“The objective is to take advantage of the current exchange rate,” Zuluaga said in his announcement as the peso explores nine-year highs. Colombian international debt spreads tightened after the announcement and the local peso fell 1.26 percent to 1,777.9 to the dollar from Friday’s close. Monday was a market holiday in Colombia. The Colombian government has struggled to control the strength of the peso, which is up 15 percent against the dollar over the last 12 months and is at its strongest level in nine years. “If they want to have a more manageable debt profile denominated in pesos, it could facilitate their arrival at investment grade status,” said Enrique Alvarez, head of Latin American debt strategy at IDEAglobal in New York. Colombia lost investment grade status following its 1999 economic crisis.”They want to embark on a lengthy process in transforming current debt into peso-denominated debt and it appears that they will start with outstanding multilateral debt,” Alvarez said. The strength of the local currency is hurting exporters who pay their costs in pesos but receive dollars for their international sales. They say they will have to lay off workers if something is not done to control the peso, which has been jacked up by record foreign direct investment. The conversion of some Colombian debt into pesos is expected to lower the value of the local currency. The government will transfer pesos to local banks, which will then buy greenbacks to pay the country’s creditors, increasing demand for dollars. But there was some confusion in the market about Zuluaga’s announcement.“It does not sound like a buyback. The government rather appears to be locking in the peso’s strength, largely through currency swaps with local banks, to fix the rate at which the government will need to buy dollars to cover external obligations,” said Gianfranco Bertozzi, vice president of emerging markets research at Lehman Brothers. Colombia’s economy is booming under conservative President Alvaro Uribe, who was re-elected in 2006 after increasing security as part his U.S.-backed crackdown on drug-running leftist rebels.
Colombia to convert foreign debt into pesos
