Colombian Peso Drops to Five-Month Low on Planned Net Wealth Tax

Colombia’s currency weakened to a five-month low on speculation foreign companies will repatriate revenue to avoid paying a net wealth tax the government is planning to extend.

The peso dropped 0.3 percent to 1,973.55 per dollar at the close in Bogota, the lowest level since March 25. It’s down 4.3 percent in the past month in the worst performance among 24 emerging-market currencies tracked by Bloomberg after the Hungarian forint.

Colombia is seeking to impose a 2.25 percent annual tax on wealth of more than 8 billion pesos ($4.1 million), with holders of smaller fortunes paying lower rates, Deputy Finance Minister Andres Escobar said this week. The tax legislation, which requires congressional approval, would lower the threshold at which the wealth tax becomes payable to 750 million pesos from 1 billion pesos. About 40,000 companies would pay the tax as well as 50,000 Colombians, or 0.1 percent of the population, according to Escobar.

“There’s a lot of talk on the net wealth tax,” Andres Munoz, the head currency trader at Corp. Financiera Colombiana, or Corficolombiana, said in a phone interview from Bogota. “In anticipation, multinationals could be buying dollars to repatriate profit” before the planned tax takes effect.

Speculation that the U.S. Federal Reserve will raise interest rates next year and make the dollar more attractive is also weighing on Colombian peso, Munoz said.

‘Strong’ Reserves

Colombia needs a “strong” level of international reserves to stand out among emerging-market peers when the Fed starts to raise borrowing costs, central bank co-director Ana Fernanda Maiguashca said in an interview yesterday.

Low volatility across financial markets may signal investors are underestimating how quickly the U.S. central bank will raise rates, according to a San Francisco Fed research paper this week.

Banco de la Republica will decide on its dollar purchase program this month as its program to buy as much as $2 billion in the currency market in the third quarter comes to an end.

Policy makers probably won’t continue dollar purchases given the peso’s plunge and current international reserve levels that seem “adequate,” Camilo Perez, the head analyst at Banco de Bogota, said in a phone interview.

The plan to extend the net wealth tax for four more years is in line with proposals laid out by the French economist Thomas Piketty in his best-selling book “Capital in the Twenty-First Century.”

‘Progressive Tax’

Colombia seeks to curb inequality with the wealth tax, Finance Minister Mauricio Cardenas told lawmakers yesterday. If passed, it would take effect in January.

“If we want an example of a progressive tax, there is no better example than the wealth tax,” Cardenas said. “It’s one of the things everyone is talking about, due to Thomas Piketty’s book.”

The price on Colombia’s benchmark bonds due 2024 fell 0.01 centavo to 124.38 centavos per peso, according to data from the central bank. The yield was unchanged at 6.56 percent.

(Earlier version of this story was corrected to show peso fell on speculation foreign companies will repatriate revenue to avoid paying a net wealth tax.)

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