Petro effect? The dollar in Colombia is in the middle of the perfect storm, this could happen

So far this week, volatility has been the norm in the dollar market, with the peso weakening 5.75 percent.

To the uncertainty created by the economic plan of the Petro government, many international factors were added that put pressure on the national currency, as well as its emerging counterparts. One is the fear of a possible recession in the developed world.

In general, inflation continues and interest rate hikes by the Federal Reserve increase the threats, mainly, that the United States is facing a recession, IMF Managing Director Kristalina Georgieva said a few days ago.

Immediately, the dollar receives all these messages and in the market the currency begins to move.

A cocktail with a political flavor

This international context is crucial, however In Colombia, there was a feeling of devaluation more than in the neighborhood and this was attributed to the political issue.

In addition, a report by Banco de Bogotá indicates that the 5-year Colombia Credit Risk Swap (CDS), a measure of state risk, has also maintained an upward trend this year, which increased after last Sunday’s election, at a current price of 278 basis points, to reach the new maximum for the year (the higher this number indicates the greater the risk). “This movement picks up on the political noise because of the elections, but it is also allied with the movement in the region. Although the magnitude of the increase in the Colombian case is larger”, I repeat in Banco de Bogota.

Oil never loses weight

In addition, the future of oil activity creates pressure on the dollar’s price. Given that crude oil is the largest source of foreign exchange in the country, and with less exploration and exports, fewer dollars will come in. This is even more serious if one takes into account that Colombia has a very negative index in its external accounts, known as the current account deficit. This indicates that there are more currencies leaving the country (due to debt repayments or imports) than those entering for any reason (exports, remittances, foreign investment, etc.) and this deficit is close to 6 percent of GDP, which is a high level compared to the average Latin America at 1.1 percent.

But if investors…

The advantage that Colombia had is that it was able to finance its deficit by entering foreign direct investmentonly in the first quarter of this year it was $5,186 million, but the problem is that most of this money comes to mining and energy activities and if this industry fades, that investment will not come back up, and also hit the rate of change.

Petro effect?

Since the election campaign was in full swing, analysts were already anticipating a strong but short-lived reaction to the electoral event.

Despite the fact that after the results that gave Gustavo Petro the victory, many sectors met with the elected president and removed doubts about what would happen, the level of uncertainty persists, but is more moderate. In fact, no scenario is completely excluded. All experts talk about the need to clarify who will take the public finance portfolio.

however, What could challenge the dollar the most is the global recession, Which, if produced, would raise the currency to a ceiling of 4,200 pesos. For market analysts at Alianza Valores, it will be “a temporary move as always in recessions.”

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