As Philipp Hildebrand explained in Tuesday’s Financial Times, there is no such thing as a global currency war. But – as John Paul Rathbone outlined the next day – that hasn’t prevented the spread of currency fears across Latin America.
Policy makers have faced those fears in different ways. Munir Jalil and Jose Vicente Romero of Citi Research argue that Colombia has turned to some fancy accounting.
Brazil, the original currency warrior, sees loose monetary policy in the developed world as a deliberate bid for a competitive edge. Others take a less belligerent stance but must still deal with the consequences.
As the chart from Rathbone’s analysis shows, Chile, Colombia, Mexico and Peru have all seen their currencies strengthen against the US dollar, putting big dents in their ability to compete against foreign manufacturers both at home and abroad.
Policy makers in these countries are less inclined to adopt the unorthodox measures used by Brazil, such as controls on flows of “hot money” or – as critics of the Brazilian approach argue – keeping interest rates artificially low to deter currency appreciation.
But that doesn’t mean they won’t do whatever they can to minimize currency appreciation. As Jalil and Romero explain, Colombia appears to be targeting its exchange rate with some recent changes to its budgetary plans for 2013.
Among the changes is a plan to extend the average duration of public debt from 5 years to 5.2 years by swapping short-term for longer-term bonds between the treasury and public entities, producing savings of 1.1tn pesos ($611m).
Further savings will come from what the government says are lower issuing costs and a reduction in treasury operations. Added together, the savings come to about $1tn.
The final impact is to reduce the amount of foreign debt issued by the government. As Citi puts it:
Particularly, the government expects to display savings arising from lower amortizations and lower issuance costs. In our view, the measure is oriented to fight the COP appreciation by announcing an increase in the demand of USD by the government.
Will it work? Well, every little helps. But while good management of marginal effects is important, it rarely matches up to the brute force of fundamental flows. Here is Citi’s conclusion:
While this measure may have some short run impact on COP, we think that FDI and portfolio inflows dynamics will be the ultimate drivers of the COP this year.