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 economic concerns about the measures that the new president generates in some sectors, in the midst of a global context of inflation and strong dollar. After two months of government, these forecasts are still a reality (although due to several factors, not just the electoral one): the dollar has been rising steadily.

On Thursday, October 6, the dollar closed at 4,672 Colombian pesos on average. At the beginning of July, the peso was trading at 4,205 per dollar.

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This is a new record that will be broken in 2022: in July it had passed 4,500 Colombian pesos per dollar. Before that, the peak had been 4,180 Colombian pesos per dollar in March 2020, at the start of the covid-19 pandemic.

The increase until this Monday represents a jump of close to 19% from the 3,905 Colombian pesos per dollar on June 19, when Petro won the elections.

Meanwhile, the devaluation of the Colombian peso reaches 19.82% in the full year, and is 14.26% in the year to date, according to estimates by Banco de la República.

The Government presented its tax reform project in October and has announced that it will raise the price of gasoline by progressively eliminating the subsidy on fuel to cover the budget deficit, measures that have generated criticism among part of the population and opponents, as well as some experts.

The president says that he will not raise gasoline prices in Colombia —which has one of the lowest prices on the continent— generates a deficit of almost 40 billion of pesos annually, about US$ 9,000 million at the current exchange rate.

In addition, the Banco de la República announced in the last week of september the rise in interest rates, something that the president Petro criticized as an effective measure to combat inflation, which in Colombia in September reached 11.44%.

The rise comes after Petro referred on October 5 that it could impose a transitory capital flow tax to prevent flight, which has been rejected by some economists and sectors. Former Minister of Finance Mauricio Cardenas said that “The jurisdiction to set taxes on swallowed capital belongs to the Board of the Bank of the Republic. It would not do so because it would be suicide. The stampede of capital would generate more devaluation and more inflation.”

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 new government’s measures, 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 new government

“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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The appointment of José Antonio Ocampo as Minister of Finance was initially well received by various sectors, but in the negotiations for the tax reform project, the minister has encountered challenges from different unions.

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.

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

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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 he has indicated from his government program and reiterated by the mining minister, wants to put an end to extractivism gradually and affirms that it will prohibit the exploration and exploitation of unconventional deposits, stop pilot fracking projects and the development of offshore deposits, will not give new licenses for hydrocarbon exploration or 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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