What has happened to the Colombian peso?
On July 18, 2023, colombian peso returned to below $4,000 after almost 13 months above that level, accumulating a revaluation of more than 17% in the year and being one of the best performing currencies in Latin America and emerging markets. This downward movement of more than $800 pesos in the year comes after a significant devaluation of 19% in the previous year, when it had an upward movement of more than $780 pesos.
COLOMBIAN PESOS VS US DOLLAR
This makes it clear that current conjuncture of this movement is challenging from a historical perspective.
So what are the reasons why the Colombian peso has recovered during 2023?
There are four main reasons that would explain this phenomenon.
- The generalized weakness of dollar worldwide. It is important to remember that our currency, as well as most of currencies of emerging countries, is closely linked to what happens with the dollar at a global level, which has been consistently losing strength since October 2022 amid expectations of a slowdown and even recession in United States, a possible pause in increase of interest rates by Federal Reserve and less room for maneuver on fiscal front due to high levels of indebtedness that this country has reached.
- A recovery in the perception of country risk for Colombia, measured by 5-year spread, which has registered a 20% improvement in this year, reaching levels not observed since June 2022. This dynamic is partly explained by recent signs of institutional strength in the country, as well as a constructive outlook that reforms pending in Congress will be approved in a version that achieves social objectives with a moderate impact on colombian economy.
- An adjustment in current account deficit this year, mainly due to an improvement in Colombia’s trade balance, which would go from -6.2% of GDP in 2022 to -3.2% of GDP in 2023, according to economic analysts’ projections. Specifically, a strong moderation in imports of consumer goods, as well as inputs, intermediate goods, machinery and equipment due to lower local manufacturing production and lower economic prospects for Colombia.
- Good dynamics of foreign direct investment. According to figures from Foreign Exchange Balance reported by Banco de la República, this investment at the end of June 2023 reached USD 7,519 million, 25% more than the accumulated amount for same period in 2022 and driven exclusively by oil and mining sector, which showed a 50% growth in contrast to decline in other sectors..
What to expect from the Colombian peso?
According to a study carried out last June by the Economic Research team, until the middle of last year the evolution of the Colombian peso had an explanation that could be largely extracted from the evolution of the international context, but more recently idiosyncratic factors have become much more determinant. They conclude that, under a historical perspective and in the scenario in which these idiosyncratic elements were not in the picture, our exchange rate should be at a level between $3,700 and $3,800.
Among these factors related to Colombian idiosyncrasies, following stand out:
– The inflationary problem in Colombia is much more challenging than in most other economies in LATAM region.
– The external (current account) deficit is historically high despite the recent improvement, which makes us more sensitive to changes in international financial conditions.
– A significant weakening of Colombia’s public finance situation and its consequent loss of investment grade in 2021.
– A large reform agenda that will involve multiple changes in economic structure (labor market, capital market) and with potential impacts on the outlook for public finances, which to date remain a source of uncertainty.
On the other hand, this improvement in some idiosyncratic factors has not yet been reflected in a strong flow of foreign portfolio investment in our country, which at the end of June and according to data from the exchange balance of Banco de la República, has presented outflows of USD 1,566 million, which contrasts with the inflows of USD 1,746 accumulated to the same period of 2022. This reflects that portfolio investor confidence has not yet been fully reestablished.
In this regard, it is worth mentioning that expectation of dollar worldwide has been of weakness, however, this perception is changing to extent that the convergence of inflation for United States has been faster than expected and that economy has shown good dynamics, leading to postponement of expectations of interest rate cuts to 2024.
The margin of error of forecast in Colombian peso is high and for this reason it is important to take into account the expectation of market analysts, as this allows to have more information that helps or complements the dollar expectation for the end of the year. According to the most recent survey conducted in July by Banco de la República, analysts expect Colombian peso to close at around $4.184 in 2023, above current levels. It is worth mentioning that dispersion is quite wide among them, although minimum level observed would be $3,850.
FORECAST OF COLOMBIAN PESO 2023-2024
With the recent movements of the Colombian peso, what opportunities are there?
Probably the question that many people ask themselves is «How far will Colombian peso go down?», actually giving an accurate answer with a high degree of confidence is very difficult due to amount of factors that influence and speed with which they change day by day.
For this reason, rather than predicting the exchange rate and trying to find the lowest point, what is usually done is to invite action from different points of view. For some, partial or early payment of debts in dollars would be attractive, for others to plan their vacations abroad in a better way, for many to make some purchases to be made abroad and why not, to start or increase their international investments in capital market by accessing assets that allow them to diversify their portfolio and improve their risk-return profile, mitigating the risk that their investments depend exclusively on what happens in Colombia.
Sources:
- Capital Inteligente
- DANE
- Investigaciones Económicas Bancolombia, julio 2023
