Balancing growth with the fight against inflation has not been easy in the past year’s volatile environment, but Colombia’s central bank governor managed to pull it off
Over the last year, central bankers in Latin America have faced a difficult balancing act between the need to stand ready to support the economy if adverse global shocks materialize, and the duty to ensure monetary policy continued to anchor inflation expectations.
Against this backdrop of conflicting priorities, Eric Curiel, strategist at Esemplia Emerging Markets, an equities manager with £3 billion ($4.8 billion) assets, said Colombia’s José Darío Uribe stood out by deciding to raise rates by a full 2.25 percentage points to 5.25% in the year to February 2012. “He stepped in forcefully last year when he could see that growth was rising too quickly,” Curiel says.
Despite the hikes, equity prices continued to outperform. “There was clearly an earnings story in Colombia, but it was also the fact that institutionally the central bank was working,” Curiel adds. “He knew what was needed to be done in terms of changing inflation expectations, and he has done a fairly good job in getting domestic demand to slow down without it falling off a cliff.”
Pablo Goldberg, head of emerging market research at HSBC, agrees, saying Uribe had the “courage to hike rates when [he] felt that domestic conditions warranted it. They have been pulling themselves away from the pack in that sense.”
Capital Economics, the London-based analysts that specialize in emerging markets, forecast that inflation will stabilize at 3% over the next two years, in line with the bank’s target, after hitting a peak of 7.1% in 2008.
Uribe has worked at the central bank since he earned his doctorate from the University of Illinois in 1992, serving as executive director of the research department and deputy governor before taking on the top job in 2005. In July this year he again took analysts by surprise by cutting rates by a quarter-point to 5%, the first reduction in two years, describing it as a “clear and strong signal of the change in posture of monetary policy”.
Uribe and the Colombian government have also been praised for their commitment to exchange rate flexibility, which saw the peso appreciate against the US dollar by around 10% in the first half of the year. HSBC expects the peso to appreciate by a further 3% this year. “The peso will continue to benefit from continuing improvements in fundamentals,” strategist Marjorie Hernandez says. “Growth is high, FDI is booming, unemployment is at a new cycle low, tax revenues have soared, and oil prices are high.”
EM INTERVIEW
Keeping inflation under control and inflation expectations well anchored, together with a flexible exchange rate, has allowed the central bank to have a counter-cyclical monetary policy during the high point of the economic cycle, avoiding excessive spending and leveraging, central bank governor José Darío Uribe says.
The country’s economic performance is due to three main factors, according to the central bank governor.
“First, the Colombian economy has become increasingly inserted into the world economy through trade and investment. Investment, for example, has more than doubled its participation in GDP in the past 10 years,” Uribe tells Emerging Markets. “Second, Colombia has designed macroeconomic policies that have made the economy more resistant to negative external shocks. And, of course, enormous progress has been made in the institutional framework, including improvements in the levels of security and confidence.”
Annual inflation over the past four years has averaged 3%, the mid-point of the central bank’s long-term target, and Uribe expects it to end the year at 3%. Public debt has fallen “significantly” as a percentage of GDP, he says, and the composition of the debt has changed, with only 30% now denominated in foreign currency.
Another advantage is that Columbia’s banks are strong, well-capitalized and highly profitable, making a positive contribution to growth, he says.
“At the same time, it is important to recognize that Colombia has witnessed a substantial improvement in terms of trade thanks to the strong increase in the prices of raw materials. There have also been increased levels of investment, both national and foreign, in the mining-energy sector,” Uribe adds.
The central bank’s priorities for next year will be to keep inflation at its long-term goal of 3% and maintain inflation expectations “firmly anchored”, as well as continuing with the policy of exchange rate flexibility and the capacity to apply a counter-cyclical monetary policy if needed.
The central bank has been buying US dollars in the market, in “relatively small” amounts through a mechanism of pre-announced daily auctions to boost its international reserves and to correct instances when it felt the peso’s exchange rate was “misaligned”, Uribe says.
“The Colombian economy is growing larger and, as a result, it is always useful to have higher levels of international reserves,” he adds. “But we have always bought reserves with clear rules, without creating any doubt about central bank’s commitment to price stability and the flexible exchange rate system.”
The bank will continue to look at the exchange rate and, if the appreciation of the peso is judged to be “misaligned”, this would trigger “a greater intervention”, the governor says.
“A justified appreciation, in our view, does not merit a greater intervention. This should only [happen] when it is accompanied by behaviour that cannot be explained or if there is the need for greater levels of foreign reserves.”
Uribe is confident that there will not be a “disorderly adjustment” in Europe and that his country will withstand external shocks if they were to occur.
“We cannot control what happens abroad, but we can control our monetary policy,” he says. “And what we have built in the past 10 to 12 years is a policy framework that allows – in terms of monetary, fiscal and financial policy – Colombia to successfully handle external negative shocks.”