Colombian peso to stay weak as fiscal risks linger – CE

The mass protests against austerity have increased the risks around Colombia’s fiscal position. Economists at Capital Economics think that local financial markets and the currency will remain on the backfoot in the coming quarters.

Protests against tax hikes make it very difficult for the government to pursue fiscal reforms

“The ongoing demonstrations have caused President Duque to scrap a tax reform bill. The move caused a sell-off in local financial markets (although they have since pared some of the losses). This continues a broader trend of underperformance in Colombian financial assets and the currency as fiscal risks have intensified.”

“Concerns about Colombia’s public finances will probably linger given the backlash against austerity, as well as the threat of a lurch to the left in next year’s elections. The key issue is that, in the absence of fiscal consolidation, Colombia’s public debt-to-GDP ratio is unlikely to decline as the current government and investors would want.”

“While a lot of bad news is now priced in to Colombian financial assets, we see little scope for a sustained rebound. We now think that the peso will end the year close to its current level of 3,800/$. We expect it to weaken even further to 4,000/$ next year as fiscal risks stay high and oil prices fall.”