Those predicting doom and gloom for the Colombian economy upon the election of Gustavo Petro had some of their arguments bolstered in mid-June 2022, when the price of the Colombia Peso, compared to the US Dollar, started to slide. Many expats watched in astonishment as, day after day, new all-time records were broken, peaking at more than 4600: 1 on July 12 before recovering slightly in recent weeks.
Today, everyone is asking: How high will the price of the dollar go in Colombia? Some dare to predict that it will reach 7,000 and even 10,000 COP. Global inflationary environment is already beginning to be felt strongly in some prices of goods and services in the country and as if that were not enough, on August 7, the new Petro regime will take control of the country.
In this article, we will analyze the situation that seems to be a classic “Perfect Storm” and the prospects for the near future.
Many investors may be wondering: What is going on and, above all: Is it a good time to invest now? Join us in this special edition of economics to find out.
Keys To Understand The Dollar Trend in Colombia
The Colombian peso is a currency that has historically been losing its value against the US dollar since 1931 when the government abandoned the old gold standard.
This macroeconomic phenomenon of devaluation means that the national currency loses nominal value against other currencies. In a market where supply and demand are accessible, such as the Colombian market, the government almost never intervenes in the relations between individuals. People can change without restrictions their money to more stable currencies such as the US Dollar, and Euro, among others to protect their assets. When this happens, if there is little supply of foreign currency, the price of the dollar rises.
As can be expected, imported products now suffer an increase and people who only have access to the national currency lose purchasing power. In 2021 alone, the COP depreciated by 10.21%, followed by the Argentine peso which fell by 10.17%, and the Turkish lira whose value decreased by 9.91% respectively.
Is the peso devaluation a bad thing? Not necessarily for everyone. One of the positive aspects of the devaluation of the Colombian peso is that the country’s exports become more competitive and cheaper. Export companies can receive more money from abroad in exchange for their products and services.
Likewise, as foreign products become more expensive, people will prefer to buy similar domestic products, which may encourage consumption of the domestic industry. Another positive effect of the devaluation of the Colombian peso is that it is an ideal time for domestic tourism and investment. If you are an expat, you will now need fewer dollars to spend here.
What is Affecting the COP VS USD Exchange Rate in 2022?
There are several factors influencing the devaluation of the Colombian peso in 2022. First, and indirectly, the uncertainty generated by the Russian invasion of Ukraine is slowing down the U.S. and European economies. This generates a rebound in the Colombian economy and in emerging countries, as there are fears of a possible global economic recession. Consequently, the downward fluctuation of financial stock markets has been a trend this year. Thus, so far in 2022, there are more than 23.4 trillion dollars of accumulated losses. Some analysts speak that we are on the verge of a real financial Armageddon.
(1) The Russia-Ukraine Conflict Revives times of War that Affect The World Economy.
The North Atlantic Treaty Organization (NATO) emerged in 1949, after the Second World War as a political and military organization led by the United States, Canada, the United Kingdom and France. Its main objective was to ensure the security of its members in the face of the threat posed by the former Soviet Union in the Cold War era. Initially, it had 10 member countries. Today, with the expansion of the bloc eastward, 30 nations belong to the alliance. Russia, as heir to the Soviet Union, has viewed this development with concern and denounced it as a threat to its own security. The Kremlin has stated several times that it will not allow Ukraine’s admission into the alliance. Despite Russia’s intense claims, NATO for years supported Ukraine’s aspirations to join the group. Ukraine has wanted to move away from Russian influence and aspires to become more like the democracies of the West.
On February 24, 2022, Putin announced a special military operation on Ukrainian territory, with the purported claim of stopping the genocide of separatist nations and the pro-Russian population by the Kiev government. U.S. President Joe Biden condemned Russia’s military action in the Ukrainian nation and almost immediately announced severe economic sanctions to hit Moscow’s economy. At the same time, the European Union also limited the purchase of hydrocarbons from the Russian giant in retaliation to the armed invasion.
When comparing the Ukrainian territory with Colombia, it represents only 52% of Colombia’s surface with 603,548 km2 (including separatist zones and zones invaded by Russia), with more than 44 million inhabitants. However, Ukraine is larger than France or Poland, ranking 48th in export volume, with a value of more than 68,075 million dollars. Ukraine exports numerous food products and raw materials. It is one of the world’s main producers of corn, wheat, barley and also has important deposits of metals such as iron, copper, aluminum, nickel and lithium. Therefore, in times of peace, Ukraine could become a very rich country.
Russia's Unusual Response to The Western Trade Embargo
In the face of severe financial sanctions by the United States and its European allies. Russia has not stood idly by, imposing the use of the Russian ruble for the payment of its exports to some nations such as Germany, Finland, and Bulgaria, among others, which depend to a great extent on Russian gas for their operations. In this way, it collects debts owed by other countries in its national currency.
