Colombia Government Buys $500 Million, Bypasses Central Bank

Colombia’s Finance Ministry is continuing a program of currency intervention parallel to the central bank’s to weaken the peso and help the Andean nation’s exporters.

The Treasury will buy $200 million this week after buying $300 million last week, Finance Minister Juan Carlos Echeverry told reporters in Bogotá today. 

The intervention is separate from the central bank’s daily $20 million daily purchases.

“We’ve been buying and by the end of this week we’ll have bought, on the part of the government, $500 million, in the plan we are adopting to support the exchange rate,” Echeverry told reporters in Bogotá. “

For now, we have the capacity to accumulate some excess of liquidity in dollars.”

The government began its dollar purchase program after central bank chief Jose Dario Uribe ignored repeated calls from President Juan Manuel Santos to step up the bank’s program of reserve accumulation. Colombia had foreign currency reserves of $34.7 billion as of July.

The peso has appreciated 6.9 percent this year, the biggest gain after the Hungarian Forint and the Chilean peso of the 31 most-traded currencies, as foreign investment continues to pour into oil and mining projects, even amid the European debt crisis.

‘Secondary Objective’

The government may use the dollars for a repurchase of its dollar debt, said Camilo Perez, the head analyst at Banco de Bogotá, the nation’s second-biggest bank.

“Holding dollars just to hold them is a very bad deal for the government, when the cost of money is much higher in Colombia,” Perez said in a telephone interview from Bogota. “

The Finance Ministry is conducting exchange rate policy, but it must also have a secondary objective of an external debt operation.”

The government won’t be able to continue its dollar purchases for a sustained period, Perez said. 

The upper limit would be $1 billion and $1.5 billion in an “extreme case” if the peso strengthens to below 1,750 per dollar.

“At the end of the day, the government spends in pesos, and needs pesos,” Perez said.

Last week, Echeverry said that the Treasury will continue to buy dollars for as long as it has “ammunition”. 

The minister, who sits on the central bank’s seven-member policy committee, said today that he is “generally not on the winning side” at the bank’s board meetings.

Policy Balance

Uribe last week published a paper entitled “In Defense of The Current Exchange Rate Policy,” in which he said that the central bank never buys reserves “in magnitudes and ways that erode the credibility and reputation of the central bank.”

Central bank board member Cesar Vallejo said last week that the government’s proposal to increase international reserves by $13 billion would “completely distort” local credit markets, although policy makers could increase daily dollar purchases to $40 million.

The peso was little changed at 1814.20 per dollar at 12:06 p.m. in Bogotá. 

The currency has weakened 1.2 percent this month, the second-worst performance among 25 emerging market currencies after the government said it was buying dollars. 

The central bank’s $20 million daily dollar purchases are scheduled to end Nov. 2.

The central bank will cut its benchmark interest rate a quarter point for a second straight month at its august policy meeting this week, according to 25 of 29 analysts.