The Colombian peso has been on a tear since the start of the year, strengthening against the dollar on a combination of booming domestic growth and a steady influx of foreign direct investment.
On Tuesday, the peso chalked up another session of gains, closing at COP1,861.00 to the dollar, from COP1,880.00 on Friday. Monday was a holiday in Colombia with markets closed.
The peso has appreciated 4% so far this month and is at its strongest level since September, when a bout of worries over the future over the euro zone prompted investors to shed riskier emerging-market assets, leading to a sharp depreciation of the peso.
“Investors are a looking at the Colombian economy and they are seeing a strong performance and large foreign investments,” said Nicolas Bernal, a currency analyst with Colombian brokerage Ultrabursatiles SA. The Colombian economy grew a strong 7.7% in the third quarter of 2011 from a year earlier, soundly beating analysts’ projections.
President Juan Manuel Santos, meanwhile, estimates that the economy will grow more than 5.5% for all of 2011. The strong performance of the economy is set to continue in 2012, which will attract more foreign investment.
“We are going to continue seeing dollars coming into the country, and that always creates a stronger peso,” said Bernal. Preliminary estimates point to FDI in 2011 reaching $13 billion, and a similar figure is expected for 2012, Finance Minister Juan Carlos Echeverry said in an interview with local media.
The exchange rate last year moved in tandem with developments overseas, but now investors are paying closer attention to the domestic situation. “People are looking very favorably at Colombia,” Bernal said.
A strong peso, however, could turn into a major challenge to the government. Exporters have demanded in the past that the government take forceful actions to curb the peso’s appreciation, which makes their products less competitive overseas and tends to stimulate imports.
But government officials have steered away from intrusive capital control measures that seek to limit foreign investment. Instead, the government’s efforts have concentrated on limiting volatility in the exchange rate.
Despite suffering short episodes of volatility, the peso was 0.9% weaker at the end of 2011 from a year earlier.
The central bank ended a dollar-buying program for $20 million daily that served to absorb dollars from the local spot market and helped limit the peso’s strength. The central bank replaced it with a plan to buy or sell foreign-exchange options if the exchange rate moves more than 5% from a 20-day moving average. The bank hasn’t yet been forced to step in.
“The bank will probably keep its current plan and won’t introduce changes anytime soon,” Bernal said.