Colombia’s exchange rate, one of the top economic worries for the administration of President Juan Manuel Santos, is facing new pressures that could push the currency to strengthen beyond the government’s comfort zone.
Colombia’s foreign debt was lifted to an investment-grade rating last week by Standard & Poor’s rating agency, a move which has made Colombian assets more attractive to investors. The immediate impact was five straight days of the peso appreciating against the dollar. The trend finally stopped on Friday, with the peso closing at COP1871.00 to the dollar, but that could be just a temporary blip.
“The move to investment grade opened the doors to more foreign investment and that has direct repercussion on the exchange rate,” said Francisco Chaves, an analyst with brokerage firm Corredores Asociados. “In the long term we’re certainly going to see the peso continuing to appreciate,” he added.
A stronger peso could represent a challenge for the government of Santos, who has been comfortable with the peso hovering over the COP1,850 mark. In the past exporters have ramped up pressure on the government when the peso strengthens beyond that level.
“Unless people start buying dollars to take protection against a major international crisis, the exchange rate could close the year below COP1,800,” Chaves warned.
The government appears to be waging that the debt upgrade had already been priced in by the market, although the peso continues to trade below the COP1892.8 seen on the last session before the rating change was announced on March 16.
The peso should continue appreciating on “structural forces,” RBC Capital Market said in a research note on March 22. The firm said that strong foreign direct investment, especially in the mining industry, and higher oil revenue are likely to push the peso to strengthen in the near term.
The government in the past has sidestepped pressure from exporters and manufacturers to impose capital controls to curb the peso’s surge, and instead has responded with a recipe that includes daily $20 million purchases in the spot market by the central bank and a decision by the government to keep abroad dollar dividends from the state-run oil firm Ecopetrol SA.
Those dividends, however, will likely have to be repatriated this year, a move which could generate more inflows of U.S. currency in to the exchange market and help bolster the peso.
The central bank also began hiking interest rates in February, a move that could generate more portfolio investments into Colombia and lead to a stronger peso against the dollar.
The root cause of the appreciation has been high inflows of foreign direct investment, something that local brokerage firm Interbolsa SA says is not going away.