Colombia’s economic authorities are set to face a renewed spate of political pressure to curb a surging peso as booming foreign investment mixed with the global weakness of the dollar continue to bolster the local currency.
The peso closed Tuesday at COP1,767 to the dollar, gaining for a third straight session and touching its strongest level since May 5, according to central bank data. The recent surge in the peso is all the more challenging for the government because it was followed by the central bank’s announcement that it would extend its dollar purchases in the spot market until at least Sept. 30, a move that should have eased the peso’s appreciation.
The peso is now nearing the COP1,750 level that many economists see as a threshold where political pressure starts to build up that could force the government to take new measures to curb the currency. The government has attempted to rein in the peso without resorting to capital controls, which limit the entry of foreign investment into the country.
Instead, the administration of President Juan Manuel Santos has used a mix of measures that included buying dollars in the spot market and keeping dollar dividends from state-run oil firm Ecopetrol SA abroad at least until next year. Some of the country’s largest business federations, however, have lobbied for the use of capital controls.
The government, though, seems to be giving a priority to foreign direct investment, which is geared mostly at Colombia’s booming oil and mining industries. Santos has set an ambitious goal of $14 billion in foreign investment this year, a figure that would mark a record for the country.
“There is a lessening risk of imminent capital controls,” RBS Capital said in research note.
Still, the government could resort to other measures to try to curb the peso’s appreciation. One likely possibility would be imposing restrictions on Colombian companies borrowing dollars abroad, said Daniel Velandia of brokerage firm Correval SA. Short-term dollar borrowing by Colombian companies has surged in recent months, generating an influx of dollars coming into the country. Limiting these loans could have a direct impact in easing the peso’s strength, Velandia said.
The peso, however, could easily appreciate past the COP1,750 mark in the coming days as the global weakness of the dollar spurs investments into emerging market assets. Additionally, the country’s foreign debt was lifted to investment-grade by Moody’s Investor Services, the second upgrade this year. The improved ratings are likely to lead to more investment in Colombian assets.
The government’s measures, while unable to revert the peso’s appreciating trend, at least “have the potential to impose a floor in the exchange rate or at least moderate its appreciation pace,” Velandia said.