The BulldogRupert Stebbings
El Peso - Un Rompecabezas Difícil de Armar
The anti valuation measures adopted by the Central Bank and the Government this past Friday should be applauded because they reflected common sense and resisted the temptation to turn the economic future of the country into a political football - the Capital Controls adopted by the last administration were badly thought through, failed to have the desired effect and brought into question Colombia's claims to be a free market economy.
Those currently claiming that capital inflows costs jobs are only partly right, those same flows bring investment and with that investment comes jobs, unfortunately there is no guarantee that those jobs will be in the same sectors that are under threat, the fact that 1000's of new positions are being created in the oil and mining sector is of little compensation to those sat in the textile factories but in the end it is about the bigger picture. In the same vein there has been (until very recently) constant complaining about the inability of the Government to make an impact on the unemployment level however there has been little attention paid to the numbers of people actually working, a figure that has grown by over 1 million in the year up until September. Some may question the quality of some of those jobs however the pattern is clear, a portion of those jobs will have come from overseas money be it direct or indirect.
For the current administration to have taken the backward step of imposing draconian Capital Controls could have had damaging consequences and still will have, should the Government decide to think again. Colombian companies need overseas investment and it is a mistake to believe those overseas investors represent so called 'hot money', the vast majority have come to believe in Colombia as an Emerging Market with tremendous potential in future years, those investors are here for the long term.
Any implementation of Capital Controls would also mean the end of any aspirations for Investment Grade from the ratings agencies and that in itself is a massive opportunity cost, countries with Investment Grade enjoy a lower cost of capital which impairs the ability of local companies to grow and growing companies employ people. Capital Controls last time also saw the country threatened with Frontier Market status by the MSCI and whilst that would only deter some overseas funds the headlines would be damaging and it is still far more favorable to be an Emerging Market especially at a time when the country is looking to the emergence of the CIVETS as another way to attract investors.
The Peso is a concern and whilst this time around dollar weakness is a problem being felt on a more global level Colombia has a dilemma. Whilst other countries such as Brazil are also adopting measures they already enjoy the luxury of Investment Grade, whereas Colombia still has some convincing to do.
This results season has shown that despite the relatively high Peso and the difficulties in relations with Venezuela with a little prudence results can be gained, both Fabricato and Enka may well have turned a corner.
Unfortunately Colombia and the other Emerging Markets are no longer a secret and the issue if inflows need to be dealt with on a long term basis, Colombia is still near the bottom of a potentially very steep growth and investment curve and concept of a Peso-Dollar at 2000 may seem like very ancient history within a couple of years.
The Government in conjunction with Congress needs to push ahead with the Stabilization Fund at it's earliest convenience in order to keep the commodity dollars overseas, those dollars should be used to pay down foreign debt and improve the fiscal profile of the country which in turn will endear the country to the ratings agencies.
The measures adopted by the authorities thus far are sensible. The purchase of dollars makes big headlines but in the end it is simply a hedging strategy and does not 'cost' US$20 million per day, it is also relatively speaking a low amount next to many other countries, Peru routinely spends US$150 million during a trading session with the same intentions.
This is an issue that is long term and will not go away, any measures by the authorities need to be well thought through, Colombian and it's companies have fought hard to earn the respect of the foreign investment community, however it is still an unfortunate truth that due to the tragic history of this country that respect could still prove very fragile should policy mistakes be made.
With the apparent détente between Colombia and Venezuela which theoretically could lead to a pickup in exports and therefore dollar inflows the next challenge could be just around the corner.