What Should Colombia Do When The Dollar Is Expensive?
The spread of the coronavirus epidemic around the world, coupled with Russia and Saudi Arabia's trade war over the price of oil caused the stock markets to fall over the world, including Colombia.
On Monday, the dollar broke its historical record again, both at the maximum price of 3,847 pesos and an average of 3,804. As today, it has reached 4.067,67 pesos. This made the Colombian peso the most depreciated currency in the region, and according to different analyses, we can expect that the trend will continue.
The fall in oil prices and the global tension in the markets due to the spread of the coronavirus marked this “Black Monday,” and Colombia is beginning to be affected. The Colombian peso reached a depreciation of 6.3 % compared to the previous day, being the highest in the region.
Without a doubt, the spread of the coronavirus epidemic, together with Russia’s refusal to reduce its oil production, and the price war waged by Saudi Arabia, have led to a global slowdown that has had a strong impact on stock markets, including Colombia’s.
bvc informa que acuerdo con lo establecido en el artículo 184.108.40.206. de la Circular Única BVC, suspende por 30 minutos la negociación del mercado de Renta Variable y Derivados a partir de la 13:36:09 p.m. pic.twitter.com/JqtwBSsAID
— Bolsa de Valores de Colombia (@bvcColombia) March 9, 2020
The shares that suffered most from the price war were those of Ecopetrol, which dropped 20.07%, followed by Cementos Argos (-16.44%) and Bancolombia (-14.39%).
This scenario is a challenge for the Colombian Government because if the dollar continues to rise, it will begin to deeply affect the family basket and, by the way, the citizens’ pockets. According to data from the National Administrative Department of Statistics (DANE), 19% of the imported goods in the family basket would increase in price. Consequently, there are warnings about the impact on the country’s inflation.
The PanAm Post spoke with economist Andrés Moreno Jaramillo, a stock market expert, about the implications of the price of the dollar in the country and the domestic effects on inflation.
According to the expert, the economy is solid; there are comfortable data regarding the region. However, he is concerned about oil and inflation due to the income from crude oil that the nation receives.
“They see a circumstantial rather than a structural issue, and the truth is that it is not up to them what happened. The government has many measures. Here, the Central Bank has to deal with inflation. The main function of the issuer is to prevent inflation from skyrocketing in the country. To this end, they have a monetary policy to control it. It is necessary to emphasize that inflation is the worst tax that an economy can have on the less well-off. The inflation figure in Colombia is a little higher than it was in January last year. In other words, there is no reason to lower interest rates, as many are betting.”
On operating on the dollar, he pointed out that it is a currency that fluctuates freely, “there are no audits, but if there is a level at which the Bank of the Republic activates auctions, but the issuer cannot really use the international reserves or the cash they have to control it because they are too big a force, and they are not powerful enough to control the currency. And if they could do so, they would have to spend billions of dollars, so this would have no effect. They are not responsible for what is happening with the devaluation in all currencies or the region. Ten years ago it was at 0.44 dollars (1,650 pesos) now it is at 3,800 pesos because of some external factors.
On the other hand, he explained the importance of the oil company Ecopetrol for Colombia, given that it is currently the company that pays the most dividends to the country.
“Precisely, now it is going to turn over 7.6 trillion, of which 90% is for the country. I have proposed that a dividend be paid. Last year was very good for the oil company, but the conditions are right for Ecopetrol to have to deal with a lot of gas and a lot of problems from now on. Then, the proposal is that Ecopetrol does not pay the dividend, but rather that it diminishes it by remembering that last year, they took out an ordinary dividend, and in December, an extraordinary one from the reserves: three trillion pesos on December 24. Since the government was a bit tough on Ecopetrol last year, it must be more cautious this year. It is well-known that the government’s finances depend a lot on the Ecopetrol issue. Those trillions are necessary since the tax reform has not passed; there is tax evasion, etc. Something that the government can do is to say, “I prefer these 7.6 trillion and see if we can distribute them at another time of the year, or next year because if it can get them out now, Ecopetrol will be on its way to some very interesting projects that require good capital, and with this price of oil, they can get through. In the short term, take dividends, in the long term, think about the company.”
Finally, he said that the Colombian government and the Central Bank of the Republic could not do more. “All the countries have met together with the central banks to analyze the situation, and it truly is an exogenous shock. Meanwhile, the Colombian government must be thinking about its finances and how it is going to avoid crushing Ecopetrol.”