José Dario Uribe: The Colombian monetary and exchange regime under
stress
Speech by Mr José Dario Uribe, Governor of the Central Bank of Colombia, at the Money
and Banking Conference "Lessons and Challenges for Emerging Countries during the
Crisis", Central Bank of Argentina, Buenos Aires, 31 August 2009.
* * *
Let me first thank BCRA for organizing this very interesting seminar and for inviting us to
share our experience in these turbulent times. The mere comparison of the shocks our
economies have undergone and our policy reactions, let alone the insights of the
distinguished economists who join us in this timely event, is of great value for our future
policy making.
After the Lehman Brothers bankruptcy in September 2008, the Colombian financial and
foreign exchange markets came under stress. However, the outcome of the shock was less
severe than for other countries in the region. In what follows, I will briefly describe the
macroeconomic context in which the shock occurred, the effects of the shock and the policy
response by Banco de la Republica. While doing so, I will advance some reasons for the
relatively low impact of the shock on Colombia. Most of them are related to the prevailing
regulatory framework.
By the third quarter of 2008, the Colombian economy was experiencing a deceleration of
growth. Consumption growth was weakening as a result of the previous tight monetary policy
and the effect of the relative price increases of raw materials and foodstuffs on costs and real
household income. Public investment fell drastically due to delays in public works programs.
Nevertheless, according to our estimates, there still remained a positive output gap inherited
from several years of strong aggregate demand growth.
As another consequence of the relative price shocks, inflation was moving well above its
target range for the year (3.5%-4.5%). At the same time, inflation expectations started to rise
which threatened to permanently unleash inflation. Hence, policy was further tightened in
July. The sharp appreciation of the currency observed in the first half of the year was
correcting itself possibly due to changing global risk perceptions and the daily purchases of
fixed amounts of dollars by Banco de la Republica in the foreign exchange market.
Immediately after the Lehman failure, the Colombian sovereign risk premium jumped around
500 bps, an increase similar to the one which occurred in other countries (Charts 1 and 2).
The currency moved along, depreciating by 15% between September 12th and October 29th.
Again, this reaction was comparable to the behavior of other currencies in the region.
Domestic public bond interest rates also rose after the shock and the zero coupon curve
became steeper as in other economies in the region (Charts 4 and 5). Thus, the heightened
risk aversion after the shock produced the usual reaction on the foreign exchange and local
bond markets.
COLOMBIA - RISK PREMIA
800
700
600
500
400
Bps
300
200
100
0
04/07/08 09/07/08 14/07/08 19/07/08 24/07/08 29/07/08 03/08/08 08/08/08 13/08/08 18/08/08 23/08/08 28/08/08 02/09/08 07/09/08 12/09/08 17/09/08 22/09/08 27/09/08 02/10/08 07/10/08 12/10/08 17/10/08 22/10/08 27/10/08 01/11/08 06/11/08 11/11/08 16/11/08 21/11/08 26/11/08 01/12/08 06/12/08 11/12/08 16/12/08 21/12/08 26/12/08 31/12/08
CDS 1 YEAR CDS 5 YEARS CDS 10 YEARS EMBI
Chart 2
EMBI - SELECTED COUNTRIES
800
700
600
COLOMBIA
500
PERU
400
Bps.
