BOGOTA, Oct 14 (Reuters) - Colombian exporters are seeing their profits cut and may have to lay off workers in the middle of a recession due to a more than 21 percent surge over the last 12 months in the country's peso against the U.S. dollar.
President Alvaro Uribe has called on his economic team and the central bank to come up with a plan for halting the rise of the peso, which was at 1,827 to the greenback on Wednesday.
Producers of manufactured goods, coal, flowers, coffee and other agricultural products pay their costs in the local currency while receiving weaker dollars for overseas sales.
But the efforts of Colombian policymakers are likely to continue to be muted by global dollar weakness.
The greenback has dropped 7 percent against a basket of major currencies so far this year and on Wednesday fell to a 14-month low on expectations U.S. interest rates will stay at very low levels for some time. Low rates reduce the attractiveness of U.S. assets for global investors.
'When a phenomenon like this occurs in most countries of the world at the same time, there is much less room to maneuver,' Finance Minister Oscar Zuluaga said on Wednesday.
Colombia's central bank will hold a special meeting on the problem of the strong peso on Thursday, but analysts see little that can be done on a local level to halt the currency's rise.
The bank has already chopped interest rates to 4 percent from 10 percent over the last 10 months, hoping not only to jump-start the local economy but to make Colombia less attractive to foreign portfolio investors and slow the inflow of dollars.
Some possible courses of action:
* DOLLAR PURCHASES
The central bank could sell 'put' options aimed at accumulating international reserves. This would increase dollar demand and might help ease the peso's rise.
The bank could also go on a dollar-buying campaign. With $25 billion in reserves, it is seen as having resources to try to fight the strong peso through outright purchases of dollars on the foreign exchange market.
But the positive effect of such a measure would likely disappear the moment that the bank stops buying dollars.
* INCREASE PROGRAMMED DOLLAR PURCHASES
The bank could also increase the frequency of programmed dollar purchases by tightening the range at which changes in the exchange rate trigger the auction of 'put' options meant to control volatility.
Currently, any daily fluctuation in the exchange rate of 5 percent triggers an auction of options to buy or sell up to $180 million dollars. A tightening of the trigger range would increase the frequency of 'put' option auctions.
* MORE RATE CUTS
The bank cut its key overnight rate 50 basis points to 4 percent at its regular monthly policy meeting in September. Policymakers cited the strength of the local currency as one of the reasons they decided to cut the rate.
Considering that inflation is running under target this year, some analysts say the bank has room to keep cutting. Other say that if the economy recovers from its recession next year, and inflation expectations rise, the bank could find itself having to quickly double back on its rate cuts.
* GOVERNMENT MEASURES
The government could adopt measures aimed at limiting foreign portfolio investment in a bid to reduce the inflow of dollars and lessen upward pressure on the peso.
Such a move would be frowned upon by free-market oriented investors and even Zuluaga has said the adoption of capital controls would probably do little to stop the peso's rise.
(Reporting by Nelson Bocanegra, Writing by Hugh Bronstein; Editing by Kenneth Barry) Keywords: COLOMBIA PESO/ (nelson.bocanegra@thomsonreuters.com;+ 57 1 6344138; Reuters Messaging: nelson.bocanegra.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
President Alvaro Uribe has called on his economic team and the central bank to come up with a plan for halting the rise of the peso, which was at 1,827 to the greenback on Wednesday.
Producers of manufactured goods, coal, flowers, coffee and other agricultural products pay their costs in the local currency while receiving weaker dollars for overseas sales.
But the efforts of Colombian policymakers are likely to continue to be muted by global dollar weakness.
The greenback has dropped 7 percent against a basket of major currencies so far this year and on Wednesday fell to a 14-month low on expectations U.S. interest rates will stay at very low levels for some time. Low rates reduce the attractiveness of U.S. assets for global investors.
'When a phenomenon like this occurs in most countries of the world at the same time, there is much less room to maneuver,' Finance Minister Oscar Zuluaga said on Wednesday.
Colombia's central bank will hold a special meeting on the problem of the strong peso on Thursday, but analysts see little that can be done on a local level to halt the currency's rise.
The bank has already chopped interest rates to 4 percent from 10 percent over the last 10 months, hoping not only to jump-start the local economy but to make Colombia less attractive to foreign portfolio investors and slow the inflow of dollars.
Some possible courses of action:
* DOLLAR PURCHASES
The central bank could sell 'put' options aimed at accumulating international reserves. This would increase dollar demand and might help ease the peso's rise.
The bank could also go on a dollar-buying campaign. With $25 billion in reserves, it is seen as having resources to try to fight the strong peso through outright purchases of dollars on the foreign exchange market.
But the positive effect of such a measure would likely disappear the moment that the bank stops buying dollars.
* INCREASE PROGRAMMED DOLLAR PURCHASES
The bank could also increase the frequency of programmed dollar purchases by tightening the range at which changes in the exchange rate trigger the auction of 'put' options meant to control volatility.
Currently, any daily fluctuation in the exchange rate of 5 percent triggers an auction of options to buy or sell up to $180 million dollars. A tightening of the trigger range would increase the frequency of 'put' option auctions.
* MORE RATE CUTS
The bank cut its key overnight rate 50 basis points to 4 percent at its regular monthly policy meeting in September. Policymakers cited the strength of the local currency as one of the reasons they decided to cut the rate.
Considering that inflation is running under target this year, some analysts say the bank has room to keep cutting. Other say that if the economy recovers from its recession next year, and inflation expectations rise, the bank could find itself having to quickly double back on its rate cuts.
* GOVERNMENT MEASURES
The government could adopt measures aimed at limiting foreign portfolio investment in a bid to reduce the inflow of dollars and lessen upward pressure on the peso.
Such a move would be frowned upon by free-market oriented investors and even Zuluaga has said the adoption of capital controls would probably do little to stop the peso's rise.
(Reporting by Nelson Bocanegra, Writing by Hugh Bronstein; Editing by Kenneth Barry) Keywords: COLOMBIA PESO/ (nelson.bocanegra@thomsonreuters.com;+ 57 1 6344138; Reuters Messaging: nelson.bocanegra.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.