Miguel Urrutia Montoya: Extracts of a speech on the Colombian economy
Extracts of a speech by Dr Miguel Urrutia Montoya, Governor of Banco de la República (Bank of the
Republic), at the III Commission of the Senate of the Republic of Colombia, Bogotá, 24 August 2004.
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•
Colombian peso appraised 10,8% against the dollar in February of 2003 and on August 17 of
2004. Real exchange rate index has been revaluated 5,7% and it is calculated that at
present it has a level similar to the one observed in October of 2002.
•
Appraisal (nominal and real) of the peso is explained by external and internal factors and by
a partial revision of an "excessive" devaluation between May of 2002 and February of 2003.
•
The devaluation of the peso during the second semester of 2002 and the first two months of
2003 was excessive in relation to the performance of fundamental determinants of the
exchange rate due to two facts:
1. As with other currencies in Latin America, the peso started its devaluation starting on
May of 2002 following the strong devaluation of Brazilian real currency and the
increment in the "spreads" of public external debt of the countries of the region. As the
doubts of the markets regarding Brazil's economic politic resulted baseless, including
the fear of the "infection" effect, the real as well as a good part of the currencies of
Latin American economies began to appreciate in front of the dollar. In Colombia and
Chile the appraisal was at first moderate and in Argentina, Brazil and Mexico it was
strong.
2. The devaluation in Colombia during the second semester of 2002 came along, with a
residue, of acceleration in the inflation. This increase in the inflation contributed to the
non-compliance of inflation target set for the year 2002 and made it mandatory that
during the first quarter of the year 2003 the Board of Directors of the Banco de la
República (JDBR) had to intervene the exchange market and elevate intervention
interest rates in 100 basic points on two occasions. The target of this measure was to
stabilize exchange rate and control inflation expectative, objectives that were achieved
in a gradual manner but that did not avoid that in the year 2003, inflation target could
not be met for a second consecutive year.
•
Due to the fact that the devaluation described was originated partially in a baseless fear and
was translated into an inflation rate and expectative incompatible with target compliance,
devaluation during the second semester of the year 2002 and two first months of the year
2003 was unsustainable. Even more, though the appraisal of the peso in front of the dollar
was not much until November of 2003, in part the appraisal of the peso at the end of that
year and beginning of 2004 corresponds to the adjustment described in exchange rate.
•
The external factors that have influenced in great manner the appraisal of the peso has its
origins in the unbalanced and economic politics of the United States of America, in the
higher dynamism of worldwide economy and the recovery of Colombian exportations to
Venezuela. Also, for the fifth consecutive year, in 2003 the remittance of Colombians
increased and during 2004 a significant increment in dollars in cash entrance has been had.
• Low interests rates and a strong unbalance in payment balance drawing account of the
United States of America are an incentive for international investors to invest their capitals in
countries with higher interests rates and diversify the currencies of their portfolio.
•
The higher growth in worldwide economy increases the demand of the goods exported by
emerging countries, including Colombia, and raises international prices of their basic
products. This has occurred with a great force in 2004.
•
Between December of 2003 and May of 2004, Colombian exportations to Venezuela have
increased in relation to the same period of the year before, US$ 220 millions (m). This is
equivalent to an increment of 114%. Also, in the lapse of the year 2004 an increment in
dollars in cash entrance has occurred. These two factors contribute to explain the
intensification of the peso revaluation process in the time elapsed during this year.
•
The internal factors that have contributed a great deal to peso appraisal are the betterment
of national and international investors confidence level and the central government deficit
and its financing.
•
Confidence incentives the inversion and consumption facilitates economy growth and
attracts capitals from foreign countries of Colombians as well as foreigners.
•
There are two channels by which the government deficit tends to appraise exchange rate.
The first an obvious one is financing. Part of government deficit financing comes from
external credit that appraises local currency. On the other hand high deficits elevate internal
indebtedness costs of the government and open external and internal differential rates in
favor of inversions of national public debt titles.
•
Up to July of 2004, Colombian exchange market has presented a dollar offer excess for an
amount of US$ 1.400 m, in which the net demand of dollars by the Banco de la República
has been of US$ 900 m, that of the government of US$ 407 m and of the financial system of
US$ 141 m. Additionally during this month of August, the Banco de la República has bought
currency for an amount of US$ 200 m.
•
The appraisal of the peso that started on the second semester of 2003 and specially and
with great force during the period of 2004 that has elapsed, is the result of three types of
factors: i) a natural consequence of an economy that is strengthening and has an important
betterment in terms of exchange, ii) the counterpart of the tendency of dollar devaluation in
front of other currencies due to very low interests rates and the strong macroeconomic
unbalances in the United States of America and iii) the limited action margin that economic
politics (monetary and fiscal) has for offsetting in a sustained manner the forces towards the
appraisal.
•
The JDBR has moved its politics movements in order to avoid an excessive appraisal of the
peso that may compromise the future of commercial goods productions sector (exportations
and importations). Also he has taken advantage of the tendency of the exchange market for
consolidating the position of international liquidity of the country and thus reducing the
vulnerability of the economy if there are future external impacts and thus diminishing external
public debt cost. In this manner a reversion of the factors that today explain peso revaluation
and that generate a macroeconomic instability that would result costly in terms of production,
employment and inflation, are avoided. Measures taken by the JDBR are the following:
• First, the Banco de la República has purchased US$ 1.400 m between December of
2003 and the time elapsed during this year 2004, taking care that the resulting effect
of monetary expansion will not compromise the compliance of inflation targets.
• Second, it has maintained low intervention interests rates, reducing them in two
opportunities during this year for a total amount of 50 basic points and leaving them
stable while Federal Reserve incremented them.
•
Third, it has taken measures that although did not have as a target, an exchange
target, it incremented dollar demand or reduced it in some manner. In the first
direction is the prohibition to financing intermediaries to maintain a negative cash
position and the second the prohibition to travel to foreign countries with more than
US$ 10.000 in cash. Also, the Banco de la República decided not to render the
service of cash currency of foreign exchange consignments to intermediaries in
exchange market.
•
Marginal diminishments on interests' rates of the Banco de la República in order to revert
revaluation pressures would be ineffective. Higher reductions would have a significant effect
over inflation.
•
Massive reserves purchase may conduct to inflation acceleration or to that Banco de la
República may suffer losses, if these are sterilized, this will worsen the fiscal situation.