Why is the dollar rising against the peso in Colombia?

( Spanish) — When Gustavo Petro won the presidential elections in Colombia, many wondered if the dollar would begin to grow in relation to the Colombian peso due to the economic concerns that the candidate generated in some people.

At least in the short term, these forecasts seem to be coming true (but due to several factors, not only the electoral one): the dollar rose to 4,205 Colombian pesos on Friday, according to Reutersbefore the weekend and the holiday this Monday in the United States for the 4th of July.

In this way, it exceeded the peak of 4,180 Colombian pesos per dollar in March 2020, at the beginning of the covid-19 pandemic, and constitutes a jump of almost 8% from the 3,905 pesos per dollar on June 19, when Petro won the elections.

Meanwhile, the devaluation of the Colombian peso reaches 11.16% so far this year, and is 5.47% year-on-year, according to data from the Bank of the Republic.

The economic challenges that Gustavo Petro will face 3:56

Why is the dollar rising in Colombia?

Beyond the impact of the elections, the appreciation of the dollar in Colombia is not just a phenomenon of recent months. With ups and downs, it keeps an uptrend at least since April 2018, when it was quoted at 2,707 Colombian pesos.

And weaker still was the dollar in July 2014, when it was quoted at 1,843 Colombian pesos.

What happened then?

Starting in mid-2014, the dollar began to appreciate around the world in the context of falling commodity prices, According to the Bank of the Republic, and Colombia, whose oil exports are very important, was no exception.

In a world context of high inflation and scarcity of resources and interruptions in the supply chain due to Russia’s war in Ukraine, the devaluation of the Colombian peso and other currencies is a reality.

The impact of the elections

“Market operators are going to feel an effect of growth in demand from some individuals who may feel nervous about the new president and his economic policies,” said Isidro Hernández Rodríguez, professor of economics at the Externado de Colombia, to , after the second round elections in which Petro triumphed.

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On Thursday, Petro said through his Twitter account that José Antonio Ocampo will be his finance minister, one of the most anticipated appointments of his future cabinet, with which he will assume the presidency on August 7.

“José Antonio Ocampo will be our Minister of Finance. Build a productive economy and an economy for life,” he tweeted.

It was a key announcement that has been very well received by various sectors, since Ocampo’s trajectory is a signal for the market economy and investors, while it is considered as a support for the management of Petro’s progressive agenda.

However, the dollar continued to rise.

The international context

In the medium term, the key to defining the dollar’s trend will be “international developments,” Scotiabank Colpatria analyst Jackeline Piraján had said in a document shared with in June.

“We do not expect the exchange rate to drop much more than 3,750 Colombian pesos” because “the context of higher rates at the international level generates a global strengthening of the dollar,” he said.

In a report shared this Monday with , Piraján highlights that “in recent days we have had a mixed composition in which central banks remain aggressive announcing more interest rate hikes, this causes the dollar to strengthen against the bulk of currencies international, both those of developed countries and those of emerging ones”.

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“Today (Monday) in particular there was a report from the United States showing that manufacturing activity had its weakest rate of expansion in the last two years, showing those problems or expectations that a recession could develop from now on,” Piraján said. , adding that in such a context, investors move to safer assets, appreciating the dollar.

In the last year the dollar has been appreciating relative to most world currencies, including the British pound, the euro, the yuan and the yen, according to Reuters.

Oil exploitation, in the sights

Petro, according to what its government program indicates, wants to put an end to extractivism gradually and affirms that it will prohibit the exploration and exploitation of unconventional deposits, will stop pilot fracking projects and the development of offshore deposits, will not grant new licenses for hydrocarbon exploration nor will it allow large-scale open pit mining.

The economic research institution Corficolombiana published on June 14days before the second round, an analysis of the estimated impact of a supposed suspension of new hydrocarbon exploration from 2023 to 2027.

In that scenario, says the company, the Colombian peso would be devalued between 39.9% and 43.7% by 2027 and the exchange rate would be between 5,080 and 7,000.

With information from Germán Padinger, Gerardo Lemos, Sebastián Jiménez Valencia and Carolina Melo.

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Written by Editor TLN

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