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Colombia Peso Rallies on Optimism Santos Win to Spur Investment

Colombian peso notes
Colombian peso notes are arranged in Bogota, Colombia. Photographer: Scott Dalton/Bloomberg

Colombia’s peso and dollar bonds rose for a fourth straight week on speculation former Defense Minister Juan Manuel Santos will win the presidential election this weekend, attracting record foreign direct investment.

The peso gained 0.8 percent this week to 1,909.60 per U.S. dollar at 3:23 p.m. New York time and is up 7 percent this year, the best performance among world currencies tracked by Bloomberg. The extra yield investors demand to own dollar bonds instead of U.S. Treasuries has narrowed to 2.15 percentage points today from 2.31 percentage points at the end of last week, according to JPMorgan’s EMBI Plus index.

Santos plans to boost infrastructure spending and tax revenue while achieving annual economic growth of as much as 6 percent in two years, according to Juan Carlos Echeverry, his economic adviser. Santos is likely to win the second round vote on June 20, according to a poll by Gallup Colombia published on June 10. Investors are betting Santos will continue the policies of President Alvaro Uribe, said Carola Sandy, an economist with Credit Suisse Group AG in New York.

“We’re getting really bullish on Colombia,” said Siobhan Morden, a Latin America debt strategist at RBS Securities Inc. in Stamford, Connecticut. You consider “what the prospects can be here and you don’t see that anywhere else in the region. It’s exciting.”

Foreign Investment

Colombia will attract about $10 billion in foreign direct investment this year, Trade Minister Luis Guillermo Plata has said. The nation received $7.2 billion of foreign direct investment in 2009 -- of which 80 percent went into oil, coal and mining -- after a record $10.6 billion the previous year, according to the central bank. Interbolsa SA, the nation’s biggest brokerage, forecasts investment will jump to $11 billion this year.

If elected, Santos will take over a government that’s forecast to have a consolidated budget deficit of 3.6 percent of gross domestic product, the highest level since 2002. Santos aims to balance the nation’s budget by 2014, Echeverry said in a June 10 interview.

After Colombia’s Conservative and Radical Change parties endorsed Santos after the first-round vote, Santos has about 70 percent of backing in Congress, according to Sandy. Santos would get 66.5 percent of the vote in presidential runoff, compared with 27.4 percent for Green Party candidate Antanas Mockus, according to the Gallup poll. The nationwide poll of 1,200 was conducted June 5 to June 7 and has a margin of error of 3 percent.

Santos Vote

In the first round in May, Santos received 47 percent of the vote compared with 21 percent for Mockus, the former mayor of Bogota. While Santos fell short of the majority needed to avoid a runoff, he had the widest margin of victory since the runoff system began in 1991.

As Uribe’s defense minister from 2006 to 2009, Santos oversaw some of the biggest defeats for the Revolutionary Armed Forces of Colombia, or FARC, including a 2008 raid in Ecuador that killed the Marxist rebels’ No. 2 leader, Raul Reyes. Uribe’s security policies helped almost halve the number of murders and slash kidnappings 93 percent by 2009, spurring economic gains. The economy grew at its fastest pace in three decades in 2007 and attracted a record $10.6 billion in foreign direct investment in 2008.

Reigniting Growth

Santos, who studied economics at Harvard University in Cambridge, Massachusetts, and the London School of Economics, said his experience as finance minister and trade minister will help him reignite growth after Colombia’s first recession in a decade last year. The government expects the economy to grow 3 percent this year and 4 percent in 2011.

“There’s also the expectation that he will work on issues that were left aside by Uribe” such as cutting a widening budget deficit, Sandy said in a phone interview. “So there’s optimism that not only will he do so but he should have quite a bit of political capital in Congress.”

Colombia’s IGBC Index has climbed 7.7 percent this year, beating the 6.1 percent retreat in Brazil’s Bovespa stock index and 4.8 percent decline in the MSCI EM Latin America Index. The rally pushed the IGBC index to 24.3 times analysts’ earnings estimates, compared with 12.3 times for the Bovespa and 12.9 times for the MSCI measure.

“Colombia is still the hot topic in Latin America,” said Rupert Stebbings, general manager of Celfin Capital SA’s Colombia unit, in a phone interview from Medellin. “It’s seen as a very exciting story.”

The new government needs to address the “high” unemployment rate that may be exacerbated as dollar inflows spur job losses in the flower and textile industries as the strengthening peso cuts exporter revenue, Stebbings said. Colombia’s urban jobless rate jumped to a four-year high of 15.3 percent in January before falling to 12.4 percent in April.

Colombia is in the early stages of an oil “boom,” raising the risk that a sudden surge of wealth that hampers expansion as a strengthening peso erodes revenue from non-mining exporting industries, Morgan Stanley said in a June 1 report. That type of economic stagnation is known as “Dutch disease,” a term first applied to an increase in income from new natural-gas fields in the Netherlands during the 1960s.

Policy makers announced March 3 the central bank would buy $20 million a day through June 30 to curb a rally they say left the peso “misaligned.” While Banco de la Republica will end the daily purchases this month, it will continue evaluating the need to intervene in the market, bank chief Jose Dario Uribe said today.

The peso declined 0.4 percent today, ending a nine-day winning streak which was its longest in two years.

Finance Minister Oscar Ivan Zuluaga said this week that Colombia is considering creating a stabilization fund where excess oil and mining revenue is saved abroad.

“Politically Colombia is seen as very stable and it has very high protection rights for investors” helping drive foreign investment, said Stebbings.

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