Last week I talked about the long-term vision that is showing the Colombian government of Alvaro Uribe, when came the news that Colombia was making sure the electricity supply until 2018, having tendered the construction of power plants, to increase generation capacity by 3,500 megawatts. And while enjoying a good momentum of economic growth, with an expected rate of 5.5% in 2008, one issue of concern not because of its implications in themselves but just because it has. And that problem is the subject of inflation. Although inflation is concerned, the fact that forces a restrictive monetary policy, even more concerned. In fact, last Friday, the Central Bank decided to keep its benchmark rate unchanged at 9.75%, a level undoubtedly high.
But the market already discounted the rate would at least hold steady, while some had bet on an increase in rate by a quarter point. As reflected in a note Colombian Site “la-republica.com.co” the fact that the Central Bank has held rates, some analysts, is a positive sign that inflationary pressures are calming down, while for others it is a sign weakness of the monetary authority to the inflation will increase inflation expectations in the future, forcing the increase in the benchmark rate. While the differential between the benchmark rate of the Bank of the Republic and the Fed is high, it has not produced a hit from the outside through speculative capital inflows that could have affected the exchange rate. However, this rate differential, to be used by Colombians themselves entering currency from abroad, has affected the price of the Colombian peso. The truth is that expectations about the future evolution of the benchmark rate, forcing the Colombian peso to the assessment and this impacts on the competitiveness of the economy. The appreciation of the exchange rate also could adversely affect the entry of foreign direct investment (FDI), if it considers that the Colombian peso appreciated is excessively, and thus expect a reversal in behavior that would affect the expected return on investment measures dollars. There is a positive aspect of the appreciation in an economy that is growing apace as the Colombian and lies in the fact observed an increase in capital goods imports cheaper for the strengthening currency.
According to the latest report by the DANE (National Administrative Department of Statistics), the Colombian peso appreciated in conjunction with the extension of the Plan Vallejo to the service sector (eliminating the tariff on imports of capital goods used in providing services exports). These two factors contributed to imports of capital goods recorded an increase in the January-April period, from 24.5% in annual terms. As is reflected in the Colombian site portfolio.com.co in a note, clearly the increase in imports of capital goods improves the competitiveness of Colombian companies. So one might think that what is being lost competitiveness due to the appreciation of the exchange rate is compensated (at least partially) with improved productivity by incorporating technology. What the investor can expect in this context? While currency appreciation works against the investor perspective, to keep under control the inflationary dynamics, there are multiple opportunities for profitability in the Colombian economy. Colombia is conducting an active policy of external openness by trade agreements. It is also encouraging foreign investment in various productive sectors but with particular focus on the energy sector (here it is worth remembering also bidding for oil exploration areas.) Thus, the prospects for profitable investments in Colombia, are positive, and are linked to economic growth quite possibly has the country in the coming years.