Some raw materials and fuels have become more expensive as a result of the conflict and the disruption of the supply chain, driving a global inflationary phenomenon. At the same time, the price of a barrel of oil and its derivatives has exceeded $100 since march, which is a breeding ground for further inflation.
Russia Considers Ukraine a Rebellious Child
Ukraine has always been an obsession for the Kremlin, ever since it was a republic belonging to the former Soviet Union. It was a favorite haunt of Russian leaders since the Russian imperial era. Historically, Ukraine had maintained close economic and social ties with mother Russia. It is no coincidence that more than 17% of the Ukrainian population is of Russian origin. With the fall of the socialist bloc in 1991, Ukraine gained its independence peacefully. However, relations have been strained since the Kiev regime began its rapprochement with Western countries. This started Russia’s rivalry with Ukraine, which reached its peak in 2014 when Russia annexed the Crimea and Sevastopol regions, in a masterstroke that demonstrated to the world Putin’s desire to restore Russia’s former splendor in the world.
(2) The United States has Seen a Shrinking Economy with Inflation and Recession Fears
The United States, the world’s leading economy and Colombia’s main trading partner, has announced that at the end of June inflation reached 9.1%, the highest rate in the last 40 years. This has raised the alarm among economists and investors. It is not surprising that if the U.S. economy enters a period of recession, this will affect Colombia.
In order to control this inflationary phenomenon, the Federal Reserve (FED) of the United States increased the reference interest rates by more than 75 basis points last June, an increase not seen for more than 22 years, when there was a fall related to the terrorist attacks of September 11, 2001. This strengthens the U.S. currency and seeks to correct the accelerated increase in demand, which was stimulated in times of the Covid-19 pandemic in 2020. Some analysts expect the Fed to announce a new increase in the coming months.
There are several reasons why inflation in the United States has increased. First, the expansive policy of public spending in the final phase of the pandemic generated a chain effect, which was not difficult to foresee. In 2021, public debt reached 135% of GDP. A large part of this debt was acquired by the FED, which increased the money supply by issuing trillions of dollars. This measure was arguably necessary for the first phase of the COVID-19 pandemic, when most workers were confined to their homes and unable to work. It may have prevented the collapse of the country and artificially revived the economy.
Although economic growth was maintained in 2021, the government expanded the coverage of its citizens’ benefit checks, granting generous unemployment benefits, which caused many Americans to prefer not to work and receive these stimulus payments for free. This resulted in a the labor shortage, in what many called “The Great Resignation”. Some industries had to raise wages to attract the necessary workers to meet the growing demand. In the end, it all translated into higher costs of products and services and the consequent decrease in the purchasing power of the population.
Similarly, there are problems in some supply chains such as the shortage of microchips and delays in imported product containers, which have affected prices. In addition, the fuel situation generated by Russia’s exit from the international market and its more than 11 million barrels of oil have caused an increase in the inflation rate and slowed down the economy of the North American giant. The United States knows this and that is why Biden has put aside his quarrels with Nicolás Maduro, trying to return Venezuela to being a reliable supplier of crude oil to the United States and at the same time contain the price.
According to recent polls, President Joe Biden’s disapproval among Americans has reached record highs of 59% with a mere 36% approval rating. Therefore, it is not unreasonable to think that the dismal management of the economy and weak foreign policy could cost the Democratic Party the White House in 2024. Some fear that Donald Trump could run and win again in a landslide.
Colombia, as an emerging country and as the main ally of the United States in South America, could be affected in some sectors of its economy if the United States, as the main buyer, sees its economy diminished. This drives the devaluation of the Colombian peso as a consequence. Currently, more than 27% of Colombia’s exports are destined for the United States market, equivalent to a figure of 5,239 million dollars, with a growth of 22% in 2021. In terms of foreign investment, the United States represents a figure of more than 1,709 million dollars, with more than 450 U.S. companies in the country, generating more than 100,000 direct jobs in Colombia. Politically and militarily, Colombia is a leader in the fight against drug trafficking and international terrorism and has always been on the side of U.S. interests in the region.
(3) New Left-Wing Government Stokes Fears About Colombia's Future
Locally, the election in June of Gustavo Petro as Colombia’s new president has generated strong expectations, given the ambitious package of reforms he has proposed for the country. The market expects Colombia’s new government to give clear signals about the economic policies it will implement starting in August when it officially begins its constitutional mandate.
Among Petro’s proposals that generate the most nervousness is the progressive substitution of oil and fossil fuel energy production. Petro’s detractors view it as irresponsible to phase out such a large part of Colombia’s revenue income. In 2021, oil represented almost 40% of COlombia’s revenues.
Another of the new government’s hot points refers to the tax reform, with which it intends to collect more than 50 trillion pesos in tax revenues for the country. As expected, businessmen and investors want to have clear rules in order to make important decisions for the near future.
