By Daniel Salazar Castellanos
As countries in Latin America began to level the pulse with inflation, they also began to reduce interest rates, as was the case in Uruguay, after a cycle of hikes that could last longer in markets such as Colombia until the biggest price increase of this century is fully declared a victory.
Colombia maintains one of the highest central bank interest rates among the main Latin American economies in its attempt to control inflation, which stood at 12.82% annually in April, lower than the historical rate reported in March (13.34%), according to the National Administrative Department of Statistics (DANE).
In this context, last month, the board of Banco de la República raised its reference rate to 13.25%, its highest level since 1999.
This is the minimum interest rate that Banco de la República “charges financial entities for the liquidity it provides them through open market operations (OMA)”, according to the Issuer.
It is also the key monetary policy intervention instrument to define the amount of money circulating in the economy.
The co-director of the Colombian central bank, Roberto Steiner, called for restraint before lowering interest rates in the country.
“The worst mistake we can make is to lower interest rates and then have to raise them”.
“The upward trend in interest rates indicates that inflation is not being controlled as expected,” warned Clara Inés Pardo, Ph.D. in Economics and professor at the School of Administration of the Universidad del Rosario, in conversation with Bloomberg Línea.
Consulted by Bloomberg Línea, the chief economist of Corficolombiana, Julio Romero, stated that Colombia started somewhat behind in the cycle of rate increases and has also extended this process of monetary policy tightening due to inflation conditions.
“In the face of foreign portfolio investors, this is a relative attraction. The carry trade, that is, the differential between the interest rate that an investor receives in a country, concerning the one received in the US, is at high levels and higher than most other countries in the region,” he said.
According to Julio Romero, this implies a higher premium for those who want to invest in Colombia.
This has been reflected in the demand for public debt securities auctions this year.
“Despite the uncertainty and all the internal discussions due to political factors, the reforms, the mining-energy strategy, among others, in the end, Colombian debt is being successfully placed due to the high profitability, the high rates that are being offered relative to other countries”, he pointed out.
He added that foreign investors find the risk-return ratio of TES attractive despite all this volatility that is evident locally.
In April, they were among the main buyers with more than US$1.5 trillion in net purchases.
At the beginning of this month, the Ministry of Finance and Public Credit auctioned in the Colombian public securities market US$375,000 million in Treasury Securities (TES) denominated in Real Value Units (UVR) in references with maturities of six (2029), fourteen (2037) and twenty-six years (2049).
The placement is equivalent to 1,094 million UVR units.
According to the Ministry, purchase offers were received for US$941 billion, 3.8 times the amount initially called.
EFFECT ON THE COLOMBIAN PESO
This interest rate differential could continue to be reflected in the appreciation of the Colombian peso against the dollar, which closed again above $4,400.
“It is an investment flow that brings dollars into the economy. When they buy debt securities, the positions of foreign investors often have a hedging operation that compensates a little the positive effect on the peso.”
“But yes, in direct terms, a greater portfolio investment entering the country is a greater supply of dollars and therefore favors the Colombian peso”, said Romero.
In the same way, analysts from the firm hEDGEpoint considered in a report that “this above-average performance has a lot to do with the fact that Colombia’s yield spread against the US is above the 5-year maximum”.
They note that the Colombian Central Bank “has been the second ‘most hawkish’ in Latin America – behind the Central Bank of Brazil”, among the largest regional economies.
ASPECTS TO CONSIDER AMID HIGH RATES
In this context, the director of Análisis y Estrategia Casa de Bolsa, Juan David Ballén, tells Bloomberg Línea that Colombia presented last year one of the highest current account deficits in history, which explains the depreciation of the local currency since last year.
“For this year, a reduction in the current account deficit is expected, explained in part by a deceleration of imports, which would contribute to the Colombian peso not weakening further,” he said.
On interest rates, he highlighted that, although foreign investors continue to buy public debt due to the high interest rates, “they have not been enough to finance the country’s current account, resulting in the depreciation of the exchange rate”.
“What foreigners invest is the inflow of dollars. But it is also necessary to analyze the outflow of dollars.”
“In very simple terms, the dollar in Colombia rose because the supply was lower than the demand (…) The differential plays in favor of Colombia, and in fact, it has been so and is reflected in foreign purchases of TES.”
“However, the trade balance and current account deficits have been higher”, he stated.
Tied to this, Clara Inés Pardo, from Universidad del Rosario, points out that higher rates could attract investors.
Still, when the yield is compared to inflation in the country, the net gain might not be so attractive.
“Therefore, in these situations, the interest rate and inflation relationship must be analyzed to define if the net profitability is effective and if purchasing power is not being lost,” he said.
Last February, a deficit was recorded in the Colombian trade balance of US$554.9 million FOB, a drop of 49.3% year-on-year.
Meanwhile, last year the current account deficit stood at 6.2% of GDP.
INTEREST RATES IN SOME LATAM COUNTRIES:
- Argentina: 91%.
- Brazil: 13.75%.
- Colombia: 13.25%
- Uruguay: 11.25%
- Mexico: 11.25%
- Chile: 11.25%
- Peru: 7.75%
With information from Bloomberg