Colombia Peso Sinks as Oil Drop Signals Pain for Current Account

  • Peso gained earlier this week as Colombia auctioned Isagen
  • Strategists see `indisputably clear' case for more rate hikes

The Colombia peso reversed two days of gains as oil’s plummet to a 12-year low highlighted the difficulty the country faces in taming a current account deficit forecast to be the highest in at least three decades.

The peso fell 1.9 percent to 3,293.25 per dollar at 10:22 a.m. in Bogota after earlier weakening through 3,300 per dollar for the first time this week. Oil is the country’s biggest export, and lower crude prices signals smaller dollar flows into the country.

The peso’s 3.6 percent decline this year has been less pronounced than the slump in oil, as the central bank raises interest rates to combat the fastest inflation in almost seven years. A weaker peso may help narrow the country’s current-account deficit, the broadest measure of trade in goods and services, by making exports more competitive.

“It’s not the policy to push the peso weaker, but it is policy to let the peso adjust to reality,” said Alvaro Vivanco, a local markets strategist at Banco Bilbao Vizcaya Argentaria SA in New York. “There is pass-through from the weaker currency, food prices are rising around 10 percent and domestic demand has been much stronger than anyone anticipated. But the weaker peso also helps control the current-account balance.”

Colombia’s central bank raised its policy rate for a fourth straight month in December, increasing it 0.25 percentage point to 5.75 percent. BBVA expects the central bank to raise rates by at least another 0.75 percentage point, Vivanco said. Goldman Sachs Group Inc. said on Wednesday that it too expects the central bank to deliver another 75 basis points of hikes during the first quarter. Traders are pricing in a benchmark rate of 6.42 percent in three months’ time. 

The case for more hikes in Colombia is “indisputably clear,” Goldman analyst Tiago Severo wrote in a note to clients. “An intense El Nino weather phenomenon and the ongoing exchange-rate pass-through to domestic prices continue to weigh on the outlook for inflation.”

More restrictive monetary policy would also help in “putting the brakes on Colombia’s galloping current-account deficit,” he wrote. The current account deficit widened to $5.25 billion in the third quarter, compared with estimates for a $4.9 billion gap.

The currency had strengthened 1.3 percent on Wednesday and Thursday as Colombia sold its majority stake in power generator Isagen SA for 6.5 trillion pesos ($2 billion) to a group led by a subsidiary of Brookfield Asset Management Inc.

“The peso drop took a break amid all the news from Isagen, and now its overreacting to many things,” said Sergio Olarte, an economist at BTG Pactual Group’s Colombia unit in Bogota. “People are very nervous about what’s going on with oil.”

Brent for March settlement dropped $1.2, or 3.9 percent, to $29.68 a barrel. Prices dropped below $30 Wednesday for the first time since 2004.