Why is the dollar rising against the peso in Colombia?

(CNN Spanish) — When Gustavo Petro won the presidential elections in Colombia, many wondered if the dollar would begin to grow in relation to the Colombian peso due to the economic concerns that the candidate generated in some people.

At least in the short term, those forecasts seem to be coming true (although for several factors, not just the electoral one): the dollar was trading this Wednesday at 4,352.6 Colombian pesos, according to Reuters, a jump of almost 11% from 3,905. pesos per dollar on June 19, when Petro won the elections.

On Friday the dollar had already reached 4,205 Colombian pesos, before the weekend and the holiday this Monday in the United States for July 4, which contained the climb until the opening of the markets on Tuesday.

In this way, it exceeded the peak of 4,180 Colombian pesos per dollar in March 2020, at the beginning of the covid-19 pandemic, and this Wednesday the record has been broken again.

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Meanwhile, the devaluation of the Colombian peso reaches 12.78% so far this year, and is 7% year-on-year, according to data from Banco de la República.

US dollar notes are photographed in Buenos Aires, on June 23, 2022. - Argentines do their accounts in dollars, traumatized by recurrent economic crises and tormented by the inflation that is eating away at their pockets and is projected to exceed 60% this year.  (Photo by Luis ROBAYO / AFP) (Photo by LUIS ROBAYO/AFP via Getty Images)

Why is the dollar rising in Colombia?

Beyond the impact of the elections, the appreciation of the dollar in Colombia is not just a phenomenon of recent months. With ups and downs, it maintains an upward trend at least since April 2018, when it was trading at 2,707 Colombian pesos.

And weaker still was the dollar in July 2014, when it was quoted at 1,843 Colombian pesos.

What happened then?

As of mid-2014, the dollar began to appreciate throughout the world in the context of the fall in the price of raw materials, according to the Banco de la República, and Colombia, whose oil exports are very important, was no exception. .

In a world context of high inflation and scarcity of resources and interruptions in the supply chain due to Russia’s war in Ukraine, the devaluation of the Colombian peso and other currencies is a reality.

It must also be said that the Colombian case is not unique: the dollar has risen against the euro, the Argentine peso and the Chilean peso, for example

The impact of the elections

“Market operators are going to feel an effect of growth in demand from some individuals who may feel nervous about the new president and his economic policies,” said Isidro Hernández Rodríguez, professor of economics at the Externado de Colombia, to CNN, after the second round elections in which Petro triumphed.

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On Thursday, Petro said through his Twitter account that José Antonio Ocampo will be his finance minister, one of the most anticipated appointments of his future cabinet, with which he will assume the presidency on August 7.

“José Antonio Ocampo will be our Minister of Finance. Build a productive economy and an economy for life,” he tweeted.

It was a key announcement that has been very well received by various sectors, since Ocampo’s trajectory is a signal for the market economy and investors, while it is considered as a support for the management of Petro’s progressive agenda.

However, the dollar continued to rise.

The international context

In the medium term, the key to defining the dollar’s trend will be “international developments,” Scotiabank Colpatria analyst Jackeline Piraján had said in a document shared with CNN in June.

“We do not expect the exchange rate to drop much more than 3,750 Colombian pesos” because “the context of higher rates at the international level generates a global strengthening of the dollar,” he said.

In a report shared this Monday with CNN, Piraján highlights that “in recent days we have had a mixed composition in which central banks remain aggressive announcing more interest rate hikes, this causes the dollar to strengthen against the bulk of currencies international, both those of developed countries and those of emerging ones”.

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“Today (Monday) in particular there was a report from the United States showing that manufacturing activity had its weakest rate of expansion in the last two years, showing those problems or expectations that a recession could develop from now on,” Piraján said. , adding that in such a context, investors move to safer assets, appreciating the dollar.

In the last year the dollar has been appreciating against most of the world’s currencies, including the British pound, the euro, the yuan and the yen, according to Reuters.

Oil exploitation, in the sights

Petro, according to what its government program indicates, wants to put an end to extractivism gradually and affirms that it will prohibit the exploration and exploitation of unconventional deposits, will stop pilot fracking projects and the development of offshore deposits, will not grant new licenses for hydrocarbon exploration nor will it allow large-scale open pit mining.

The economic research institution Corficolombiana published on June 14, days before the second round, an analysis of the estimated impact of a supposed suspension of new hydrocarbon exploration from 2023 to 2027.

In that scenario, says the company, the Colombian peso would be devalued between 39.9% and 43.7% by 2027 and the exchange rate would be between 5,080 and 7,000.

With information from Germán Padinger, Gerardo Lemos, Sebastián Jiménez Valencia and Carolina Melo.

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