Dollar-buying by the Colombian central bank has doubled and will continue as a means to keep the peso down
Colombia is winning its battle to prevent the peso from appreciating and hurting its economy by doubling its dollar buying program, the head of its central bank said on Friday.
The bank bought an average of US$20 million day last year and announced in January that it would up the amount to US$30 million. It has now surpassed that, said central bank Governor José Dario Uribe.
“We are now close to an average of US$40 million a day,” he told Emerging Markets. “This has had, without a doubt, a stabilizing impact on our exchange rate. The peso has remained very stable and the exchange rate today is basically the same it was 12 months ago.”
The revelation comes amid growing concern about quantitative easing measures announced by rich countries.
Uribe did not specify if the bank would up the daily purchases further, but comments from President Juan Manuel Santos on March 14 signalled that this is a definite possibility. He called on the bank to use mechanisms to keep the peso from gaining ground. The government has been under intense pressure from exporters to lower the peso’s value to make Colombia’s non-mining and oil exports more competitive.
Uribe said there were other instruments available and could be used “if we believe that the benefits of these instruments will be higher than the cost. At this point, we believe that the decision to intervene in the exchange market through the exchange market through pre-announced purchases is the appropriate mechanism.”
The peso strengthened by 9.7% last year and reached its highest point in nearly two years at the start of 2013. It has since retreated 2.3%. The bank purchased $4.84 billion in 2012 and $1.38 billion in the first two months of this year. The Finance Ministry has said that the amount purchased in the first five months of the year would be around $3 billion.
The bank has also aggressively cut interest rates to help ease the peso’s gain, slashing 150 basis points since midway through last year. The current rate is 3.75%, the lowest in South America.
One of the results of the currency appreciation has been an increase in international reserves, which were $39 billion in February. The vast majority of its reserves are in U.S. dollars, which account for 87.7%. It has changed the makeup of the remaining currencies, adding Canadian, Australian and New Zealand dollars, while dumping euros and yen. Euros, which accounted for 11% in its basket of currencies in 2010, are now below 1%.
While the economy expanded by approximately 3.6% in 2012, below initial forecasts, and is expected to expand by 4% this year, Uribe and analysts are optimistic about future prospects.
“Some of the numbers in 2013 may get worse, but we feel that they are resilient for structural reasons,” said Víctor Herrera, director general of Standard & Poor’s.
Among the positive signs are a new fiscal rule, which will kick in fully in 2014, and the application of a new royalties law and tax code that has helped address distortions with labour costs.
The new fiscal rule is similar to that in place in Chile and introduces counter-cyclical elements. It includes a stabilization fund that the government will grow to address potential problems. The fund has around $1 billion.
Uribe expects new trade agreements being pursued by the administration, particularly with Asian nations, to have a crucial impact. “This is one of the most potent changes for the Colombian economy,” he said.
Colombia signed an agreement with South Korea in February that will eliminate more than 90% of tariffs. It is also working on a trade pact with China. It implemented a trade agreement with the United States last year and is on the verge of implementing a pact with the 27-member EU, which the bloc approved late last year.