Colombia Draws Pension Funds Into Battle to Weaken Peso

The Colombian government drew the nation’s pension funds into its fight to weaken the peso, as it tries to revive the nation’s manufacturing and agricultural sectors.

The government will change rules on risk and profitability governing pension funds to encourage them to follow the example of their Chilean and Peruvian counterparts in investing more outside their home country, Finance Minister Mauricio Cardenas said. The government estimates the changes will boost demand for dollars by $4 billion this year.

Additionally, a royalties fund controlled by the government, known as Fonpet, will buy $1 billion of assets outside Colombia, rather than bring the money back to Colombia, Cardenas said.

“We need a more diversified pension portfolio, which includes more dollars,” Cardenas said. “Right now they are too concentrated in pesos. They’ve put all their eggs in the same basket.”

The changes to pension fund rules were part of a stimulus package rolled out by President Juan Manuel Santos and his Cabinet today, aimed at “reactivating” the country’s industrial sector and boosting growth by 1 percentage point this year. Manufacturing has grown slower than the rest of the economy for several years, as it struggles with the currency rally, Santos said.

The peso weakened 0.5 percent to 1834.43 per U.S. dollar today in Bogota. Yields on Colombia’s peso bonds maturing in 2024 rose 1 basis point to 5.01 percent.

‘Equilibrium Rate’

Santos said the currency’s equilibrium rate is about 1,900 per U.S. dollar. Record investment in oil has contributed to the peso’s 23 percent rally since the start of 2009, the best performer of 25 major emerging market currencies tracked by Bloomberg after the Chilean peso.

Colombia currently invests 6 percent of its pension assets outside the country, while Chilean and Peruvian funds invest more than 30 percent of their assets abroad, Cardenas said. Increasing the proportion of Colombian assets invested abroad would have a “very positive” impact on the peso, Cardenas said.

Stimulus Plan

The 5 trillion-peso ($2.7 billion) stimulus package, called the “Plan to Boost Productivity and Employment,” also includes subsidized mortgage credit, lower energy costs, an expansion of a housing program for low income families, and a plan to cut loading times at ports. It also allows businesses to import raw materials without paying tariffs until August 2015, and brings forward some public works programs.

The interest rate on loans for homes worth between 80 million and 200 million pesos will fall to 7 percent from 12 percent, Cardenas said. Banks will cut their lending rate 2.5 percentage points, which the government will match with a 2.5 percentage point subsidy, Cardenas said.

Industrial output contracted 1.7 percent in January from a year earlier, its third straight month of contraction. The central bank has cut its policy rate 2 percentage points over its last nine meetings, to 3.25 percent, to try to revive an economy it says is growing below potential.

Gross domestic product grew 4 percent last year, slower than Chile and Peru, and down from 6.6 percent growth in 2011. Santos said today that the economy can grow 4.8 percent per year without stoking inflation.

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