Colombia Peso Rally Will Turn Into Rout

Colombia Peso Rally Will Turn Into Rout, Merrill, Citigroup Say

By Bo Nielsen and Andrea Jaramillo

June 11 (Bloomberg) -- Wall Street's biggest banks are certain the Colombian peso, the world's hottest currency, will tumble for the rest of 2007 and may even erase this year's 16 percent gain.

Merrill Lynch & Co., based in New York, says the peso will be the worst performer in the foreign-exchange markets, losing all of its advance against the dollar. Frankfurt-based Deutsche Bank AG sees a 10.5 percent decline by mid-November, while Citigroup Inc. in New York expects a 8.9 percent drop by year- end and Goldman Sachs Group Inc., 6.3 percent.

President Alvaro Uribe's success in reducing terrorism, balancing the budget and selling state-owned companies has increased foreign investment threefold since 2003, driving up the peso and slowing growth in overseas sales. While a weaker currency may relieve pressure on exporters, it also would undermine central bank efforts to rein in the highest inflation rate since 2004.

``The economy is growing too fast and Uribe is now facing a choice between growth and inflation,'' said Maya Hernandez, an analyst with HSBC USA Inc. in New York. The firm forecasts the peso will weaken 8.9 percent by year-end as the trade deficit widens.

The peso's rally this year to 1,928 per dollar makes it the best performer of the 71 currencies Bloomberg tracks against the dollar. The peso fell 2 percent last week.

Murder Rate Down

Colombia's currency appreciated 47 percent the past four years as Uribe, a graduate of Harvard University in Cambridge, Massachusetts, bolstered consumer confidence and lured record investment by cutting the murder rate 40 percent and kidnappings 63 percent.

Uribe, whose father was killed by guerrillas two decades ago, also persuaded about 40,000 paramilitaries and guerrillas to put down their weapons. The 54-year-old president has survived 18 assassination attempts.

Export growth slowed to 12 percent in the first quarter from 15 percent in 2006 as the currency cut into profit margins at companies such as Flores de la Sabana SA. The Bogota-based flower company closed in April, firing 2,500 workers.

``My focus is on how to protect jobs,'' Uribe said in a June 5 interview in Bogota. For ``those activities affected by appreciation, we have designed a fiscal package to support employers and employees.''

Uribe said last month he wants to push the jobless rate below 10 percent by the end of his second term in 2010 from 11.6 percent in April. He balanced the fiscal budget in 2005 for the first time in more than a decade, the Finance Ministry said.

`Amazing Job'

``Uribe has done an amazing thing by pacifying the country and implementing reform,'' said Alberto Ramos, an economist at Goldman Sachs in New York. In a June 1 report he forecast a rate of 2,050 pesos per dollar at year-end. ``Now the economy is growing faster than it should.''

The economy expanded 6.8 percent last year, the fastest since 1978, exceeding Brazil's 3.7 percent and Mexico's 4.8 percent. Foreign direct investment grew to $16.6 billion in the two years ended 2006, more than triple the total amount for the previous two years.

Companies have been unable to meet increased demand from consumers, fueling an increase in imports and inflation. Car sales tripled and the benchmark stock index rose 10-fold in dollar terms since Uribe took office in 2002. House prices in Bogota soared 44 percent last year.

Inflation quickened to a 6.2 percent annual rate in May, almost 2 percentage points above the Banco de la Republica's target range, from 4 percent a year earlier. Price increases have accelerated even as the central bank raised the benchmark lending rate 11 times sine March, bringing it to 8.75 percent.

`Side Effects'

Colombia's current account deficit, the broadest measure of trade in goods and services, will more than double to the equivalent of 4.8 percent of gross domestic product from 2.1 percent of GDP in 2006, according to Deutsche Bank.

``When you have a good thing going, there are always side effects,'' said Greg Anderson, a currency strategist at ABN Amro Bank NV in Chicago. He predicts the peso will slide to 1,950 per dollar this week and end the year at about 1,900.

The central bank imposed currency controls last month saying investors buying local stocks and bonds will have to deposit 40 percent of their purchases with the central bank for six months to curb speculative flows into the peso. It's the second time it has tried such a measure in three years. Uribe set aside $106 million last week for subsidies and loans to exporters.

The central bank bought $4.5 billion in the currency market in the first four months of this year, more than double the amount in all of 2006, to stem the peso's climb. Foreign exchange reserves reached a record $19 billion in April.

Bear, Morgan Stanley

Currency traders Victor Manuel Velez at Banco de Occidente SA in Cali and Diego Galvan at Corredores Asociados SA in Bogota say the central bank has started to scale back dollar purchases, concerned about injecting cash into the economy and adding to inflation.

The money supply, as measured by the central bank's M2 monetary aggregate, has risen 22 percent in the past 12 months. The central bank is slated to release details on its dollar purchases from May tomorrow.

Some Wall Street firms say the peso has room to appreciate. New York-based Bear Stearns & Co. forecasts the peso will gain in coming weeks before ending the year at 1,950 per dollar. Morgan Stanley, also based in New York, predicts the currency won't begin to weaken until 2008. It forecasts a 2007 year-end rate of 1,850.

Foreign currency inflows may decline in coming months because state asset sales will slow after the government disposes of a 20 percent stake in oil company Ecopetrol SA. The sale begins in August and may raise as much as $5 billion, the most ever, the company's President Javier Gutierrez said in April.

