.
The central bank disappointed several economists and analysts who had expected it would announce the start of its currency intervention at its policy meeting last month. The bank’s board of directors, which includes Echeverry, is slated to meet again on Sept. 23.
A potential intervention, even with additional tools, is unlikely to be sufficient to reverse the peso’s gains, said Cardenas. A surge in foreign direct investment, which is expected to reach $10 billion this year, is behind the peso’s strength. On Monday, the peso traded at COP1,791.3 a dollar, its strongest since October 2009.
The peso’s strength has raised the specter of capital controls, which in the past has failed to curb the peso’s appreciation. The risk of capital controls is climbing because of the peso’s strength, currency strategist Win Thin, with Brown Brothers Harriman, wrote in a research note.
For others, however, that remains unlikely. “They have other alternatives and using capital controls could be damaging at a time when the country wants foreign investment,” Cardenas said. (Darcy Crowe / Dow Jones Newswires)