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Colombia: grappling with a rush of greenbacks.

BOGOTA -- A massive influx of American dollars has produced a super-sized Colombian peso. But some analysts liken the effect to fast food: instant gratification yet damaging to the country's long-term economic health.

The Colombian peso has gained 11.2 percent against the American dollar this year, one of the biggest gains in Latin America. Like Colombia, Brazil, Chile and Peru are also confronting rising currencies against the dollar, although the highest appreciations are among the Asian currencies like the yen.


Although the strong peso benefits Colombians who travel abroad or those who import consumer goods and machinery, it can increase costs to business and make the nation's exports--from fresh-cut flowers to foodstuffs to textiles--more expensive and less competitive.

"Your average Colombian works in manufacturing or agriculture, and these sectors have been hit very hard," said Mauricio Cardenas, a former Colombian economic development minister who is now a senior fellow at the Brookings Institution in Washington, D.C. "The strong peso keeps unemployment high."

The jobless rate is 10.6 percent, higher than in any other country in the region, except Jamaica and Haiti. Almost one-third of job-age workers in Colombia are ranked as underemployed.

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

Better security has opened vast new areas of Colombia for oil and mineral extraction at the same time that liberalized investment laws have attracted foreign companies. All told, there has been a five-fold increase in foreign direct investment in Colombia over the past eight years. Billions more dollars in short-term portfolio capital have also flowed into the country.

This is partly the result of a struggling U.S. economy. Because of low interest rates in the United States and loose monetary policy as the Federal Reserve announced its intent to buy up to $600 billion in U.S. debt, billions of American dollars are landing in Asia, Europe and Latin America. Moreover, trade between Latin America and China is booming, with the Asian country helping to boost its exports by maintaining a weak yuan.

In March 2009, the Colombian peso was trading at 2,500 per dollar. Since then, the dollar weakened to about 1,820 and some economists say it could dip to 1,600--and stay there.

Colombia's flourishing export sectors are the hardest hit.

Asocolflores, the business group representing flower growers, says the strong peso has caused the sector's worst crisis in nearly half a century. Growing roses and carnations is labor-intensive, so when the flower export businesses must cut operating costs they are forced to cut jobs. Some 15,000 workers--about 11 percent of the total--have been laid off in the industry over the past five years.

The country's auto parts industry has experienced a drop of $275 million in exports this year, while footwear exports have declined 35 percent.

"The revaluation of the peso puts the survival of important sectors of our export economy in question," said Guillermo Perry, a former World Bank chief economist for Latin America and the Caribbean, in a column he wrote in El Tiempo, a Bogota daily.

Though critics say the government has moved too slowly; Colombian officials are now taking action to stem the peso's rise.

On Oct. 28, the Central Bank announced it will extend through March its policy of buying $20 million of currency each day. The government has also decided to maintain two dividend payments worth $1.4 billion for the state oil company Ecopetrol in foreign accounts rather than convert the funds to pesos.

"This represents a substantial alleviation in dollars in the exchange market, so there's less pressure to strengthen the peso," Finance Minister Juan Carlos Echeverry told reporters.

Echeverry has also raised the possibility of capital controls on incoming portfolio capital. But the government must walk a fine line between helping 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," said Cardenas, the former official now at Brookings. "All of this is cyclical."
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Title Annotation:OUTLOOK 2011
Author:Otis, John
Publication:Latin Trade
Geographic Code:3COLO
Date:Nov 1, 2010
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