Colombia’s peso fell the most in five months after policy makers indicated they may take further measures to ease a decade-long rally that is squeezing exporters’ profit margins.
The peso tumbled 0.6 percent to 1,769.83 per dollar at the close in Bogota, the biggest drop since Aug. 15. It touched 1,750.50 on Jan. 2, the strongest intraday level since July 2011, and has rallied 1.5 percent in the past month. The peso gained 9.7 percent last year, part of a 64 percent decade-long surge that is the biggest in emerging markets.
Finance Minister Mauricio Cardenas told reporters yesterday the Treasury will boost dollar purchases this month and buy about $1 billion this year for its petroleum stability fund, where some of the country’s oil royalties are invested. Central Bank Governor Jose Dario Uribe said on RCN Radio today that policy makers are worried about the peso’s rally since December and Colombia would benefit from a weaker currency. Cardenas said on Caracol Radio today that he wants the peso to weaken toward 1,800.
“There are elements that indicate the peso won’t remain as strong,” Andres Langebaek, the chief economist at Banco Davivienda SA, the nation’s third-biggest bank, said in a telephone interview. Policy makers “have demonstrated their willingness to act.”
The central bank bought a record $4.8 billion last year while the government purchased $1.9 billion, President Juan Manuel Santos said yesterday on Caracol Radio. Banco de la Republica may also boost dollar purchases from the current minimum of $20 million a day through the first quarter to curb the peso’s advance, Langebaek said.
Policy makers have also lowered the overnight lending rate by 1 percentage point since July to 4.25 percent, helping to weaken the peso. The central bank will cut the benchmark by a quarter-percentage point to 4 percent at its Jan. 28 meeting, according to 16 of 19 economists surveyed by Bloomberg. Three project borrowing costs to stay unchanged.
The peso will drop to 1,800 in the first half of the year as lower interest rates make the currency less attractive to international investors, Langebaek said.
A tax cut on overseas investors’ bond profits is contributing to gains in the peso, Cardenas and Uribe said today. Colombia reduced the levy on domestic securities to 14 percent from 33 percent as of Jan. 1 to help increase demand for local bonds and lower the nation’s borrowing costs.
In the interview with Caracol Radio, Cardenas said Colombia’s government doesn’t like capital controls “but it’s not good to say never.”
Colombia probably won’t impose such controls because that would go against the country’s efforts to attract overseas investors, Camilo Perez, the head analyst at Banco de Bogota, said in a phone interview.
“The government has shown if anything it wants to attract foreign investors into Colombia,” Perez said. “Especially after the bond tax cut, it’s not going to foil those plans by introducing capital controls.”
To stem a rally in the peso in 2007, policy makers ordered companies and investors taking loans abroad to deposit 40 percent of the funds in the central bank for six months to reduce the incentive to bring in short-term capital. The Finance Ministry imposed deposit requirements on new portfolio investments in the country including bonds and stocks. The controls were abolished in 2008.
The yield on Colombia’s 10 percent peso-denominated debt due in July 2024 rose three basis points, or 0.03 percentage point, to 5.47 percent, according to the central bank. The bond’s price fell 0.331 centavo to 137.961 centavo per peso. The yield dropped yesterday to 5.43 percent, the lowest since the securities were first issued in 2009.