Since Gustavo Petro won the Presidential Election on Sunday, June 19, 2022. The value of the dollar in Colombia has steadily decreased. It is striking that the Colombian peso has lost more than 12% of its value in just one month. While other currencies such as the Chilean peso, Mexican peso, Peruvian sol, or Brazilian real have accumulated losses of no more than 6%. Therefore, the political rhetoric could be taking its toll on the new government, so if it does not take urgent measures to calm the fears of the market, it will face difficulties from the first day it takes office.
Economic and Inflation Figures in Colombia VS 2021-2022
As for inflation, in 2021 Colombia had inflation of 5.66% according to official figures from DANE, being the highest in the last five years. However, so far in 2022, the consumer price index (CPI) has already exceeded 9.67% at the end of June 2022. This exceeds the initial forecasts of the Banco de la Republica at the beginning of the year by more than two percentage points, which was 7.1%.
In recent years, the sectors with the highest consumer price increases in Colombia are the following: food and beverages with an annual variation of over 23.65%, followed by restaurants and hotels with 14.37%, household goods with 11.76%, transportation with 8.33%, among others. In Colombia, the minimum wage with transportation allowance is COP 1,117,172 (equivalent to 253 USD per month). This equates to around $1 USD per hour at the current exchange rate.
With respect to other South American countries, Colombia ranks among the six countries with the highest inflation, after Venezuela at 151%, Argentina at 60%, Brazil at 11.73%, Chile at 11.5%, and Paraguay at 11.5% respectively. The inflationary phenomenon is not exclusive to Colombia as it is being experienced all around the world.
Despite the growing phenomenon of inflation and currency devaluation, Colombia has a positive performance in terms of economic growth post-Covid-19. Forecasts estimate that the country will have a GDP growth of 5.3% thanks to the increase in crude oil and raw material prices.
Employment rates in Colombia have been progressively recovering in recent months. According to official figures, the unemployment indicator fell by 4.6 points, closing at 10.6%. Although still among the highest in the region, it is already lowering to pre-pandemic levels. Another challenge of the new government is to encourage entrepreneurship and investment in Colombia, in order to reduce unemployment and social gaps.
Is it Still Safe to Invest in Colombia?
Despite the almost generalized pessimism of the national and international markets, there are no compelling reasons to doubt the strength and resilience of the Colombian economy. So whatever the lobbyists say, they are political interests and speculations that are not worth listening to seriously. Logically, some internal and external effects of a true perfect storm have begun to be felt, where devaluation, inflation, and uncertainty dominate the current outlook. However, developed and emerging markets show similar behavior, as we have seen before. Astute investors will know that in times of uncertainty and doubt are when many of the most profitable investments are made.
Growth projections for the next few years have been lowered. Despite the growing phenomenon of inflation and currency devaluation, Colombia has a positive performance in terms of economic growth post-Covid-19. Forecasts estimate that the country will have a GDP growth of 5.3% thanks to the increase in crude oil and raw material prices.
Colombia is a resilient country that has always overcome the most adverse difficulties. Let’s not forget that the country had a bloody armed conflict for more than 60 years, until the signing of the 2016 peace accords. It also dealt with the pervasive problem of criminal gangs in the 90s. The Colombian nation is putting behind the era of violence and has become a democratic model for the world, generating better opportunities for the local population.
The arrival of hundreds of thousands of foreigners in recent decades clearly demonstrates that confidence in the country has improved. It is a hotspot for tourism, investment, and living. This was unthinkable a few decades ago. Today, cities such as Bogotá, Cartagena, and Medellín, among others, abound with authentic communities of expatriates, digital nomads, and foreign retirees. The real estate sector in Medellín is booming, with excellent investment opportunities to be made in a growing market.
Conclusions for Weathering The Current Storm - What Can We Expect?
(1) There is a highly unpredictable global inflationary phenomenon. The only sure thing is that having money in the bank is not a wise decision right now, as inflation erodes bank balances. The interest paid by financial institutions for saving does not compensate for the accelerated increase in the cost of living. So, it is a good time to move the money out of the bank and look for a more profitable shelter.
(2) As a consequence, there is strong volatility in the markets. At this time, any news produces panic and a stampede. The crypto-winter currently experienced by Bitcoin and other cryptocurrencies is a clear example of the damage caused by speculation and Fake News. Faced with this situation, it is time to remain calm beyond the current situation. Whenever there is a downturn, then calm returns later and those who were patient.
(3) At the local level, the climate of political uncertainty in Colombia has added fuel to a flame, fanning a red-hot fire. However, we believe that the new government will soon understand that it is one thing to be the leader of the political opposition and quite another to be responsible for the economic policy of an entire country of 50 million people. President Gustavo Petro will be obliged to learn to govern quickly and give clear signals to reassure the market, with coherent policies and apply fiscal discipline.
(4) If you are an expatriate, it is a good time to take advantage of the historically strong price of USD to invest in real estate. The brick is ultimately the safest asset. However, don’t wait too long for prices to go up further. Securing a cash-flow producing investment in real estate is one potential way to weather the coming storm.
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