Colombia has received a long-coveted investment-grade ranking – but the move by Standard & Poors earlier this month could be a double-edged sword, as the government tries to keep its currency from getting too strong.
Finance Minister Juan Carlos Echeverry told Emerging Markets that Colombia’s macroeconomic fundamentals are strong enough to absorb an influx of capital that is likely to come from the investment-grade ranking.
“We are heading for growth of between 5% and 6%, and inflation that will be near the 3% target,” he said. “What we want is stable growth, not fast growth that only leads to an overheating economy.”
One of the first impacts of the upgrade was a quick appreciation of the Colombian peso against the US dollar. This comes on the back of a 5.9% appreciation in 2010, and further improvement against the dollar could hurt exports, according to analysts.
This is particularly tricky, since the USA has now ended trade preferences offered to Colombia since the early 1990s under the US Andean Trade Promotion and Drug Eradication Act (ATPDEA).
Echeverry said he simply does not understand the US decision to end ATPDEA preferences, while at the same time failing to approve a free-trade agreement (FTA) completed in 2006.
He argued that exporters should not worry, because the government is diversifying Colombia’s trading partners, completing FTAs with Canada and the European Union and actively courting China.
“Monogamy is good for marriage, but it is not good for trade. We are looking to have multiple trading partners,” Echeverry said.
The Central Bank would continue its policy of buying dollars on the spot market to make sure the peso does not spike, he added.
Echeverry said the administration is confident that the central bank will be able to manage inflation and any concerns caused by capital, because “if you have good fiscal policy, it facilitates good exchange and monetary policies.”
Joydeep Mukherji, who was Standard & Poors’s primary analyst for the Colombia upgrade, said while Colombia has been receiving and will receive more foreign direct investment, it needs to be cautious with financial flows. Foreign direct investment increased to $7.2 billion in 2009 from $2.1 billion in 2002.
“Financial investment can be both a blessing and a curse, depending how much comes in, how quickly, and what is the absorptive capacity,” he said. “This is something that Colombia needs to watch carefully.”
Echeverry said absorbing inward capital flows would not be a problem. The government has identified five motors of growth for the coming years: mining, agriculture, infrastructure, housing and science and technology. Investment is forecast at $30 billion over the next 10 years.
Echeverry added, however, that President Juan Manuel Santos’s administration is aware that the strong focus on nature resources could lead to Dutch disease (i.e. currency appreciation on the back of commodity exports making manufacturing sectors uncompetitive) – and that it was vital to avoid such a trend.