MEXICO
BRAZIL
300
CHILE*
200
100
0
01/06/08 15/06/08 29/06/08 13/07/08 27/07/08 10/08/08 24/08/08 07/09/08 21/09/08 05/10/08 19/10/08 02/11/08 16/11/08 30/11/08 14/12/08 28/12/08
NOMINAL EXCHANGE INDEX Sept. 12/08 = 100
150
140
130
120
110
100
90
12/09/08 17/09/08 22/09/08 27/09/08 02/10/08 07/10/08 12/10/08 17/10/08 22/10/08 27/10/08 01/11/08 06/11/08 11/11/08 16/11/08 21/11/08 26/11/08 01/12/08 06/12/08 11/12/08 16/12/08 21/12/08 26/12/08 31/12/08
COLOMBIA MEXICO CHILE PERU BRAZIL
Chart 4
Colombian Government Local Bond Zero-Coupon Rates
July 2008- December 2008
15%
1 Year 5 Years 10 Years
14%
13%
12%
11%
10%
9%
8%
01/Jul/2008 16/Jul/2008 31/Jul/2008
14/Oct/2008 29/Oct/2008 13/Dic/2008 28/Dic/2008
15/Ago/2008 30/Ago/2008 14/Sep/2008 29/Sep/2008 13/Nov/2008 28/Nov/2008
BIS Review 102/2009 3
10 Year Government Bond Zero Coupon Rates
Latin America*
21%
19%
17%
15%
13%
11%
9%
7%
01-Jul-08 16-Jul-08 31-Jul-08
13-Dic-08 28-Dic-08
14-Oct-08 29-Oct-08
15-Ago-08 30-Ago-08 14-Sep-08 29-Sep-08 13-Nov-08 28-Nov-08
Brazil Mexico Colombia Peru
years for Brazil
F*7.25 t Bl b SEN
However, the shock had more widespread consequences. As key markets in the U.S. were
closed (e.g. the short term commercial paper and the ABS markets), short term external
funding for emerging markets was severely hampered. Those countries in which the financial
system depended significantly on foreign financing suffered stress in both the foreign
exchange and the local short term lending markets as banks and other institutions scrambled
to close their foreign currency liquidity gaps.
However, this was not the case for Colombia, where regulation prevented local banks from
being exposed to maturity mismatches between currency and foreign currency. It also
restricted their non-derivative net foreign asset position to be positive which effectively
inhibited the existence of a foreign currency interbank loan market.
In other countries, pressures on the foreign exchange market and financial stability emerged
from two things: the exposure of the corporate sector to currency risk and the realization of
huge losses after the depreciation of the local currencies against the US dollar. Again, this
was not the case of Colombia where capital controls and exchange rate volatility limited the
corporate sector's external indebtedness. At the same time, regulation limited the gross
foreign exchange derivative position of banks to five times their net worth or less. This was
established to curb bank counterparty risk in a period in which there were large speculative
and arbitrage positions against the dollar and had the effect of restricting the currency
exposure of the corporate sector.
As a result, the impact of the Lehman shock on the Colombian foreign exchange and short
term markets was smaller than it was in other countries. The Colombian peso depreciated
less than other currencies in the region during the fourth quarter of 2008 (Chart 1) while
Banco de la República's intervention in the foreign exchange market to support the currency
was far lower than elsewhere (Table 1). The interbank overnight interest rates remained
close to the policy rate. The spread between the short term deposit interest rates and the
policy rate did not increase and financial system deposits continued to grow faster than GDP
(Charts 6, 7 and 8).
Table 1
FX Intervention II Semester 2008 (US$ Million)
Supporting the Local
Total
Supporting the Dollar
Currency
1.347 -235 1.112
Colombia
Chile* 3.050 -969 2.081
-15.178 -15.178
México**
Perú -5.810 -5.810
Brazil 5.343 -25.967 -20.624
*The "sales" of the second semester correspond to the outstanding value of the swaps by the end of the year.
