Scolded Colombian Executives Borrowing Overseas at Fastest Pace Since 1999

Colombian companies are borrowing the most money overseas in at least 12 years, spurring speculation that policy makers will rein in the credit boom as part of an effort to stem the peso’s rally.

Foreign net loans jumped to $1.11 billion in the first seven months of the year, the most since the central bank began collecting the data in 1999, from a net decline of $184 million a year earlier. The companies are taking advantage of the near- zero benchmark interest rate in the U.S. to borrow more cheaply than in Colombia, where the interbank rate is 4.5 percent.

“The peso’s appreciation is clearly something that worries the central bank,” said Andres Pardo, the head analyst at financial services holding company Corp. Financiera Colombiana, known as Corficolombiana. Policy makers “will seek to limit the significant growth in external borrowing,” he said.

Developing nations from Brazil to South Korea are seeking to curb currency gains that are hurting exporters and limiting job growth. Colombia’s Banco de la Republica may impose limits on overseas bank loans as soon as tomorrow when central bankers hold their monthly meeting, according to Pardo and Daniel Nino, the head analyst at Bancolombia SA, the nation’s biggest bank.

Photographer: Alejandra Parra/Bloomberg

Colombia's finance minister Juan Carlos Echeverry, a member of the bank’s board, said in an interview Aug. 8 with Caracol Radio that rising dollar inflows are to blame for recent gains in the peso as “big” Colombian companies borrow abroad. Close

Colombia's finance minister Juan Carlos Echeverry, a member of the bank’s board, said... Read More

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Photographer: Alejandra Parra/Bloomberg

Colombia's finance minister Juan Carlos Echeverry, a member of the bank’s board, said in an interview Aug. 8 with Caracol Radio that rising dollar inflows are to blame for recent gains in the peso as “big” Colombian companies borrow abroad.

Echeverry Calls

Finance Minister Juan Carlos Echeverry, a member of the central bank’s board, said in an Aug. 8 interview with Caracol Radio that dollars are pouring into the country as “big” companies borrow abroad. Echeverry said he called the companies to warn them that the stronger currency is undermining the economy and to urge them to “make money from what you know how to do and don’t get into a market you don’t understand.”

Colombia’s peso is the best performing currency in Latin America this year, strengthening 7.4 percent to 1,777 per dollar, compared with the Brazilian real’s 3.9 percent advance and the Peruvian’s sol’s 2.4 percent appreciation.

The central bank in 2007 ordered Colombian companies and investors that took out overseas loans to deposit 40 percent of the funds in the central bank for six months, reducing the incentive to bring in short-term capital. The measure, a bid to stem gains in the peso, was scrapped in 2008.

Seeking to put a brake on the peso’s rally, Echeverry said in April that the government would create an overseas fund with as much as $1.2 billion from dollars bought in the local market, and forgo repatriating funds from abroad for the rest of the year. The central bank has bought a minimum of $20 million daily in the currency market since Sept. 15. It plans to keep up the purchases until at least Sept. 30.

Ministers Meet

Regional finance ministers met this month at the urging of Colombian President Juan Manuel Santos to discuss ways to protect their economies and the value of their record $700 billion in foreign currency reserves from a deteriorating U.S. and European economic outlook. The Federal Reserve pledged last week to keep its benchmark interest rate at record low levels at least through the middle of 2013 in a bid to shore up the flagging U.S. economic recovery.

In a speech yesterday in Santiago, Chile, Santos warned authorities in Latin America against taking a passive approach to currency appreciation that diminishes the region’s competiveness in export markets.

Minutes of the central bank’s July 29 meeting showed one board member disagreed with the move to raise borrowing costs to 4.5 percent, noting that higher rates could lead to more dollar inflows and a further expansion of credit.

‘No Rush’

“We could end up feeding what we seek to control: inflation,” the board member said, according to the minutes.

The central bank will raise the overnight lending rate by a quarter percentage point to 4.75 percent at the meeting tomorrow, according to 20 of 34 economists surveyed by Bloomberg. The other 14 analysts expect rates to stay at 4.5 percent.

Daniel Velandia, the head analyst at Bogota-based brokerage Correval SA, said the central bank will likely wait until the peso strengthens beyond 1,730 per dollar to impose limits on external borrowing. The peso weakened to as low as 1,929.53 at the beginning of the year before gaining to as strong as 1,742.5 in July.

“There’s no rush while the peso” remains weaker than 1,750, Velandia said. “Once it gets closer to 1,700 is really when we’ll see” policy makers announce new measures.

Rate Increases

Bancolombia’s Nino estimates a company in Colombia pays on average about 5.5 percent interest on loans that are less than six months. The interest rate on the same loan abroad would be about 1.5 percent, with the cost rising to about 3 percent when factoring in currency hedging, he said. Gross foreign borrowing jumped to $5.09 billion in the first seven months of the year, up from $3.76 billion a year earlier, according to the central bank.

An official from the central bank declined to comment.

The increase in foreign borrowing is offsetting the impact of the central bank’s six interest-rate increases this year, which were designed to slow economic growth and keep inflation in check, Nino said.

Colombia’s economy expanded 5.1 percent in the first quarter, and the government estimates it will grow about 6 percent this year. Annual inflation was 3.42 percent in July, within the central bank’s 2 percent to 4 percent 2011 target.

“The economy is like a speeding car, and right now the central bank has one foot on the accelerator and one foot on the brake,” said Nino. Banco de la Republica “needs to resolve the issues with external borrowing,” he said.

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

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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