Analysts worry over the consequences of a strengthening peso after Colombia recorded a jump in foreign direct investment in 2012.
Colombia, the third largest economy in Latin America, reportedly received $16.7 billion in foreign direct investment in 2012, far exceeding the Ministry of Commerce’s goal of $10.8 billion. This marked a 25% increase from 2011.
Roughly 59% of capital inflows, however, poured in to Colombia’s booming energy and mining sectors, provoking concern amongst some analysts over the severity of a potential “Dutch disease,” which occurs when currency appreciation, in response to a steep rise in commodity demand, erodes the price competitiveness of other export products.
David Reese, an emerging markets economist and Colombia analyst with Capital Economics in London told the Financial Times that “on the one hand, it is good that Colombia is being seen as a favorable destination for FDI. It shows how far the economy has come in building investor confidence.”
But Reese expressed concern over the negative consequences that come with a sharp increase in foreign investment inflows.
“We’ve seen industry struggle for a long time now,” said Reese. “We have seen consumer spending slow and we have reached the point of low growth and rate cuts.”
The Colombian economy experienced an extreme slowdown in the third quarter of 2012 when GDP grew just 2.1% — a five percent drop from the same period in 2011.
As Reese explained, pressure on the peso warps sectors other than energy and mining.
Economist Ed Dolan explained that the behavior of the peso has in turn produced a loss of competition for Colombia’s manufacturing and agriculture sectors.
The peso’s gain in 2012 prompted the Central Bank to shore up its dollar-buying policy in order to cool down the peso and prevent a more dangerous onset of Dutch disease. Jose Dario Uribe, Manager of the Central Bank, told local media that in 2013 the bank plans to buy at least $4.6 billion in US currency.