Dollar exchange rate: Winners and losers of the revaluation of the Colombian peso

June 29, 2023

The cycles of devaluation and revaluation of the Colombian peso have major consequences for the economy. Over the year to date, the U.S. currency has lost $565.20.

Revaluation of the Colombian peso, Devaluation and revaluation, Exchange rate, Más Colombia

For months now, Colombians have experienced dizzying changes in the exchange rate of the US dollar. From almost 5,000 Colombian pesos in November 2022, they have been able to get it for less than 4,200 in the last few days. Indeed, the revaluation of the Colombian peso this year has been sharp.

Every time it either rises or falls, analysts go into great detail analyzing the advantages and disadvantages of the fluctuation. As a matter of fact, both high and low dollar exchange rates affect some and benefit others. And once they pass a certain threshold, they bring tough implications for the national economy.

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Below, we tell you who are the winners and losers of the current revaluation of the Colombian peso, and how the Colombian economy is faring in each case.

Devaluation of the Colombian peso

If the Colombian peso suffers a devaluation, that is, if it loses strength against the dollar, there are winners and losers.

Exporters who receive dollars can convert them into a larger amount of pesos. And, if their main costs are in our currency, they increase their profits and could be said to be net winners. This favors, for example, the income of flower growers, coffee growers, and other exporters.

Stock prices, Stock market, Más Colombia — Display of stock prices

Others who benefit are those who receive remittances from abroad, as they get more Colombian pesos for the same amount of dollars.

At the same time, when the dollar is expensive, those who have debts in dollars and income in pesos need a larger amount of pesos to convert them into dollars. This punishes those who have private external debt, which in March 2023 stood at USD $80,903 billion (23.9% of GDP). Of this figure, 80.2% were non-bank sector obligations, according to Banco de la Republica.

In the event of a devaluation of the Colombian peso, public debt service also becomes more expensive, since more resources in pesos must be allocated from the national budget to make payments that are denominated in dollars. In March 2023, Colombia’s external public debt balance reached USD $106,499 billion, representing 55.3% of GDP. In only three months, from December 2022 to March 2023, the debt increased by USD $3,319 billion.

From the public sector’s point of view, this means that the government’s margin for action is reduced by devoting a larger portion of the budget to debt service.

Revaluation of the Colombian peso

When there is a revaluation of the Colombian peso, as is currently occurring and could occur for a significant period of time, the opposite happens.

In this case, private and public debt service becomes cheaper, which is good news.

On the other hand, exports become less competitive and imports become cheaper since it is necessary to spend less pesos to pay for them in dollars.

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As for remittance receivers, they receive the same amount of dollars but can exchange them for fewer pesos.

While devaluation represents an involuntary protection mechanism, revaluation stimulates the already large and persistent trade deficit. However, an excessive devaluation of the Colombian peso increases production costs, especially those related to imported inputs, which in turn reduces the country’s competitiveness.

Who decides?

For Colombia, one difficulty is that the choice between devaluation and revaluation of the Colombian peso does not depend on the government, since the exchange rate does not depend on the Central Bank but on the market, which is determined by the international financial situation and by the abundance or scarcity of dollars.

There is a shortage of dollars when remittances or indebtedness decrease, exports fall, or foreign investment slows down. This in turn leads to revaluation.

In contrast, there is an abundance of dollars when remittances, indebtedness, foreign investment, and exports increase. In this case, devaluation follows.

Financial capital movements, large foreign investors movements, and the living standard of Colombians abroad determine to a large extent whether or not there is an abundance of dollars.

If the U.S. Federal Reserve (FED) raises the interest rate, it attracts investors who buy U.S. Treasury debt bonds, which offer higher and safer returns. This is what has happened in recent months when the FED has systematically raised the interest rate.

Meanwhile, the Banco de la Republica tries to counteract this by increasing the local interest rate in order to compete for the attraction of this capital.

In addition to the FED’s decisions, there are other external factors that explain the devaluation or revaluation of the Colombian peso. The perception of risk when investing in Colombia and the forecasts made by international entities on the evolution of the Colombian economy also play an important role in the behavior of the exchange rate.

This year, forecasts have increased slightly. At the beginning of 2023, the Banco de la Republica estimated that the Colombian economy would grow by 0.8% in 2023. According to the Minister of Finance, the government calculated it at 1.8%, based on the Medium-Term Fiscal Framework. On the other hand, the World Bank and the OECD put it at 1.5%.

The global context is one of weakening of the dollar, but Colombia’s dependence on the U.S. currency means that price trends follow the Federal Reserve’s positions more than other global phenomena.

The debate is growing on an area in which the government has a reduced capacity for action. The orthodox voices, which fundamentally leave the behavior of the exchange rate in the hands of the market, with reduced action by the Central Bank, are opposed by analysts such as Eduardo Sarmiento Palacio, who recommends a massive devaluation, but with a controlled exchange rate and a revision of the economic model.