Peso depreciation will weigh on Colombia’s growth by increasing inflation and undermining business investment
Last week, the Colombian peso saw rapid depreciation of 7% to record levels as investors responded to recent statements from the Petro administration about oil exploration and capital outflows that heightened uncertainty about the stability of the government’s fiscal policies. The Colombian peso has devalued by over 20% during 2022, making it one of the most devalued currencies in the world.
We have adjusted our FX forecasts to reflect the rising risk premium and now expect the COP:USD rate to average 4,810 in 2023. However, reflecting heightened volatility and uncertainty, our downside scenario has the peso depreciating further, surpassing 5,100 in 2023. Firms should plan for continued peso fluctuations and general weakness during 2023. Clients should work with distributors and offer financing where possible to support local partners and customers contending with rapid peso depreciation.
Since the victory of Gustavo Petro in the June presidential election, the Colombian peso has been the fifth most devalued currency in the world, falling just short of the depreciation seen by the Argentine peso. While high global oil prices normally bolster the Colombian peso, unprecedented policy and political risks are undermining this effect. Recent statements by Colombia’s minister of mines and energy as well as President Petro have driven the most recent episode of peso depreciation, as investors reject the government’s calls to end oil exploration and issue debt to purchase and redistribute land. Following the rapid depreciation of the peso last week, the Petro administration, including the finance minister, has sought to ease investor concerns by walking back these statements, reassuring investors that Colombia will maintain its commitments to fiscal responsibility. While the peso has stopped its decline, it remains depreciated, and the COP:USD rate continues to hover above 4,900:1.
A globally strengthening US dollar only partially explains the depreciation of the Colombian peso amid historically high oil prices. Political risks have played a central role in the peso’s depreciation under Colombia’s first left-wing, populist president. Despite the government’s recent worrying policy statements, there is no concrete plan or path for their implementation, particularly for the wide-scale purchase of land with new debt. As such, investors are likely overestimating the risk of these policies being implemented. While the finance minister’s efforts to reassure investors have halted the peso’s decline, the heightened level of risk amid an environment of global uncertainty will continue to weigh on the peso’s value in 2023. We expect the depreciation of the peso to weigh on Colombia’s growth by increasing inflation and undermining business investment.
At FrontierView, our mission is to help our clients grow and win in their most important markets. We are excited to share that FiscalNote, a leading technology provider of global policy and market intelligence has acquired FrontierView. We will continue to cover issues and topics driving growth in your business, while fully leveraging FiscalNote’s portfolio within the global risk, ESG, and geopolitical advisory product suite.
Subscribe to our weekly newsletter The Lens published by our Global Economics and Scenarios team which highlights high-impact developments and trends for business professionals. For full access to our offerings, start your free trial today and download our complimentary mobile app, available on iOS and Android.