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Colombian Peso is at record low. Good for growers?

Colombian Peso is at record low. Good for growers?

The Colombian peso has depreciated more than most predicted and on Monday even dropped to a historic low: One dollar is now worth COP3,300.

During Monday’s trading the dollar peaked at COP3,324 and ended the day at COP3,308, a value not measured in the entire history of Colombia’s currency.

The depreciation is mainly because over the past decade, Colombia’s exports have increasingly become dependent on oil exports.

When global commodity prices began dropping in September last year, Colombia and other oil-dependent emerging economies saw their revenue and export figures drop in what has been called the bursting of the emerging markets and commodity bubbles.

How the weak peso will really hurt workers

The decrease in value of the peso has spurred Colombia’s inflation rate, which is currently at 6.11% or double what Colombia’s Central Bank had anticipated at the beginning of the year.

The latest peso drop and an expected further increase in inflation is almost certain to hurt the wallets of more than half of Colombia’s employed population in 2016.

Some 55% of formally employed Colombians earn minimum wage, according to a 2013 study.

Unions, employers and the government traditionally negotiate the increase of the coming year’s minimum wage in December.

Because unions and employers have a history of not being able to find consensus on this issue, the government has in effect been defining an increase in minimum wage.

Over the past years, the custom has been to link the coming year’s minimum wage increase to the inflation rate of the past year.

The administration of President Juan Manuel Santos has increased minimum wage more than the inflation rate in efforts to curb economic inequality and poverty.

However, Santos was doing this in economic heydays during which the country was enjoying massive increases in oil revenue that was followed by lowering unemployment figures and poverty rates.

But for the first time in years, 2015’s unemployment figures are up, economic growth is down and the government is facing a major budget deficit.

Choosing between spending power and unemployment

Employers have long argued that excessive increases in minimum wage impede the creation of jobs and can even cause lay-offs if the economic tide is adverse.

Additionally, higher labor costs affects Colombian products’ and services’ already delicate competitiveness abroad.

Consequently, employers try to keep minimum wage as low as possible.

But if next year’s minimum wage hike is lower than the inflation rate, Colombian workers earning the current minimum wage of $195/month would become significantly poorer.

Avoiding a decrease in spending power of workers seems virtually impossible, mainly because the current inflation hike is not expected to spontaneously stop on January 1, but continue throughout 2016.

This means that while minimum wage is fixed for a year on January 1, prices will continue to go up, slowly decreasing the spending power of more than half of Colombia’s labor force.

The government has already announced austerity measures for its 2016 budget, but the way the Colombian economy is going predicts that millions of Colombian households will also have to tighten their already very tight belt.

http://colombiareports.com/colombias-peso-sinks-further-us-dollar-now-worth-more-than-cop3300/

2 Comments

  • Another perspective
    SME
    What Economists Don’t Get about the Colombian Peso’s Devaluation
    Oil Prices and the Failure of Macroeconomics

    JAVIER GARAY MARCH 6, 2015 AT 11:17 AM

    The competitiveness of Colombian industry doesn’t depend just on the exchange rate.
    The competitiveness of Colombian industry doesn’t depend just on the exchange rate. (Colombia.com)
    EspañolIf there’s one issue in economics that demonstrates the ignorance of the general public — and some economists — it’s exchange rates. The proclivity towards alarmism by multiple media outlets and experts is reflected by any change in monetary value being seen as a grave signal of imminent crisis.+

    Only a few months ago, the problem was the revaluation of the peso. Many augured insurmountable difficulties for the Colombia’s productive sector, and those experts who live to be afraid of economic changes cried out for greater state intervention to avert catastrophe.+

    They were so concerned that they never anticipated that the situation could reserve itself. As a result, since late 2014, the “problematic” phenomenon has been the complete opposite: the devaluation of the peso.+

    Many economists, media organizations, and politicians understand economics as a whole, without differentiating into different sectors and individuals.

    To be fair, the levels of concern over the revaluation were never compared to those generated by devaluation. At the end of the day, speaking of these phenomena requires the use of inexact and often artificial definitions, the unique language of a diverse and fragmented discipline that has developed under the misleading banner of macroeconomics.+

    Due to the obsession of many economists, media organizations, and politicians with this unified vision of economics, they understand economic phenomena as a whole, without recognizing that these affect different sectors and individuals within society in a differentiated and asymmetrical manner.+

    This vision has meanwhile generated several socially shared ideas, repeated in various contexts and rarely questioned, that have little do do with advancing knowledge of economics, instead turning it into a normative discipline: what “ought to be.”+

    People would have you believe that the “national” economy should perpetually increase what it sells to the “rest of the world” (exports) and limit as much as it possibly can what it buys (imports). As a consequence, as revaluation (according to the macroeconomic logic) stimulates the latter and diminishes the former, it’s regarded as a much greater evil than devaluation.+

    As a result, although the phenomenon surprised and generated a degree of concern, analysis has centered on reviewing its immediate causes and placing bets, so loved by the addicts of the macroeconomic vision, about the peak that the increase in the price of the Colombian peso per dollar will reach.+

    What analysis has had little place for is the fact that Colombia is highly dependent on global petroleum prices, without being an internationally relevant country in the production of crude. There are few explanations for why the Colombian peso continues to be so volatile and sensitive, both in revaluation and devaluation.+

    Economists prefer to stimulate sales abroad in an artificial way rather than seek a solution to the fundamental problems of national production.

    In the same way, beyond holding forth on the potential winners and losers of the phenomenon, macroeconomists rarely develop their vision to include a deeper perspective, taking into account different sectors. For example, as a result of devaluation, Colombia’s coffee-growers, led to believe they’re still the country’s most important sector, feel like they’re benefiting.+

    They comfortably assume that because they’re coming off better — in an artificial way, via the price of the currency and not through greater productivity — this will automatically increase the well-being of all Colombians. The problem is that when the tendency reverses, they return to demanding that all of their fellow citizens, through the state, make up for their losses.+

    In the same way, instead of providing information about the impact of devaluation in the serious phenomenon of the impoverishment of the poorest that inflation represents, they instead reflect on the undesirability of a situation where the prices of goods in a basic shopping basket are impacted.+

    Fundamentally, like the perpetuation of Keynesian thought, responsible for the macroeconomic illusion, they pay little attention to the expected and unexpected consequences of a greater tolerance — and lesser concern — for the phenomenon of revaluation.+

    One one side, although sensible voices exist, economists prefer to stimulate sales abroad in an artificial way rather than seek a solution to the fundamental problems of national production. Business leaders have to stir themselves to improve their attention to consumers’ needs, and the state must recognize that their labor is, more often than not, an essential cause of the country’s low competitiveness.+

    On the other, at the root of it is the willingness — and desire — of these analysts to maintain perverse levels of state intervention in the economy. Not only in a direct way, through manipulating exchange rates, but indirectly through its dependence on oil prices; or more damaging still, through intervening in other areas of the economy such as price fixing. These are experiments which, applied to the limit, are causing our Venezuelan neighbors so much suffering.+

  • In general a devalued Peso is good for any company getting paid in US Dollars. In the long run I suspect that this is not good for a country but the growers are happy.

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