Foreign investment: Colombia's too-mighty peso

BOGOTA, Colombia — Colombia’s transformation from pariah state in the eyes of investors to dynamic emerging market has led to a massive influx of U.S. dollars. But the flood of greenbacks is drowning some of the nation’s most important producers.

Until the Bogota government took action this month, the Colombian peso had gained nearly 13 percent against the American dollar this year and ranked as the world’s most revalued currency.

That’s good news for Colombians traveling to Disney World or for those purchasing imported refrigerators and lawn mowers, which are now cheaper. But it’s a blow to many of the country’s exporters.

True, world commodity prices remain high thus Colombia’s oil, mineral and coffee exporters are holding their own. But the strong peso makes Colombian flowers, foodstuffs, garments and other textiles more expensive abroad and less competitive. As their profits tumble, these industries are laying off thousands of workers.

“For most Colombians, the revalued peso is a bad thing,” said Mauricio Cardenas, a former economic development minister who is now a senior fellow at the Brookings Institution in Washington. “Your average Colombian works in manufacturing or agriculture and these sectors have been hit very hard. The strong peso keeps unemployment high.”

The jobless rate is 12 percent while 34 percent of working Colombians labor in the informal sector and are considered "underemployed." In a letter to government officials this month, the country’s main business associations warned that the revaluation of the peso “jeopardizes the Colombian economy’s positive outlook.”

The peso’s rally is the result of economic troubles in the United States, fiscal policies in China and an oil and mining boom at home.

As guerrilla groups retreated amid a long-running U.S.-backed military offensive, vast new areas of the countryside that were once considered no-man’s land opened up for exploration. Meanwhile liberalized investment laws and lower royalty rates attracted foreign companies.

Daily oil production is expected to jump from the current 764,000 barrels to 1.5 million barrels by 2018. Colombia is now the world’s No. 5 coal producer while overall mining exports have jumped from $5.2 billion in 2006 to $8.1 billion last year.

All told, there’s been a five-fold increase in direct foreign investment in Colombia over the past eight years. Billions more in short-term “portfolio” capital have flowed into the country. As a result, Colombia was recently included in a new economic grouping called CIVETS, an acronym for the so-called “Baby BRICs” that includes Indonesia, Vietnam, Egypt, Turkey and South Africa. (The BRICs are Brazil, Russia, India and China.)

“We are in the midst of a bonanza,” Treasury Minister Juan Carlos Echeverry told the Bogota daily El Tiempo.

The United States, by contrast, is struggling and the Fed is pumping more dollars into the economy. But due to low interest rates and better returns abroad, billions of dollars are landing in Asia and Latin America. Moreover, trade between Latin America and China is booming yet Beijing has insisted on maintaining a weak yuan.

As a result, Brazil, Chile, Costa Rica, Peru and other Latin American nations are dealing with the fallout of their suddenly strong currencies. But Colombia has been hit hardest.

The peso was trading at 2,500 per dollar in March 2009. Since then, the dollar weakened to 1,771 pesos before rebounding to the current 1,846 (as of Oct. 27). Some analysts predict the peso will soon trade at 1,600 to the dollar and stay that way for several years.

Among the most vocal critics of the super-sized peso are the nation’s flower growers. Colombia is the world’s No. 2 exporter of fresh-cut flowers. But because cultivating roses and carnations is labor-intensive, it’s hard for business owners to cut operating costs when income drops.

Richard Franklin Cruz, vice president of Asocolflores, the business group representing flower growers, blamed the strong peso for provoking the sector’s worst crisis in 45 years. Some 15,000 flower workers — about 11 percent of the total — have been laid off while another 12,000 punch the clock for companies that have filed for bankruptcy and could soon lose their jobs.

“This has been devastating,” said one flower grower.

The country’s auto parts industry has lost $275 million in export profits this year while the shoe exports have declined 35 percent. In Medellin, Colombia’s industrial hub, factory closures have put 4,000 people out of work since the start of the year, said Javier Diaz Molina, president of the National Trade Association.

Some wags comment that even the drug traffickers are complaining.

Though critics say the government has reacted too slowly. The Central Bank is now buying up dollars while Echeverry, the treasury minister, has raised the possibility of capital controls — meaning taxes — on incoming portfolio capital to restrict the inflow of greenbacks, a measure which Brazil and other countries have taken.

But officials must walk a fine line between propping up domestic producers and sending the wrong signal to foreign investors. Besides, the factors pumping up the peso may shift.

“U.S. policies will change. Commodity prices won’t stay high forever. And the peso won’t always be so strong,” Cardenas said. “All of this is cyclical.”