Colombia: Colombian peso plummets to record low
The Colombian peso has fallen by over 11% against the U.S. dollar over the last month—reaching record lows—and 20.0% year to date. The currency has been weighed on by an increasingly hawkish U.S. Fed—which hiked by 75 basis points for the fourth consecutive meeting on 2 November—and growing investor squeamishness regarding the policy agenda of President Gustavo Petro. The president has expressed support for a number of heterodox economic policies—including taxing capital outflows and issuing debt to buy land for the poor—which have been poorly received by the market. Immediate comments by the finance minister repudiating these policies only went part way to calming investor jitters and also suggested a lack of order within the government.
Going forward, our panelists expect the peso to gradually claw back some of its recent losses by the end of next year. Finance minister Ocampo—and the government’s delicate majority in Congress—will continue to act as bulwarks against sharp shifts in economic policy. This should lead to a gradual narrowing of the ‘Petro-risk premium’ on Colombian assets. Along with the end of the Fed’s hiking cycle—expected in Q1 2023—this should support the currency.
The main risk to the outlook is a further deterioration in the president’s political capital, which has already been eroded by the recent fall in his poll ratings precipitated by rising inflation and financial instability. The president’s declining popularity could lead to the loss of his working majority—as well as increasingly radical economic policies to cater to his left-wing base, which could unnerve markets and cause a selloff of Colombian assets. Other key factors to watch include Ocampo’s continuation as finance minister, commodity prices and the U.S. Fed’s hiking cycle.