Colombia's peso hit its strongest level since July 2008 on Thursday, pushed up by surging foreign direct investment in a rally worrying exporters who are pressing the government to act.
The currency COP=RR COP2=STF has risen more than 4.5 percent so far this month, raising expectations the central bank could take extra measures to ease the peso's rise at its monthly monetary policy meeting on Friday.
An increase in dollar purchases, an extension of the purchase program or controls on dollar debt are the most likely measures the bank would take, analysts say.
So far this year, the peso has appreciated nearly 7 percent raising costs for Colombia's exporters who earn dollars but have to pay for salaries and materials in pesos.
An increase in dollar purchases, an extension of the purchase program or controls on dollar debt are the most likely measures the bank would take, analysts say.
So far this year, the peso has appreciated nearly 7 percent raising costs for Colombia's exporters who earn dollars but have to pay for salaries and materials in pesos.
The following are some options for curbing the peso :
Increase programmed dollar purchases :
The central bank in February announced it would extend a daily dollar buying program to mid-June and left the door open for more aggressive measures.
The policy as it stands now allows the bank to buy at least $20 million a day through at least mid-June and the body has bought $4.3 billion since last year.
Analysts say the authority may extend the program or increase the minimum amount allowed at each daily auction.
Controls on dollar debt :
The central bank could establish a local currency deposit requirement equal to a percentage of the dollars investors have in U.S. dollar debt outside the country.
This could curb the so-called "carry trade" the government sees as one of the causes of the peso appreciation.
These measures were in place until October 2008.
Last year the government eliminated the tax exemption for interest on loans abroad to make them more costly in an attempt to discourage "carry trade."
Dollar put options :
The central bank could sell "put" options aimed at accumulating international reserves, which would increase dollar demand.
The government estimates that once it pushes through fiscal reforms, the central bank has room to buy up to $9 billion.
But the impact may evaporate when the bank stops intervening.
Interest rate cuts :
The central bank has raised the interest rate two months in a row to 3.5 percent and is expected to ratchet it up again by 25 basis points at its monthly policy meeting on Friday.
Experts are not expecting the bank to cut the rate, which is still at historically low levels. In theory, rate cuts could decrease capital inflows but may not have the desired effect since the rising peso is mainly attributed to a boom in foreign direct investment in the mining and oil sectors.
Fiscal reform :
Santos has promised to slash Colombia's deficit and reduce the need for foreign borrowing. Success would decrease the number of dollars entering the economy.
He is pushing a fiscal rule aimed at cutting central government debt from 39 percent of gross domestic product in 2010 to 28 percent by 2020.
Santos is also seeking to reform management of oil and mining royalties, which currently amount to 1.2 percent of GDP.
He plans to steer the expected increase in tax revenues from the sector toward debt reduction.
Analysts say those measures should ease pressure on the peso in the long term.
Both proposals must still get past the Congress, where Santos holds a majority.
Keeping money abroad :
In October, the government said it would not bring in $1.5 billion expected to enter Colombia at the end of the year, $1.4 billion of which are dividends from the state energy company Ecopetrol ECO.CN and said it may buy up to $3.7 billion in the forwards market in 2011.
Last month Finance Minister Juan Carlos Echeverry said the government would have to bring in some of the Ecopetrol money to cover local needs, although it will enter the country gradually to avoid affects on the peso.
The government could avoid issuing foreign bonds or receiving loans from multilateral institutions to cut back on money flows, but analysts see this as unlikely given the financing needs to cover the fiscal deficit.
Short term capital controls :
Echeverry said this week he saw no need for capital controls to curb the inflow of money.
In 2007-2008, Colombia put in place capital controls on short-term portfolio investment to stem the flow of dollars.
Governments can increase bank deposit requirements or impose a required time for investments to stay in the country.
But such measures are not the first choice of policymakers, especially as Colombia waits for a second credit rating agency upgrade after Standard & Poor's granted it investment grade in March.
Increase programmed dollar purchases :
The central bank in February announced it would extend a daily dollar buying program to mid-June and left the door open for more aggressive measures.
The policy as it stands now allows the bank to buy at least $20 million a day through at least mid-June and the body has bought $4.3 billion since last year.
Analysts say the authority may extend the program or increase the minimum amount allowed at each daily auction.
Controls on dollar debt :
The central bank could establish a local currency deposit requirement equal to a percentage of the dollars investors have in U.S. dollar debt outside the country.
This could curb the so-called "carry trade" the government sees as one of the causes of the peso appreciation.
These measures were in place until October 2008.
Last year the government eliminated the tax exemption for interest on loans abroad to make them more costly in an attempt to discourage "carry trade."
Dollar put options :
The central bank could sell "put" options aimed at accumulating international reserves, which would increase dollar demand.
The government estimates that once it pushes through fiscal reforms, the central bank has room to buy up to $9 billion.
But the impact may evaporate when the bank stops intervening.
Interest rate cuts :
The central bank has raised the interest rate two months in a row to 3.5 percent and is expected to ratchet it up again by 25 basis points at its monthly policy meeting on Friday.
Experts are not expecting the bank to cut the rate, which is still at historically low levels. In theory, rate cuts could decrease capital inflows but may not have the desired effect since the rising peso is mainly attributed to a boom in foreign direct investment in the mining and oil sectors.
Fiscal reform :
Santos has promised to slash Colombia's deficit and reduce the need for foreign borrowing. Success would decrease the number of dollars entering the economy.
He is pushing a fiscal rule aimed at cutting central government debt from 39 percent of gross domestic product in 2010 to 28 percent by 2020.
Santos is also seeking to reform management of oil and mining royalties, which currently amount to 1.2 percent of GDP.
He plans to steer the expected increase in tax revenues from the sector toward debt reduction.
Analysts say those measures should ease pressure on the peso in the long term.
Both proposals must still get past the Congress, where Santos holds a majority.
Keeping money abroad :
In October, the government said it would not bring in $1.5 billion expected to enter Colombia at the end of the year, $1.4 billion of which are dividends from the state energy company Ecopetrol ECO.CN and said it may buy up to $3.7 billion in the forwards market in 2011.
Last month Finance Minister Juan Carlos Echeverry said the government would have to bring in some of the Ecopetrol money to cover local needs, although it will enter the country gradually to avoid affects on the peso.
The government could avoid issuing foreign bonds or receiving loans from multilateral institutions to cut back on money flows, but analysts see this as unlikely given the financing needs to cover the fiscal deficit.
Short term capital controls :
Echeverry said this week he saw no need for capital controls to curb the inflow of money.
In 2007-2008, Colombia put in place capital controls on short-term portfolio investment to stem the flow of dollars.
Governments can increase bank deposit requirements or impose a required time for investments to stay in the country.
But such measures are not the first choice of policymakers, especially as Colombia waits for a second credit rating agency upgrade after Standard & Poor's granted it investment grade in March.
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