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Bad Peso Good Peso

Bad Peso Good Peso

Currencies whose economies are helped by oil exports have all been hit by the slump in crude prices, but the Colombian peso has taken a particular battering in recent weeks.

And the currency fell for a fourth straight day on Thursday, to hit a fresh 11-year low of 2726.50 pesos per dollar.

Thursday’s drop takes the peso’s loss since the start of May to more than 12 per cent, handing it the dubious distinction of being the second-worst performing major emerging markets currency this year after the Brazilian real.

Once tarnished by a reputation for cocaine and violence, Colombia has emerged as a darling of investors in recent years as a decade long commodities boom and an improved security situation helped fuel the growth of a new middle class that drove spending in a myriad of areas.

But just as the Andean country has reaped the benefits of high commodity prices, the 50 per cent fall in oil prices since last June has cast a pall over Latin America’s third largest economy.

While Colombia does not even figure among the world’s top 10 oil producers, the commodity does play an outsize role in the economy.

It accounts for more than a half of the country’s exports and generates more than a quarter of total government revenues, according to Bank of America Merrill Lynch estimates.

As the chart below from Capital Economics shows, Colombia’s current account deficit is now among the largest in the emerging world as the oil price slump take a toll on its finances.

Colombian policymakers have responded by raising taxes and cutting spending.

But that is not going to be enough to prevent a dramatic easing in the pace of growth to around 2 per cent for this year, compared to the 4.8 per cent average annual increase the country recorded over the previous decade.

Tiago Severo, analyst at Goldman Sachs, reckons the peso could fall to as low as 2,800 by the end of this year. He said:

The recent slide in oil prices has contributed to keeping Colombia’s terms of trade severely depressed. The adverse consequences of this negative shock are increasingly visible in the current account, capital inflows and real business cycle data.

The testier external backdrop should exacerbate already sizeable external imbalances, undermining the currency’s fundamentals.

The view was shared by Mario Castro at Nomura, who said the ongoing weakness in oil prices, slowing growth in China and an impending rise in interest rates from the US Federal Reserve should all continue to weigh on the peso.

Interestingly, Colombian policymakers have so far been happy to let the peso slide because it is helping to make exports from the country’s coffee, banana and flower industries more competitive.

How long they can take this wait and see stance remains to be seen.

http://www.ft.com/fastft/360621/colombian-peso-tumbles-fresh-11

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