Colombian President’s key messages to calm the markets and curb the dollar

Faced with the historical rise of the dollar, which is already threatening to climb above COP 5,000 for the first time, the administration of Colombian President Gustavo Petro has focused its agenda on providing calm messages to the markets to contain the depreciation and generate confidence in investors as they dispose of government bonds.

The dollar closed Thursday at COP 4,885 on average and reached a new high of COP 4,921 in intraday trading, with investors having their sights set not only on the challenging global macroeconomic context, marked by high interest rates and inflation but also on how the country performs in this scenario.

Among the main issues that have generated noise in the last few weeks are the proposals that emerged from the government, such as freezing prices to contain inflation or controlling swallow capital, but the Minister of Finance, José Antonio Ocampo, came out to tackle these situations and denied that these measures would be adopted.

However, among the issues that generate more concern in the market are those related to the future of oil, the primary source of foreign currency in the country, so the government’s calm messages have focused on clarifying the main aspects of its program in this field.

These were the key messages offered by the government amid the market volatility that drove the peso to historic lows:

CONSENSUS BETWEEN MINISTRIES OF MINES AND FINANCE?

Recently, the Minister of Mines and Energy, Irene Vélez, reaffirmed that no new oil exploration contracts would be signed, but the head of the Treasury, José Antonio Ocampo, later said this decision had not yet been made.

After the apparent disconnect in the statements of the Minister of Mines and Energy and the Minister of Finance on the future of oil, the government seeks to align itself in the discourse and on Thursday sent messages in that sense.

First, President Gustavo Petro said on his Twitter account that oil, coal, and gas exploitation contracts continue normally. “Exploration contracts in force continue normally. There is no prohibition,” he reiterated.

Then, Irene Vélez said that the energy transition would be made without putting energy sovereignty at risk “in the practice of a responsible macroeconomic policy,” backing up what Finance Minister José Antonio Ocampo said.

He also pointed out that the country currently has more than 147 contracts in the exploitation phase, around 750,000 barrels of oil per day and 1,100 million cubic feet per day are produced, and it has proven reserves for 7.6 and 8 years of oil and gas, respectively.

For his part, José Antonio Ocampo clarified that Colombia is in the middle of three transitions, not just an energy transition. “That is the message I convey in internal discussions,” said the minister.

“Colombia is living an energy transition, which is what the president has been announcing and which was one of his central campaign themes, but at the same time, we are living an export transition and a fiscal transition,” said the minister.

Amid the noises generated about the continuity of Minister Vélez, a government source with knowledge of the matter told Bloomberg Línea that this information is false and that the president had ratified his support for her.

“THE ECONOMY IS MEASURED IN LONG BREATHS”

Petro also referred to these issues during his speech at the First Ibero-American Forum: Challenges of Labor Formalization, in which he mentioned that “a good part of the world, almost everything, maybe everything, is on the verge of an economic crisis.”

“The President of the United States (Joe Biden) thinks it is mild. Maybe it is. Maybe we are in front of a real economic storm dating back to 2008. It marks a long wave, as (Simon) Kuznets would say, of economic stagnation in the world, of a slowdown in productivity,” said the Colombian president.

He defended that with only two months of government, one can only speak of intentions, of proposals, “of something written in a budget”, which today continues to be that of the Administration of Iván Duque.

“Today, the media and a certain part of the Colombian society are surprised because the government is implementing the program. Such was the lack of habit in Colombian political life of saying things in campaigns and doing others in government. We are doing what we said,” Petro said.

Referring to the local economic panorama, he warned in his speech that “Colombian capitalism is rickety, as in a good part of Latin America,” and in this sense, he stressed that most of the economy of this country is not formal.

“The informal is the internal enemy. What must be eradicated, and what must be repressed. It is almost confused with the illegal. And, in a certain way, because we are confusing the concepts so much, in reality, criminality has spread both in the formal and informal sectors,” he said.

On the dollar, he commented: “The press is looking to see if we reach COP 5,000; they are looking to see if every minute, every minute, there, to put the headline. But the economy is measured in long breaths”.

“Do we want to be economically prosperous in Colombia? We all want to live better. Well, to be able to live better, to be economically prosperous, to be richer, there has to be more social equality. And that is, let’s say, the programmatic table of this government,” he concluded.

HOW TO STOP THE DOLLAR?

José Andrés Rueda, professor at the School of Economics and Administrative Sciences of the Universidad de América, tells Bloomberg Línea that to understand how to curb the rise of the dollar, the ideal is to isolate the effects, which are linked to global variables, the high global inflation due to the disruption of the agricultural supply chain by the war in Ukraine, the lags of the logistical problems of the pandemic, among others.

“These effects have increased the Fed’s interest rate to control inflationary outbreaks and attract investors to that market due to higher rates.

“As for the domestic environment, the announcement was made of the suspension of the granting of new exploration licenses for gas and oil, key products that are generators of foreign exchange in the country,” said the academic.

He added that investors abroad are clear about the effect these decisions may have on the long-term sustainability of the country’s finances, so much so that this week, the risk measure of Colombia’s 5-year bonds (CDS) surpassed that of Brazil.

“This is due to several fronts. The first, already mentioned, is the focus on the mining-energy issue, and the second in the case of the tax reform that wants to increase the ‘government take’ on the profits of mining-energy companies (among others),” he said.

The professor indicates that one of the possibilities is that the Bank of the Republic takes the decision (autonomously) to intervene, but he considers that this type of measure does not help to soothe this market volatility.

“In cases where internal and external trends combine to affect the exchange rate, central bank interventions have not been very effective (…) Cases such as the Argentinean Corralitos, the restriction of purchases with dollars in Venezuela, and the hedge in Greece a decade ago, have not proven effective in controlling the dollar price,” he explained.

He also indicated that formulas on capital control could be promoted (which have already been voiced by the president), but “they are seen as restrictive measures in an environment accustomed to a market operation, which also does not consider the fundamentals of the economy that form the trends”.

Therefore, he believes that “better communication from the government to the actors of the economy must be articulated, showing a clear path, and a joint management of the authorities to retain/increase exports and the income of dollars, and to have the political will to reactivate the granting of gas and oil exploration licenses, which allows the market to have certainty that foreign currency will continue to enter the economy and calm that uncertainty, as the main variable of the behavior of the dollar”.

With information from Bloomberg