Colombia: Colombian peso appreciates to strongest level in a year over last month after Petro’s reform agenda frozen
The Colombian peso appreciated 7.4% against the USD over the last month, reaching the strongest level since June last year and marking the best performance among all major Latin-American currencies. Investors flocked to buy Colombian financial assets after on 5 June the leader of the lower house of Congress said that debate on President Petro’s reform agenda would be frozen. This decision came shortly after a former ally suggested Petro had broken financing rules during his electoral campaign in 2022. Normally, political crises cause a currency to depreciate, but investors reacted favorably in this case because they think Petro is now less likely to succeed in getting his radical leftwing reforms through Congress. The currency was also supported by recent falls in the fiscal and current account deficits as well as the Central Bank’s consistently hawkish forward guidance.
Our panelists are likely to revise their forecasts for the peso over the next few weeks to take into account the strong appreciation seen over the last month. That said, even after revisions, the Consensus should continue to forecast the current rally losing steam by the end of the year. Moreover, the peso should remain far weaker than its 10-year average of around 3000 per USD. An expected reduction in the Central Bank’s policy rate by end-2023 will narrow the positive interest rate differential with the U.S., hurting peso demand. In addition, the peso is likely to be weighed on by lower investment in the oil sector. That said, an expected uptick in oil prices by year-end will provide support.
Renewed reform progress is a risk that would likely weaken the currency; Petro may still be able to pass his pension reform in a watered-form for instance, as a cross-party Congressional committee recently voted to allow the reform to be debated in Congress on 13 June. Moreover, the President’s energy policy will be a key factor to watch. After his policy agenda was frozen, the President said the roadmap for future of the energy sector would be published in February 2024 instead of May 2023 as originally planned. If the President decides to halt new oil and gas exploration, the peso is likely to depreciate; alternatively, a more flexible approach to exploration would boost the currency.
Analysts at Scotiabank Colpatria said:
“For now, the fundamental value of the dollar, removing idiosyncratic [domestic political] risk and assuming that the external deficit continues to correct at a moderate pace, suggests a range of variation between COP 4250 per USD and COP 4350 per USD in the medium term. However, if [market] perception regarding the energy transition changes, the fundamental level could be between COP 3859 per USD and COP 3950 per USD.”
Analysts at the EIU said:
“For now it seems unlikely that the scandal will lead to Mr Petro’s impeachment. However, the government will have to shift its efforts towards defending Mr Petro from allegations of illicit financing, which will severely weaken governability.”