The price of the dollar is one of the thermometers of the economy. Their movements are followed with expectation because they reflect international and local tensions, market concerns and even the stability of public finances.
The arrival of Gustavo Petro’s Government, announcements about the decision not to deliver more oil and gas exploration contracts, and the proposed reforms, to which was added the strength of the dollar in the world, meant that in November 2022 the price of the currency in the country will exceed the barrier of 5,000 pesos. But after hitting that ceiling, the dollar has been correcting its value and in 2023 it fell almost 1,000 pesos, closing the year at 3,822 pesos, after having started at 4,810. “The institutional counterweights moderated fears about the approval of the economic reforms proposed by the Government of Gustavo Petro and contributed to closing most of the punishment to the Colombian peso that was opened since mid-2022. The regional elections of October 29 ratified this perspective,” says a study by Corficolombiana.
And there was a perfect cocktail that contributed to the fall in the exchange rate: the entry of foreign currency to honor the payment of taxes and the distribution of dividends from the oil sector after the good results of 2022, a boom in remittances arriving in the country, the Government’s budget execution below expectations and the expectations of international markets that have shown the fragility of the dollar against other hard currencies.
In recent days, the dollar has been below 4,000 pesos, although it has recovered value and the outlook is still uncertain. And it will move in scenarios where different factors may agitate it: the future of global inflation – pressured by conflicts and impacts on trade – and the decisions of central banks, where there is expectation for an eventual resumption of increases in interest rates and greater caution against cuts.
The price of the dollar represents, depending on its movements, joyful ones for some and painful ones for others.
An expensive dollar favors exporters, who will receive more pesos for their operations abroad. But after a fall of close to 20 percent in the last year, which meant the rebound of the peso, the debate was reopened by Augusto Solano, president of Asocolflores. He highlighted that this revaluation would be explained by the fall in imports, greater remittances, capital flows due to high interest rates and, mainly, the weakness of the dollar in international markets. He also warned that it is worrying that the increase in illicit crops could be causing an immense supply of currency.
“Defining the appropriate level of the exchange rate to have a dynamic economy is not easy. However, a competitive figure, which at this time could be around 4,500 pesos per dollar, would not only encourage exports, but is the most effective tariff on imports of cheap products that compete with national production,” Solano stated.
The price of the dollar has advantages and disadvantages for the country.
However, the benefits of a falling dollar have recently led to one of the most anticipated effects on the national economy: the reduction of inflation, especially food inflation, which even in December was negative.
Felipe Campos, Investment and Strategy Manager of Alianza Valores y Fiduciaria, reiterated that with the movements of the dollar there are always winners and losers. “But on a net basis, there are more winners when the dollar goes down. The consumer (representing 75 percent of GDP) benefits from lower prices of imported products and raw materials, inflation decreases and rates can be lowered to stimulate the economy. Debts in dollars of the public and private sectors are reduced, raw materials and international trade are stimulated, since when traded in dollars they become less expensive, and short and long-term international investment returns because it does not fear devaluation. Technology imports become cheaper and in weak dollar cycles the country ends up growing above 4 percent. The losers are the short-term flows of the Government (although in the long term the total debt decreases and rates go down) and, of course, the exporters. Now, if an exporter cannot survive with a dollar above 3,500, which was already high before the pandemic, then the problem is not on the couch,” Campos said in a trill.
For his part, Javier Díaz, president of Analdex, summed it up like this: “Man does not live by bread alone. And I believe that exporters do not live off the dollar alone. Experience shows us that your business cannot depend on the price of the dollar. They have to be competitive and make the country competitive too.” He is concerned about the setback in logistics due to the increase in costs and the problems in Dian’s foreign trade platforms. “If the dollar is above 4,000 pesos, we should consider ourselves well served,” said Díaz.
What should be the ideal price of the dollar? For the financial superintendent, César Ferrari, it is a very difficult question to answer. “Without precise knowledge of the inflows and outflows of dollars, it cannot be answered. What can be said is that it should be high enough to enable new exports and fewer imports. But it should be relatively stable so that both can develop their cash flows. In both cases it requires decisive and sufficient intervention from the monetary authority.”
The impact of the dollar is reflected on other fronts, such as fiscal accounts. According to Andrés Velasco, technical director of the Autonomous Committee of the Fiscal Rule, the estimate is that 100 pesos of less average exchange rate in the year “has a net effect on the balance of approximately 230,000 million pesos, of more deficit.” And he explained it: “This would be the result of lower income of 1.1 trillion pesos, which would be, in part, offset by lower interest payments of 900,000 million pesos.” He added that these lower incomes are due to two thirds corresponding to external VAT and tariffs and one third to retefuente, mainly from oil revenues.
In turn, one of the sectors sensitive to the greenback is oil. At the time, Acipet, the Association of Petroleum Engineers, took the data from the 2023 Medium-Term Fiscal Framework, which they calculated in the Ministry of Finance, and in which they estimated a value for the Brent reference of 78.6 dollars per barrel for 2023 and 74.5 dollars for 2024. But in reality this was 90 dollars, so they projected the increase in additional income. The calculation showed that by 2023 Colombia would receive an additional 15 percent of income for each barrel exported and by 2024 it would be 21 percent if the export volume remained at 14.4 million barrels per month, according to Dane figures in August 2023. But the price of Brent oil is no longer $90 and today it is trading at $75.96, a decrease of $14 for each barrel.
“Assuming that the volume of exports is maintained, the additional percentage of income for 2024, compared to what was budgeted in the Medium-Term Fiscal Framework, would only be 2 percent,” says Acipet. He adds that, if the criterion of the effect of the fall in the price of the dollar is added to the analysis, it would be assumed that the Medium Term Fiscal Framework will be affected, “since by monetizing the dollars received as a result of the export of crude oil, at a lower representative market rate –as is the current case–, the consequence is that the State will receive a smaller amount of pesos.”
On the tourism side, expectations are favorable, international travelers show an important performance. According to Anato, 51 percent more passengers were mobilized in November 2023 compared to the same month in 2019 (before the pandemic). And between January and November of last year, nearly 17.7 million traveled on international flights, which is equivalent to 29 percent higher than what was revealed in the same period in 2022.
According to a report by Corficolombiana, a depreciation of one percentage point in the exchange rate increases, on average, by 0.5 percentage points the flow of foreign passengers entering Colombia in the same month and two months later. Thus, it estimates that the flow of travelers entering the country will register an annual growth of 17 percent in 2023 and a contraction of 3 percent in 2024. But the firm considers that this appears to be a transitory effect caused by the behavior of the rate. exchange.
And for Colombian travelers going abroad, a cheap dollar helps in their equation. In fact, it is a market that is also growing: according to Anato, at the end of 2023, 5,174,032 Colombians left the country, which meant an increase of 5 percent compared to 2022.