[Politics] Dollar close to $ 5,000: in the face of a crisis of confidence they suggest that the Issuer intervenes

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The lack of confidence, the confusing messages from the Government, the economic uncertainty and the throes of the international situation continue to exert such pressure on the exchange rate in Colombia that yesterday, Monday, the price of the dollar was only one peso away from 5,000 pesos, marking thus a new record, the sixth in series and the seventh so far this year.

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Despite having reached a maximum of 4,999 pesos in the interbank market, in just an hour and a quarter of operations the US currency began a gradual decline to 4,926.3 pesos, which at the end of the day allowed the official rate for Tuesday will be around 4,968.94 pesos, that is, about 56 pesos above that of Monday of this same week, a level at which some market agents consider that the intervention of the Banco de la República would be necessary through the mechanism of auctions.

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To the voices of Colombian economists and businessmen who blame the sharp loss in value of the peso (the devaluation so far this year is 24.8 percent) against the dollar on the wrong messages from the Government, in terms of exploration and oil exploitation and foreign exchange market intervention, among others, was also joined by analysts from the US investment bank J. P. Morgan, who in a recent document pointed out that Colombia faces a "crisis of confidence" derived, in addition, from the combination of " financing needs with a very tight external balance”.

According to the financial entity, to avoid a further depreciation of the peso that is "self-reinforcing and a sudden interruption of capital flows", a "short-circuit" political intervention is required, that is, going beyond the reassuring messages of the Government facing the energy transition and fiscal spending.

"Markets also need tangible measures to stabilize in the short term," says J. P. Morgan in his report.

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rate hike
The Colombian government, led by President Petro, insists, must propose a solid macroeconomic policy roadmap that motivates the arrival of foreign capital, taking into account the revaluation of the dollar, which is close to 5,000 pesos, and the depreciation of the Colombian peso, one of the most undervalued currencies in the world.

The entity also warns that although the rate of the Banco de la República has increased in recent months (it is at 10 percent) it “still does not seem to be compensating for the current risks; real interest rates are insufficient for a country with Colombia's imbalances”.

That is why it expects an increase of 150 basic points, after the Issuer's meeting on October 28 to bring its rate up to 11 percent.

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And to curb the current volatility in the foreign exchange market, he points out that “BanRep can also use limited foreign exchange intervention”, although they believe that this will only prevent a disorderly depreciation of the currency and will not significantly alter the trajectory of the currency.

“Colombia could benefit from a more modestly sized intervention package, with regular and flexible programmatic auctions over a longer period of time, to curb volatility and provide support to the foreign exchange market,” comments J. P. Morgan.

Consistent messages
To address the current crisis of confidence and prevent the country from going overboard, the Government must take urgent and concrete action.

Juan Pablo Córdoba, president of the Colombian Stock Exchange (BVC), says that one of these actions must be on the way to clarify compliance with the fiscal rule. "Not complying with it in a scenario as delicate as the one we have for financing public debt would be a serious mistake and would put us at risk of not being able to refinance the debt going forward."

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He added that the situation makes the announcements very sensitive to the opinion and actions of different actors, so greater cohesion is required in the government team in the face of public opinion. "It is important that in the conduct of economic policy, the spokesperson for this should be the Minister of Finance."

For his part, Mauricio Santa María, president of the economic studies center Anif, points out that the government must be much more careful with the announcements it makes because this has a great impact on the markets.

“When the government speaks, people make decisions based on those announcements. Second, these announcements must be coordinated in the Government. And third, that the substantive things that are proposed in terms of energy, health, pensions and taxes are studied first and reforms are not announced without knowing what their impact will be, their cost, what is changed. You have to study it well, draw up a draft so that it can be discussed and no controversy is generated over vague ideas”, he specifies.

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‘Extra income from the reform

ma should not be spent '
The Government has to send a clear message in the sense that all the additional income that the tax reform will generate will not be incorporated into spending in 2023, as it has mentioned. This is how Luis Fernando Mejía, director of Fedesarrollo, considers it, who considers that this message of higher spending does not help generate the confidence that the country requires at this time.

But it is not the only thing, the economist also considers that the solutions also go through the fiscal issue and the tax reform, in which it is important to adjust what seems to be a fiscal burden for the mining-energy sector, a key generator of foreign exchange for the country.

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In this sense, he specified that the deductibility component of royalties should be reviewed, which can increase considerably in the case of not allowing it, and also that which concerns the combined taxation of partner companies, through the increase in the tax on dividends.

However, Mejía said that it was key that there be clarity on the destination of the resources of the tax reform.

"From Fedesarrollo we consider that it is worth discussing this point because a part of that collection should at least go to pay the debt," he warns.

He considers it essential to resolve the uncertainty in the exploration contracts, key to the sustainability of external and fiscal accounts, as well as to the stability of the exchange rate.

Economy and business

https://www.eltiempo.com/economia/sector-financiero/dolar-las-salidas-del-gobierno-para-devolverle-la-confianza-al-mercado-712267