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Colombia's Peso Strengthens the Most in Two Months as S&P Raises Outlook

Colombia’s peso rose the most in two months after Standard & Poor’s Ratings Services raised its outlook on the country’s credit rating to positive.

The peso jumped 1.1 percent to 1,884.98 per U.S. dollar at 2:08 p.m. New York time, from 1,906.20 yesterday. That’s its biggest advance on a closing basis since May 10. Colombian markets closed before S&P’s announcement yesterday.

S&P, which rates Colombia BB+, or one level below investment grade, raised the outlook from stable, citing optimism President-elect Juan Manuel Santos’s plan to reduce debt and create a stabilization fund will boost the economy’s “resilience.”

“An investment-grade rating would boost flows into Colombia,” said Carlos Torres, head analyst at Medellin-based brokerage Asesores en Valores SA.

The positive outlook “reflects the likelihood of an upgrade if the next administration pursues policies that strengthen the growing resilience of the economy, including reducing its vulnerability to external shocks,” S&P credit analyst Joydeep Mukherji said in the statement.

Colombia’s government should consider capitalizing on its oil riches by creating a fiscal stabilization fund once it cuts debt to a desirable level, according to policy recommendations made by officials from the Finance Ministry, central bank and national planning department presented yesterday.

Strengthening Trend

Santos has said he plans to create a dollar-denominated sovereign wealth fund using royalties from oil and coal, dividends from state oil company Ecopetrol SA and tax revenue.

The peso has jumped 8.4 percent this year, the best performance among all currencies tracked by Bloomberg.

Speculation the central bank will intervene in the foreign- exchange market to stem the currency’s rally is easing gains in the peso, according to Torres.

Banco de la Republica last month ended the purchase of $20 million each day in the foreign-exchange market. Policy makers said March 3 the bank would purchase $20 million daily through June 30 to curb a rally they said left the peso “misaligned.”

“The peso’s natural trend is to continue strengthening, given increased foreign investment flows as well as exports,” said Torres. “The risk, however, is that the central bank may come in at any moment and take measures, and that’s limiting that trend.”

Peso Bonds

Central bank director Cesar Vallejo said in an interview yesterday that the peso is trading close to equilibrium. Banco de la Republica has no immediate plans to buy dollars in the spot market because that tactic isn’t effective at slowing the currency’s appreciation, he said.

Separately, central bank director Carlos Gustavo Cano said in an interview yesterday that he is “worried” about the strong peso and that the economy is showing “clear signs” of so-called Dutch disease.

Dutch disease is a sudden surge of wealth that ultimately hampers expansion. The term was first applied to a surge in income from new natural-gas fields in the Netherlands during the 1960s that triggered a currency gain and eroded other exporters’ earnings.

The yield on Colombia’s benchmark 11 percent bonds due July 2020 fell one basis point, or 0.01 percentage point, to 7.66 percent, according to Colombia’s stock exchange. That’s its lowest level on a closing basis since April 2006. The bond’s price rose 0.092 centavo to 122.809 centavos per peso.

S&P’s move follows comments from Alessandra Alecci, an analyst with Moody’s Investors Service, who said in a June 30 interview that the agency is “optimistic” on Colombia and that there is “potential” for the South American country to move towards investment grade. Speculation an upgrade would lure more foreign investors to the country’s debt has pushed yields on the 2020 peso bonds to drop 18 basis points since June 29.

Moody’s rates Colombia’s foreign debt Ba1, or one level below investment grade. It has a stable outlook on the rating.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

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