Economy

Steady in the Storm

Currency Devaluation

Fresh off a 2016 that saw inflation rise to its highest levels in 16 years, Colombia's peso will try to weather an uncertain global economic climate in 2017.

Colombia experienced a volatile 2016 across several sectors of its economy, and the peso was not immune to these conditions. After rising dramatically in recent years and becoming Latin America’s best-performing currency by early 2014, the Colombian peso has faced declining fortunes in the past year. A combination of slowing domestic output and difficult global conditions combined to make it one of the most devalued currencies in the world over the past two years, at one point losing up to 70% of its value. The outlook for 2017 remains uneven, as market conditions stemming from the US’ fiscal policy could continue to challenge the central bank’s anti-inflationary policies.

The Colombian peso posted a strong performance after the global financial crisis of 2008. A more stable political landscape allowed the country to increase oil production, bringing new foreign investment, and strengthening the nation’s financial position. Today, oil accounts for roughly half of Colombia’s exports and one-fifth of all government revenue. However, such heavy reliance on a single commodity left the country vulnerable to external shocks. The fall in the price of oil beginning in 2014 had an outsize effect on the Colombian economy and thus its currency as well. With global overproduction cutting prices in half, Colombia developed a current account deficit that reached a high of 6.5% of GDP in 2015 before coming down below 6% to end-2016. Economic performance has lagged as a result, with GDP growth for 2016 projected at between 1.5% and 2%. With economic stagnation has come currency concerns, and Colombia’s central bank has found itself in the unenviable position of trying to stimulate growth while preventing runaway inflation. Inflation hit 8.97% in July 2016, the highest level since October 2016, with consumer prices rising over 5% in the first eight months of the year thanks to a number of issues coming to a head, including a nationwide trucker strike and drought-like conditions due to a strong El Niño. In response, the Colombian Central Bank raised interest rates in July to 7.75%, the 11th straight month of rate increases. This rate, a 7-year high, was effective in bringing inflation down over the rest of the year; the inflation rate fell to 6.48% in October 2016 and 5.96% in November. While still above the central bank’s target range of 2-4%, this progress encouraged domestic and global financial bodies that were concerned about the inflation rate.

Still, questions remain about the future of the Colombian peso. While some of the factors that led to 2016’s high rates of inflation were temporary and unlikely to remain issues in 2017, global and domestic economic conditions continue not to be in the peso’s favor. In mid-December 2016, the central bank lowered its interest rate to 7.5% due to concerns that economic growth was more persistently stagnant than expected due to low levels of investment. In addition, global economic shifts appear ready to challenge the Colombian economy in 2017. Oil prices have recovered in recent months, which should provide a much-needed boost, but slow global growth and a stronger dollar due to the US’ new government create a difficult environment for the peso. The Colombian peso dropped in the wake of US elections as markets braced for changes in policy. Whatever the case, specifics are still unavailable, and investors expect volatility as a result.

Whatever happens, Colombia’s core industries will be affected. The US accounted for USD10 billion in exports to and USD16 billion in imports in 2015, making it far and away Colombia’s most valuable trade partner. Along with oil, Colombia’s agricultural and mineral industries are vulnerable to currency shifts as a result of policy. In light of the global landscape, industry, and government officials are considering new measures to support these industries, including opening new trading markets. Colombia’s challenge in 2017 will be to withstand the expected global volatility in the market while keeping the peso a strong and reliable currency.

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