COLOMBIA INTRODUCES CAPITAL CONTROLS AS PESO CLIMBS IN VALUE.
The government of Colombian President Alvaro Uribe has introduced measures to control capital flight and slow the rapid appreciation of the peso relative to the US dollar. As Colombia's peso reached highs that it had not seen in years, exporters and manufacturers sought relief from the government. On May 24, Uribe's economy team set requirements on investors to deposit 40% of their purchases with the Banco de la Republica, the country's central bank, for six months. The move did not reverse the peso's upward climb, although it seemed to briefly slow its growth somewhat. Economic growth estimates for 2007 are now around 6%.
Investors required to deposit in Banco Central
Finance Minister Oscar Ivan Zuluaga said the 40% deposits with the central bank would not earn interest and investors could avoid the forced deposit by paying a 9.4% fee. The controls were imposed by presidential decree.
"The Colombian government is committed to stemming the entrance of short-term capital because Colombia, along with Brazil, has the most appreciated currency in Latin America," Zuluaga said. He said the steps "won't affect at all flows of foreign direct investment (FDI)."
The announcement came one day after Uribe called for further measures to "control capital that comes into the country to make a short-term profit," seeking to curb a rally that is eroding exporters' profitability.
The central bank on May 6 imposed lending limits to curb inflation and prevent the peso from strengthening further. It ordered companies and investors taking loans abroad to deposit 40% of the amount with the bank for six months in a bid to reduce "the incentive to bring in short-term capital as interest rates rise."
"The measure should be a short-term palliative that will slow down the speed of appreciation of the currency, but not powerful enough to reverse the appreciation trend," Goldman Sachs analyst Alberto Ramos said in a research note the day the controls were set in place.
On May 18, policymakers had raised the overnight lending rate to 8.75%, the highest since November 2001, in another effort to blunt inflation. The bank has raised the rate 11 times since April 2006 from a three-year low of 6% as it sought to bring inflation within the target range. By June 15, policymakers had raised the rate to 9%.
Speculative capital, known in Spanish as "golondrina" (swallow) capital because it comes and goes like the bird, can wreak havoc on small economic powers like those of Latin...
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