Political tensions: why the dollar rose in December and is now down

The volatility of dollar It can occur for various reasons that can be of a purely economic nature, such as investor confidence in the financial outlook in a given country, or due to political and productive situations.

Colombia It has not been alien to this formula, having as proof the fact that the North American currency has had enormous volatility with respect to the Colombian peso. However, It may be striking that the behavior of the dollar currently in the country is contrary to what it had in the month of December, this despite the fact that both periods have political tension in common.

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The reasons can be explained from different angles and can be explained in different ways, something that is not exclusive to the country, since it is a condition that is not alien to the rest of the world, especially to emerging markets.

As explained Hernando Zuleta, Professor of Economics at the Universidad de los Andesone of the main reasons why the price of the dollar against the peso has had an upward behavior at the end of 2022 and at the beginning of 2023 has been the fear caused in some sectors by the assembly of the reform package.

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“At the end of 2022 and the beginning of 2023 we had a government with radical reforms, for better or worse, and that generated fear“, he explained.

In this delves Daniel Velandia, Chief Economist at Credicorp Capitalmentioning that the political factor is important for the price of the dollar, taking into account international factors such as interest rates.

“The political issue deepens, to one side or the other, the movements. But the main trend of the dollar is international, because the country has been moving in the same direction as the rest of the currencies in Latin America.“.

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The economist explained that the big difference between the bullish behavior of the dollar in December 2022 compared to how the currency is behaving in the middle of 2023, from the political sphere, lies in the risks that the government’s reform package may have.

“The Petro government’s reforms are going in a direction that generates fiscal risks, taking into account that fiscal accounts, historically, have been a great factor of concern for the markets“, held.

Zuleta adds that the government’s position regarding the reforms has also been a key factor for the value of the dollar in the country.

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“Today there is a strong political tension that reduces the power of maneuver of the Government and in this sense the radical nature of the reforms is perceived as less strong. Reforms affect expectations depending on how radical they are. The weaker, the less impact.“, he mentioned.

Another of the points that concerns the country in the face of the volatility of the dollar is that of the energy transitionWell, knowing that oil and gas have been, in some way, important in the energy supply in the country, which, if this project is carried out, leaving aside new explorations, can create a question of the country’s energy security and, therefore, skepticism on the part of investors.

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“The energy transition has generated a lot of tension and anxiety in the markets because, basically, there is a lot of uncertainty about what would happen if new oil and gas exploration contracts were not awarded. The country depends on the flow of foreign exchange from trade, 50% of the flow of exports of these two resources. That is 30,000 million dollars a year in foreign currency for the oil and coal sector“, he mentioned.

Therefore, according to the experts, the behavior of the US currencywith respect to the times in reference, are explained by government tensions.

(Colombian peso, the most appreciated currency so far in 2023).

An apparent weakening in the governance of the president, derived from a political tension, according to experts, has calmed the waters in the position of the Government in front of the approval of the reforms in the present; while in December 2022, factors such as the lack of synchrony between the ministries and the energy transition have been the factors that have deepened the rise of the dollar at that time.

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