SocGen Bullish on Colombia Peso While Morgan Stanley Cites Risks

  • Colombia peso reached record low Tuesday before rebound
  • SocGen predicts gain toward 3,000/USD; MS says headed to 3,600

As Morgan Stanley warned that the Colombian peso was headed to a record low, Societe Generale SA said it will likely gain to the strongest since November.

The divergent views, which came in research reports released Wednesday, come down to disagreements over the impact of lower oil prices and policy makers’ efforts to support the currency. Morgan Stanley said that the tumble in crude prices will sap government revenue and drag Colombia’s currency down further, while SocGen expects energy prices to stabilize and policy makers to step in with support.

The peso has lost 45 percent in the past 18 months, making it the third-worst performing emerging-market currency, on concern that the current-account deficit was set to balloon given that oil accounts for about 40 percent of Colombia’s exports. The currency touched a record low Tuesday before recovering. It gained 0.3 percent today to 3,354.89 per dollar, as oil advanced for a second day in New York. 

“Given sound domestic fundamentals, the expectation of further central bank rate hikes and dollar sales by the Treasury to support the currency, we expect the Colombian peso to recover from its recent lows, provided that commodity prices stabilize in the coming months as our economists expect,” analyst Bernd Berg wrote in report.

Colombian policy makers will probably raise the benchmark borrowing rate to 6 percent on Friday, according to the median estimate of analyst surveyed by Bloomberg, in what would be the fifth increase since September. Finance Minister Mauricio Cardenas said Tuesday that the Treasury has been selling dollars since December, and the “new normal” will be to continue doing so, which would also lend support to the currency.

Berg forecast the peso will strengthen toward 3,000 per dollar. 

Bears point to forecasts that the current-account deficit, the widest measure of trade in goods and services, will expand to the widest in 30 years. Morgan Stanley said the peso is likely to remain vulnerable to declines with oil at current levels, after tumbling 31 percent over the past year, which implies an extra 6 trillion pesos ($1.8 billion) in funding needs for the government. The bank said the currency will head toward 3,600 per dollar.

“With the tax reform initially scheduled for March delayed, investors may become concerned about how the government will fund this gap,” according to the Morgan Stanley report. The peso “should remain under pressure given unrealistic oil price assumptions in the budget, though intervention efforts could slow the pace of weakness.”

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