Colombian President Juan Manuel Santos warned Tuesday against additional interest-rate increases by his country’s central bank, saying it would attract more foreign investment that could lead to further unwanted appreciation in the local currency.
While rising foreign investment is a positive reflection of the progress that has been made in the South American nation long ravaged by war, too much of a good thing is always a risk, Mr. Santos said in an interview at the Casa de Narino presidential palace in downtown Bogota.
“We are now the darling of investors, and if the interest rate goes up, they will come with even more enthusiasm, which could be counterproductive,” as it could spawn a further appreciation of the peso, he pointed out.
The peso is 9% stronger against the dollar this year, and last week it edged toward its strongest level in nearly three years. This has become one of the top economic worries for the government because it is damaging Colombia’s vital export sector by making products more expensive abroad.
Mr. Santos made clear that the Colombian peso’s appreciation against the dollar over the past six months to one year has not been as severe as other currencies, and he suggested that more draconian measures to halt its advance, such as capital controls, are not likely.
By using other measures, such as the daily purchase of $20 million in the spot market, “we have been very successful at avoiding too much appreciation of the peso,” he stressed.
Still, Mr. Santos said his administration “cannot rule out any options” to combat the peso’s appreciation, which economists have blamed largely on a surge of foreign investment entering the country. One potential move that some analysts have suggested to curb peso strength is capital controls, which seek to limit foreign investment through regulatory measures.
“I never disregard any options,” Mr. Santos said in response to that possibility, adding that a delegation from the International Monetary Fund recently suggested the use of capital controls.
The president, a former finance minister trained at Harvard University and the London School of Economics, noted he is “very conservative in economic policy” and stressed that he “takes into account economic fundamentals.”
“The main objective of the government in order to counteract the appreciation of the peso is fiscal balance,” he said.
On the issue of interest rates, which the central bank has increased at five straight monthly monetary-policy meetings, Mr. Santos said he is worried rates could become too high and have a negative impact on overall demand. This, he said, could needlessly put the brakes on an economy that has been growing at a healthy pace and fostering job growth, which has been a point of pride for his nearly one-year-old administration.
The bank’s benchmark rate stands at 4.25% after its mid-June increase of 25 basis points.
In a world where tepid growth rates have become the norm, Colombia’s economy expanded a solid 5.1% during the first quarter compared with a year earlier, and the government estimates growth could reach 6% for all of 2011. These growth rates helped chip May’s national unemployment rate down to 11%, its lowest rate for that month since 2008 and well below January’s 14% jobless rate.
“We don’t want to stir things up,” Mr. Santos said.
Still, he said leaving interest rates low for too long could pose serious risks to the economy, including inflation.
He pointed out the latest retail-sales data showed a 23% jump in April from a year earlier. As such, the president said he has plenty of confidence that the country’s central bank will make the best decision when it comes to the timing of interest-rates moves.
“For me, it would be preferable to leave rates as they are,” Mr. Santos said. “But if they have information that the economy is overheating, then another notch or two up wouldn’t hurt…the worst thing we can do is to cause the economy to overheat.”
Colombia’s economic fortunes in the past few years have been tied to an oil and mining boom spurred by improved security in areas once controlled by leftist guerrillas.
During his presidential campaign, Mr. Santos warned that if the mining and oil boom was not properly managed, it could become a curse for the Colombian economy, leading to a strong currency and dwindling manufacturing.
Since taking office, Mr. Santos secured three key pieces of legislation to limit the negative impact that a surge in mining and oil income could have. The reform package seeks to save excess oil and mining revenue in a sovereign fund, places a limit on the amount of debt the government can issue, and also changes how oil and mining revenue is divided by Colombia’s regional governments.
The government is now considering the possibility of carrying out a tax reform, which would not increase rates but would instead close a series of loopholes, Mr. Santos said. “We don’t need it in terms of income,” he added.
The reform instead would try to limit tax evasion and simplify the tax code. The government could present the reform to Congress this year, Mr. Santos added. “We have much support right now in Congress and maybe we should take advantage of that,” he said.