The price of the dollar in Colombia continues to fluctuate: what factors influence its behavior?

One of the issues that has most concerned Colombians in the last year has been the loss of value of the Colombian peso against the U.S. currency. This devaluation trend was strengthened today, after the latest decisions taken by President Petro at noon yesterday, with the replacement of seven of his ministers and the director of the Administrative Department of the Presidency of the Republic.

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Well, the Market Representative Rate (MRR) for yesterday, April 26, closed at $4,486.60, while the intraday price touched $4,674. Today, it opened at $4,552.59.

To learn about the national and international factors that influence the devaluation or revaluation of the Colombian peso against the dollar, we talked to the dean of the School of Economics and Administrative Sciences of the Universidad de La Sabana, Catherine Pereira Villa, an economist with a PhD in Management from the Swiss Management Center University, Switzerland.

Since the interview ended minutes before the presidential decision was announced, we have added the first question and answer of the interviewee after the video recording. Below, you can read some excerpts from the interview, which you can see in full in the video located at the top of this news item.

We have seen that yesterday’s decision by President Petro, in the sense of making a big change in the cabinet, influenced the depreciation of the Colombian peso. What effects could this scenario of political uncertainty have on Colombia’s economic situation?

The changes announced in the government’s cabinet, including that of the Minister of Finance, have generated uncertainty in the markets because investors were confident that Minister Ocampo would maintain a responsible macroeconomic policy and compliance with the Fiscal Rule and the medium-term fiscal framework.

In this context, public messages from the new Minister, Ricardo Bonilla, will be very important to moderate market fears and gain investor confidence in the country. As we have seen this morning, the peso has devalued more than 2%, and a further sustained devaluation could encourage price increases in the economy and increase the perception of country risk.

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The Representative Market Rate has had a striking behavior in the last year: On April 26, 2022 it did not reach $4,000, at the end of last year it touched the $5,000 barrier and now it is “below” $4,400. At the international level, what factors usually affect the price of the dollar and which of them have played the most predominant role in the recent behavior of the exchange rate?

Indeed, as you mention, the peso has devalued 14% in the last year. In general, what affects the value of the currency, the value of the peso and of any currency in the world, is its supply and demand.

What affects the offer? The economic and financial information available. This makes a country more attractive or a currency more in demand or more interesting. The same happens with prices, because they affect inflation in the short term, the resources I have to convert from one currency to another to pay for goods.

On the other hand, they affect long-term decisions, for example, if a country’s goal is to become more competitive. To be more competitive is to be able to produce in a more cost-efficient way, and if that is the case, the price of goods falls. In other words, I become more competitive over time and my currency gains value because inflation tends to be a little lower.

The interest rate also affects the behavior of a currency. Money competes for profitability all over the world; money moves in real time in one market and another. In that sense, if money can earn a higher return in another country, it simply sells one currency, buys another, and that affects the market and its rate.

The other very important issue for the Colombian case is the issue of speculation and risk. In other words, there is always someone who can win in the markets based on information that is circulating, but above all on the perception of risk, that is to say, how much of the risk situation we see today tends to be similar in the future.

Human beings always make that calculation, and what I am experiencing today is going to be similar to what I am experiencing later on. The markets somehow pick up that perception.

On the other hand, there are currencies that are strong and everybody wants them. The United States is the largest economy in the world; the dollar is a safe haven currency and in that sense many people want it to protect themselves from risk.

In addition, it is in the debt of the States, because many times the debt is in dollars. Then, I have to use many of my resources, for example in Colombian pesos, to pay debts denominated in dollars.

All this moves the markets.

Let us now enter the national context: What are the situations that affect this situation of fluctuation in the price of the dollar in Colombia?

I believe that in Colombia there are two very fundamental things at the moment. Basically, on the one hand, the issue of interest rates.

Interest rates in many parts of the world have risen because after Covid-19 many people, in household spending, postponed decisions. Immediately after Covid, people started to interact more and there was a greater tendency to spend. This means that there is a greater interest in economic activities and transactions and this produced a post-Covid inflation effect in most countries.

One way to stop that is to tell people “the money is worth more”, “it is going to cost you more”, “postpone your purchase decision”. So, the first point is that interest rates, generally speaking, have been higher in many parts of the world. This is particularly so in the United States, which is a major trading partner of ours, but also the largest economy in the world and the one that drives a large part of world trade.

On the other hand, with the new government that was installed in August in Colombia, there has been a greater perception of risk, particularly around the projects proposed by the government. So, those two things have been fundamental in the exchange rate.

In the last few days there has been an intense debate due to the controversial statements made by the new president of Ecopetrol, Ricardo Roa, to the effect that there will be no new oil exploration contracts and that, in case there is a lack of gas, it could be imported from Venezuela. Considering the importance of hydrocarbons for the country’s economy, can we expect any impact of these announcements on the exchange rate?

This is a very pertinent question for today because the statements made by the president of Ecopetrol, Dr. Roa, were made yesterday.

What we see is that 26% of Colombia’s sales abroad are of oil, that is, they are very important. If the president of Ecopetrol makes statements about Ecopetrol, he is making statements about the rhythm of Ecopetrol’s business and that has a lot to do with production.

Production has a lot to do with the contracts and we all know that in the exploration contracts there is a large percentage that normally does not manage to have important findings or that some of the findings are not easily exploitable, among others.

So, a statement in the sense of not making new exploration contracts means that the probability of oil supply in Colombia immediately decreases, because if I do not explore, I do not find. And if I do not find, the reserves have a much more predictable contraction in time.

In that sense, the statements of the new president of Ecopetrol are more around the loss of value of the company’s share, which was exactly what happened yesterday, when it ranged between 6% and 12% drop.

This does not affect the exchange rate so much, except for the implication that it increases Colombia’s risk at the level of its income, because it will tend to have lower future income if there is no exploration, and that would affect the exchange rate secondarily.

So, the effect on the exchange rate is not so direct. In fact, the exchange rate fell today, that is to say, the peso gained value, in spite of Dr. Roa’s statements.

However, what it does raise is that Ecopetrol’s future revenues can and will suffer, if that is the decision, and that affects Colombia and its exchange rate in the sense that the Colombian peso will lose value.

Let us now look at the impact of the devaluation or revaluation of the Colombian peso on Colombia’s foreign debt.

It is very interesting because there is public debt and private debt in dollars. So, if a person owes a credit card for consumption in dollars, it means that his monthly payment and his total payment will be higher because he needs more pesos to pay those dollars.

Then, it is not minor that the exchange rate fluctuates, in particular that the peso loses value, because if it loses value I will need more pesos to pay the same debt that used to cost me less when the peso was worth more.

What impact does the behavior of the dollar have on household spending?

The family basket has approximately 380 goods and services. Of these, some products are bought by families and are totally imported, others are produced in Colombia with inputs from abroad and through these two channels what really happens is that if the peso loses value I need more pesos to buy the same goods that are expressed in a foreign currency, in this case the dollar.

In other words, it is more expensive to buy products from other countries and it can make national production more expensive, which is the most serious thing, because there are importers who bring things from abroad to finish products in Colombia. All this, in turn, makes the family basket more expensive.

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