** By December 11th 2008 the Central Bank had purchased US$ 22.629 million from PEMEX.
Chart 6
Spread between the Interbank Overnight Rate and the Policy Rate
2008
20
-
-20
-40
Points
Basis
-60
-80
-100
02-Jul-08
02-Dic-08
02-Abr-08 02-Jun-08 02-Oct-08
02-Ene-08 02-Feb-08 02-Mar-08 02-Ago-08 02-Sep-08 02-Nov-08
02-May-08
Chart 7
Spread between the Average Deposit Interest Rate and the Policy Rate
2008
-140
-160
-180
-200
Points
-220
Basis
-240
-260
-280
-300
04-Jul-08 18-Jul-08
05-Dic-08 19-Dic-08
11-Abr-08 25-Abr-08 06-Jun-08 20-Jun-08 10-Oct-08 24-Oct-08 07-Nov-08 21-Nov-08
01-Feb-08 15-Feb-08 29-Feb-08 14-Mar-08 28-Mar-08
04-Ene-08 18-Ene-08 01-Ago-08 15-Ago-08 29-Ago-08 12-Sep-08 26-Sep-08
09-May-08 23-May-08
Chart 8
Deposit Real Growth Rates
Real Growth of the Deposits in the Financial System *
17,0%
16,0%
15,0%
14,0%
13,0%
12,0%
11,0%
10,0%
9,0%
8,0%
7,0%
20080104 20080125 20080215 20080307 20080328 20080418 20080509 20080530 20080620 20080711 20080801 20080822 20080912 20081003 20081024 20081114 20081205 20081226
* Deflated by CPI ex - food
Credit growth remained strong even for foreign-owned banks (Chart 9), which work as
subsidiaries in Colombia and are subject to the same regulatory framework as domestic
banks. However, lending interest rate spreads did rise in October 2008 thus reflecting a
larger risk premium, especially for prime and corporate treasury loans (Chart 10). Our
financial system survey showed tightening local credit conditions in the fourth quarter (Chart
11) and both firms and banks reported anecdotal evidence regarding more expensive credit
with shorter maturities. Interestingly, throughout 2009 the behavior of foreign and domestic
banks in the local loan market has diverged. Foreign banks have drastically cut their
exposure to consumer credit while domestic banks have kept high rates of growth of loans
(Chart 9).
At the same time the external credit lines available to the Colombian Banks were reduced
and their cost raised (Chart 12). Nonetheless, the use of those lines remained below the
approved amounts and declined along with them (Chart 13). This reflected, among other
things, a dramatic fall in the demand for funding linked to international trade (Chart 14).
Chart 9
Real Growth of the Colombian Financial System Loans
25,0%
20,0%
15,0%
% 10,0%
5,0%
0,0%
-5,0%
4/01/2008 4/02/2008 4/03/2008 4/04/2008 4/05/2008 4/06/2008 4/07/2008 4/08/2008 4/09/2008 4/10/2008 4/11/2008 4/12/2008 4/01/2009 4/02/2009 4/03/2009 4/04/2009 4/05/2009 4/06/2009 4/07/2009 4/08/2009
Local Banks Foreign Banks Total
* Deflated by CPI ex - food
Lending-Deposit Interest Rate Spreads
2008
900
850
800
750
Points
700
Basis
650
600
550
500
04-Jul-08 18-Jul-08
05-Dic-08 19-Dic-08
11-Abr-08 25-Abr-08 06-Jun-08 20-Jun-08 10-Oct-08 24-Oct-08 07-Nov-08 21-Nov-08
04-Ene-08 18-Ene-08 01-Feb-08 15-Feb-08 29-Feb-08 14-Mar-08 28-Mar-08 01-Ago-08 15-Ago-08 29-Ago-08 12-Sep-08 26-Sep-08
09-May-08 23-May-08
Average Lending Rate - Deposit Rate Corporate Treasury Rate - Deposit Rate
Prime Lending Rate - Deposit Rate
Chart 11
Observed and Expected Tightening of Requirements for New Bank
Commercial Loans Approval (Survey)
(% of Respondents)
80,0%
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
Jul-08 Jul-09
Abr-08 Jun-08 Sep-08 Oct-08 Dic-08 Ene-09 Feb-09 Abr-09 Jun-09 Sep-09
Ago-08 Nov-08 Ago-09
Mar-09
May-08 May-09
Observed Expected (previous quarter survey)
External Indebtedness through the Financial System: Stock and interest Rate
3.500,0 6,50
3.300,0
6,00
3.100,0
5,50
2.900,0
5,00
2.700,0
(%)
Million)
4,50
Rate
2.500,0
(US$
4,00
Stock
Interest
2.300,0
3,50
2.100,0
3,00
1.900,0
2,50
1.700,0
1.500,0 2,00
Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov Dic Ene Feb Mar Abr May Jun
2008 2009
Stock Interest Rate
Chart 13
External Credit Lines of the Colombian Financial System
Approved Amounts and Use
9.000
8.000
7.000
6.000
Million
5.000
US$
4.000
3.000
2.000
1.000
Jul Jul
Ene Feb Abr Jun Sep Oct Dic Ene Feb Abr Jun Sep Oct Dic Ene Feb Abr Jun
Ago Nov Ago Nov
Mar Mar Mar
May May May
2007 2008 2009
