It’s quite the reversal of fortune.
Colombia’s peso has gone from Latin America’s best currency to one of its worst in the past 12 months after the drop in oil prices left it with a widening budget deficit. Its growing current account gap -- the broadest measure of trade -- is forecast to exceed the average for India, South Africa, Indonesia, Turkey and Brazil in 2013, when Morgan Stanley coined the phrase “fragile five” to describe the nations that would suffer the most when the U.S. raised interest rates.
The peso’s volatility is now at its highest relative to emerging markets since 2008 as traders wager that U.S. Federal Reserve tightening will begin this year. After a decade in which Colombia benefited from rising oil revenue as improved security opened swaths of land to energy exploration and fueled foreign investment, analysts are now cutting forecasts for growth and turning more bearish on the peso. Standard Chartered Plc predicts the currency will drop 8 percent by September.
“You can fall out of love as easily as you can fall in love,” Mike Moran, the head of research for the Americas at Standard Chartered, said from New York. “The economy is so reliant on revenue from commodities that it is left exposed when external conditions become more averse.”
With oil accounting for about half of Colombia’s exports and 17 percent of government revenue, crude’s 44 percent collapse in the past year is reducing the flow of dollars to the South American nation and widening its budget deficit.
Most at Risk
Morgan Stanley now considers Brazil, Turkey, South Africa and to a lesser extent Indonesia the most at risk from the fallout of the first U.S. interest-rate increase in a decade. Beyond those countries, Colombia, along with Russia, Peru and Mexico, are the next-most exposed nations, the bank says.
Colombia’s current-account deficit is forecast to reach 5.8 percent of gross domestic product this year, the highest in more than three decades and wider than any of the four countries Morgan Stanley says are most at risk. As that pushes down the value of the peso, the cost to borrow in dollars will increase. As recently as 2013, the current-account deficit was 3.3 percent.
“Colombia’s current account has deteriorated quite aggressively,” Manoj Pradhan, an economist at the bank, said from London.
The peso has plunged 27 percent in the past year to 2,584.09 per dollar, the worst performance after the Russian ruble and Brazilian real among 24 emerging-market currencies tracked by Bloomberg. With a 0.9 percent plunge Friday, led declines among developing countries.
The currency was the best in Latin America from mid-2013 to mid-2014, climbing 2.3 percent while Chile’s peso dropped 7.8 percent and Argentina’s currency was devalued 34 percent.
Steffen Reichold, an economist and portfolio manager at Stone Harbor Investment Partners, said the peso’s plummet means it doesn’t have much more to fall.
But traders are bracing for more volatility. They’re now betting that the currency will fluctuate the most since 2008 relative to emerging-market peers, according to data compiled by Bloomberg and JPMorgan Chase & Co.
“Markets are applying a higher risk premium,” Moran said. “Investors are a little bit more cautious on what Colombia is going to look like in a year or two.”
Analysts aren’t the only ones pointing to concern over Colombia’s current account gap. Central bank co-director Cesar Vallejo said in a June 18 interview that at the moment it’s the country’s “most shocking” economic indicator. That same day, central bank co-director Carlos Gustavo Cano said the widening gap is the Colombian economy’s “Achilles heel.”
Since Dec. 31, strategists surveyed by Bloomberg have cut their year-end forecast for the peso by 12 percent. The median projection is for the peso to fall another 1 percent to 2,600.
Eduardo Suarez, a currency strategist at Bank of Nova Scotia who appears among the top four forecasters for the Colombian peso in a Bloomberg ranking, says the currency is expensive. He predicts further declines.
“Its economy has become too dependent on oil,” Sanchez said from Toronto. “The peso still needs to adjust to the terms-of-trade shock.”