Colombia takes measures to stem appreciation of the local currency
Colombia’s government and central bank announced new measures to stem a rally in the peso after President Juan Manuel Santos expressed concern its appreciation is hurting exporters and job growth.
The Finance Ministry will avoid bringing in 1.5 billion US dollars from abroad through the first months of 2011 to reduce demand for the local currency. The government will make changes to its 2011 external finance plan to keep 384 million out of Colombia, and will hedge as much as 3.7 billion in debt payments.
“This represents a substantial alleviation in dollars in the exchange market, so there’s less pressure to strengthen the peso” Finance Minister Juan Carlos Echeverry said.
The Colombian peso is the biggest gainer this year among Latin American countries as foreign investors flood the country with capital amid near-zero interest rates in the U.S., Japan and other developed economies. Currency volatility can make it difficult for businesses to plan, and a stronger peso hurts exporters by making their goods more expensive in dollar terms, damping profits and potentially putting jobs at risk.
The Trade Ministry also announced plans to reduce some tariffs for raw materials and capital goods in a bid to help companies, especially small- and medium-sized businesses, obtain equipment and other goods more cheaply. The tariff reductions will boost economic growth by 0.22% point and generate 150,000 jobs, the government said.
Colombia’s central bank also announced it will extend the period during which it will purchase dollars in the spot currency market as policy makers kept the benchmark interest rate at a record low 3% for a sixth straight month.
The monetary authority will continue to buy “at least” 20 million USD a day through March 15, two months longer than previously planned, bank chief Jose Dario Uribe said. He said the purchases may continue after March 15 if needed.
The Colombian peso 2010 gain stands at 11.2%. That’s the second-best performance among the 31 most-traded currencies tracked by Bloomberg, following the Japanese Yen. The Colombian economy is forecasted to expand 4.5% next year.
Colombian business associations warned in October that the strong peso threatens jobs and “jeopardizes the Colombian economy’s positive outlook”. Policy makers and the government had already taken measures aimed at slowing the Peso’s appreciation.
Echeverry on October 13 said the government would keep two dividend payments worth 1.4 billion USD from state oil company Ecopetrol SA abroad instead of converting the dollars into local currency.
The Colombian central bank has been purchasing at least 20 million USD daily in the spot market since Sept. 15.
President Santos expects the economy to grow 6% annually within two years after a 0.4% expansion last year. He intends to create 2.4 million jobs to bring the jobless rate down to single digits from 11.5% in September.