Approved Amount Use (Stock)
BIS Review 102/2009 9
Total Trade (X+M) Subject to Foreign Finance and External Indebtedness through
the Financial System (US$ Million)
5.000 3.500,0
4.800 3.300,0
4.600 3.100,0
ess
n
4.400 2.900,0
ted
4.200 2.700,0
e
eb
d
4.000 2.500,0
rad
In
T
3.800 2.300,0
al
3.600 2.100,0
xtern
E
3.400 1.900,0
3.200 1.700,0
3.000 1.500,0
2007-01 2007-02 2007-03 2007-04 2007-05 2007-06 2007-07 2007-08 2007-09 2007-10 2007-11 2007-12 2008-01 2008-02 2008-03 2008-04 2008-05 2008-06 2008-07 2008-08 2008-09 2008-10 2008-11 2008-12 2009-01 2009-02 2009-03 2009-04 2009-05 2009-06
Trade External Indebtedness
Meanwhile, the global economy slumped, terms of trade dropped and the external demand
for Colombian products slowed down. Consumer and business confidence indicators
collapsed thus driving domestic spending down. Policy makers were then left facing the
dilemma of high and increasing inflation on the one hand and a growing deterioration of both
the external and domestic economic outlook on the other. Thus, while the picture became
clearer, monetary authorities started to relax policy gradually. Capital controls were lifted in
October and domestic reserve requirements were reduced in November. Liquidity provision
was increased substantially as reflected by the negative and decreasing spread between the
overnight interbank interest rate and the policy rate as the end of the year approached (Chart
6). Finally, policy rates were lowered by 50 bps in December, the first such move among
emerging economies. A rapid sequence of cuts ensued, dropping the policy rate from 10% in
November 2008 to 4.5% in June 2009.
A key component of the policy reaction was the flexibility of the exchange rate. This was
possible because currency mismatches were small and inflation expectations remained
partially anchored despite the large shocks to the price of food, energy and raw materials.
Exchange rate flexibility was fundamental in many senses. First, it enabled us to avoid the
need to follow the pro-cyclical monetary policies of the past. Second, it worked as an
absorber of the shocks hitting the current account of the balance of payments (terms of trade,
export demand and workers' remittances). And third, it prevented dollar demand pressures
that liquidity-thirsty global financial institutions would have exerted under a peg regime.
In summary, in the last quarter of 2008 our economies underwent a rapid transition from a
supply shock situation to a global financial crisis and a world recession. My take from the
Colombian experience is that, as a regime, the inflation targeting framework with financial
stability complements has fared well and done the best possible job of withstanding the
storm. This was mostly due to the fact that the financial stability measures taken before the
crisis, when the economy was booming, enabled us to avoid large mismatches and to
moderate leverage. The results were:
- The financial system was strong enough to absorb a large external shock and policy
makers could focus on dealing with its macroeconomic consequences.
- The regime was flexible enough to accommodate a gradual path of disinflation under
a preannounced path after the relative price shocks pushed inflation far above target.
- At the same time, this flexibility allowed the central bank to maintain the liquidity of the
financial system in a period of stress.
Our challenge ahead consists of carefully examining our financial regulatory framework to
shore up some aspects such as countercyclical provisioning and bank capital requirements.
Simultaneously, we must strive to enhance financial deepening and enlarge the set of
financial instruments available to Colombian firms and households. However, we must do so
without significantly increasing systemic risk or depriving policymakers of the tools they need
to face shocks. In such a task, difficult tradeoffs must be made, most importantly, perhaps,
the one between the financial integration of the Colombian economy and the scope for
systemic risk and macroeconomic management.