Colombia’s Peso Weakens to Record Low as Crude Oil Prices Tumble

Updated on

Colombia’s peso dropped to a record low as prices tumbled for oil, the country’s biggest export, and after a central bank official said the currency selloff is justified.

The peso slid as much as 1.6 percent Thursday to 2,985.55 per dollar, the lowest level since it began trading freely in 1999. The currency fell to 2,983.05 at the close in Bogota. The peso’s 37 percent slide in the past 12 months is the worst performance after the Russian ruble and Ukrainian hryvnia among 151 currencies tracked by Bloomberg.

“Oil continues to be the driver,” said Daniel Velandia, the head analyst at Credicorp Capital’s Colombia unit. “There is also a big psychological component. Everyone is eyeing the 3,000 mark, and so the market itself is taking us there.”

Central bank co-director Adolfo Meisel said in an interview Wednesday that slowing growth will limit inflation, and the peso’s decline is healthy, echoing previous comments from Finance Minister Mauricio Cardenas, who chairs the policy meeting. The Colombian currency’s plunge is creating divisions within the central bank; some officials said a weakening peso will stoke inflation and called for an interest-rate increase at the last policy meeting.

Emerging-market currencies have slumped to the lowest since at least 2008, according to a Bloomberg index. The Colombian peso’s plunge has been exacerbated by the South American country’s reliance on crude exports, which account for about half of sales abroad. As the price of oil tumbled by more than half over the past year, the peso’s correlation with the commodity rose to the highest among developing nations.

Interest Rates

In a bid to stem declines, policy makers from Mexico to South Africa have stepped up intervention, raised interest rates or signaled an end to monetary easing. Colombia’s central bank has kept the lending rate unchanged at 4.5 percent since August 2014.

The fallout from the 57 percent drop in oil prices over the past year can also be seen in Colombia’s broader economy. The central bank has cut its 2015 growth forecast three times, predicting the slowest expansion since 2009, while the current-account deficit is poised for the widest in at least three decades.

Stocks and bonds have also taken a hit. The country’s benchmark stock index has sunk 53 percent in dollar terms over the past 12 months, the worst-performing among global indexes, while Colombia’s peso bonds have lost 41 percent in dollar terms, more than ten times the emerging-market average.

Good? Bad?

Speaking to reporters Thursday in Cartagena, Cardenas said that the move in the exchange rate’s level is neither good nor bad. On Aug. 4 he had said the weakening peso was positive for Colombia.

Declines in the peso mark a reversal after the Colombian currency posted increases in eight of the 10 years through 2012. As government officials bemoaned the gains, the central bank bought a record $6.77 billion of dollars in 2013 and $4.06 billion last year to accumulate reserves. Policy makers stopped the purchases this year.

Co-director Meisel said he ruled out an intervention.

Colombia’s central bank probably won’t take measures to ease the peso’s drop, since the declines help narrow the current account gap, according to Mario Castro, a strategist at Nomura Holdings Inc.

“You still see pressure on the currency,” Castro said by phone from New York. “The only thing that is for sure is that the trend is for a weaker peso.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE