Falling oil prices are crushing a golden child of Latin America, Colombia.
The Colombian peso dipped to its lowest level since 2009 last week. It traded at 2413.75 to the US dollar last Thursday morning, after a 5.6 per cent depreciation over a five-day period, Businessweek reported.
Apart from Russia’s ruble, Colombia’s peso is the only major currency to weaken more than 20 per cent since mid-year.
Oil exports are the number one source of foreign exchange for Colombia, which is the fourth-largest oil producer in the region. As investors lose interest in oil projects there, it could lead to a slump in foreign direct investment, or capital flight on expectations of higher interest rates to come, Reuters reported.
The state-run oil company, Ecopetrol SA, is already struggling; they have cut their 2015 output target by 7.2 per cent. They plan now to produce 760,000 barrels of oil per day, down from previous expectations of 1 million barrels per day, while investment spending will be down 26 per cent from this year, the report said.
Meanwhile, the country’s trade deficit grew to a thundering $US449.6 million in September, up from $US66.2 million in the same period last year. At 4.4 per cent of GDP in the first half of this year, the deficit is unlikely to meet the government’s 2.4 per cent target in 2015.
Until now, things have been good
Colombia’s GDP grew 4.2 per cent in the third quarter, up 0.6% from the previous quarter.
Colombia’s growth outpaced many Latin American neighbours, including Mexico’s 2.2 per cent, Peru’s 1.75 per cent, and Chile’s 0.8 per cent. Brazil’s economy contracted by 0.2 per cent this quarter.
But Colombia’s growth rate is still short of President Jan Manuel Santos’ growth forecast of 4.3-4.5 per cent for next year.
Finance Minister Mauricio Cardenas says the weaker currency could help lessen the impact of falling oil revenue by making exports in other industries, like agriculture and manufacturing, more attractive.
Central bank moves ahead
Plans are likely underway to slow the currency’s depreciation.
In a radio interview on Friday Cardenas said he’s starting to get worried.
The current exchange rate is a rate that is desirable, healthy… But the process of devaluation has been very accelerated, and we have to observe this constantly, which is something we do alongside the central bank, to ensure that there aren’t big leaps and that absolutely nothing occurs which could generate negative effects.
That could mean the central bank will begin making changes in its upcoming policy meeting on Friday.
One system the bank has used to curb volatility in the past involved buying and selling dollars in auctions when the currency starts to move off track, according to Businessweek.
In a country emerging from 50 years of civil conflict and in the midst of negotiating a long-term peace agreement, any moves towards stability, and away from volatility, would be welcome.