Biggest Decline

Investment in the stock and bond markets may also weaken as rising global interest rates curb demand for emerging-market assets.

The peso had its biggest decline in two months on June 7, sliding 1.4 percent, after benchmark 10-year U.S. Treasury yields rose to the highest since July. The peso is down 3 percent from a seven-year high reached June 5.

``If the global risk appetite falls we are going to see a sharp reduction of the flows into the peso,'' said Clyde Wardle, an emerging market strategist at HSBC in New York.

LINK: http://www.bloomberg.com/apps/news?pid=20601086&sid=aNpv5PqSuaUg

By Ctg Bound on Jun 11, 2007, 05:10 in Friendly Talkzone.

Waterdawg says on Jun 11, 2007, 09:05:

Interesting read , How ever may I say ....

" The Bogota-based flower company closed in April, firing 2,500 workers. "

That is just the tip of the Huge Ass Iceberg ! If the Peso can't climb back to at least 2200/2400 by years end you are going to see all hell break loose on the streets with the unemployed ! You can take that to the bank !

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cayita says on Jun 11, 2007, 09:27:

waterdog I would argue the damage has already been done. I think those companies effected have been hit so hard and carried this strong peso for so long the effects are going to be long lasting. Of course more damage will be done if it does not turn around but it will never be the same. We will never be the same, we had to hedge against the strong peso in our business so even if it does come back that hedging will pull us to medium. Nope the central bank here screwed up in my opinion and the damage is done. To the flower industry and exporters anyway. I might even argue if the peso does drop it will be worse as we have hedged a strong peso environment. So you know if that happens... you see why only the corrupt and politicians get rich in Colombia. ;)

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goin_south says on Jun 16, 2007, 05:07:

it can't happen fast enough Voy para del Sur

Some say: All things are better in...Medellin! ....Oscar Lopez just says it's better.....LATE!!! (WHERE EVER YOU ARE)

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Janneman says on Jun 17, 2007, 03:14:

Import goods to improve Colombia Isn't this the perfect time for Colombia to import goods to improve some situations. Like a good broadband cable for Medellin, agriculture machinery, airplanes, camara's in some areas etc.
This will generate jobs, maybe one for me...

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beckloud says on Jun 17, 2007, 19:36:

Uribe is a Graduate from Harvard.?....ja,ja ja..Uribe hardly Ja,ja,ja,Uribe hardly speaks any Engligh....With the due respect, I would like to know more about Uribe`s "graduate studies in Harvard" may be he went there to try to learn some basic English,I wonder how Uribe with such a basic & garbled command of the English langauge was able to pass a TOEFL test and not to mention a GMAT test,and even less to attain an Academic Degree in Harvard. I think this claim is just cheap political propaganda.

beckloud

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goin_south says on Jun 17, 2007, 20:51:

well beckloud, I know a handfull of colombians who live here,.. stateside, who speak very good or quite good english.
But, in Colombia,... that's about the only thing I've run into: Colombians speaking garbled english, about like my spanish.
Right, miguelito?

Some say: All things are better in...Medellin! ....Oscar Lopez just says it's better.....LATE!!! (WHERE EVER YOU ARE)

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goin_south says on Jun 17, 2007, 20:55:

The good news is that someone - una colombiana - told me yesterday that the dollar was back up to around 1950 Col Pesos on Friday!

Some say: All things are better in...Medellin! ....Oscar Lopez just says it's better.....LATE!!! (WHERE EVER YOU ARE)

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juanalejo says on Jun 17, 2007, 22:38:

Uribe & Dollar Uribe not only got a Management and Administration Post-Graduate Degree from Harvard, but was also associate Professor at Oxford University. His english is not very good, I agree, but it is definitelly understandable enough to address the United Nations Assembly on a permanent basis and even interviews for the BBC. He is definitelly not trying to address the common US American citizen, as most of them can hardly even understand Australians or Scottish who happen to speak english as a first language, much less a Medellin native who speaks it as a second language.

Dollar unfortunately came back down to 1920 and exchange bureaus in Bogota will not pay more than 1800 for it. Make sure you use electronic means (i.e. credit, debit cards) to make the best of your money.

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aztec says on Jun 18, 2007, 18:46:

Uribe does hold a degree from Harvard. I certainly support him and believe he is doing a good job. However, I couldn't miss this opportunity to share a comment by a well known U.S. writer and philosopher.

" As William F. Buckley rightly instructs us, it is better to be governed by the first 2,000 names in the Boston phone book than by the faculty of Harvard University."

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BAQ says on Jun 25, 2007, 14:07:

Where is this 10% unemployment, here on the northern coast, its more like 25-30% unemployment. Yea the worst thing Colombia could have done was let the peso rise against the dollar. When you look at the number of people who have dollars vs the number who have pesos, well, you get the idea. Those INVESTMENT DOLLARS are steaming to other shores and not stopping in Colombia, as are purchases of colombias export crops and other goods.

When this thing crashes it wont be pretty, the building boom of apartments, bank loans ect will all crumble. Just wait another year and you will be able to pick up new apartments dirt cheap. Reminds me of the big boom we had in the U.S. back in the 80s, then BAM, you couldnt give property away and people were defaulting on loans right and left.

So save your dollars and wait a bit, then you can pick up a slightly used car, apartment ect at great prices.

Semper Fidelis !

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