Bogotá — The depreciation of the Colombian peso is causing concern across the country, with the US dollar hitting historic highs week after week, and with the Colombian peso having hit 4,627 to the dollar this week, its highest rate of exchange ever, while uncertainty surrounds when the dollar’s rise might wane given the concerns of a possible global recession.
A report this week by the Latin American Reserve Fund (FLAR), a Bogotá-based entity created in 1978 as a regional financing mechanism in response to the needs of Bolivia, Colombia, Ecuador, Perú, Venezuela, Costa Rica, Paraguay and Uruguay concludes that non-financial companies in Latin America have very high indebtedness in dollars, and which is also a cause for concern.
“The research points out the high levels of indebtedness in dollars of non-financial companies in Latin America, as well as the evolution of some of their financial indices that, analyzed as a whole, offer some warning signs for the macroeconomic and financial stability of the region,” FLAR’s executive president José Darío Uribe, who is also a former governor of Colombia’s Banco de la República, told Bloomberg Línea in an interview.
“The macroeconomic data shows how the international debt of non-financial companies in Latin America has grown in an extraordinary way over the last 10 years, making them much more leveraged and with a greater risk of exchange mismatch,” he said.
“From a microeconomic perspective, the figures confirm that these companies, in the tradable and non-tradable sector, have increased their debt in dollars while reducing their profits and capital investment, increasing their solvency risk,” the former central banker added.
In the first quarter of 2022, Colombia experienced growth of more than 8%, and the expectations of the Finance Ministry are that the second quarter saw economic expansion of 11%, with GDP growth for the full year expected to be 6.5%, although that is seen as a conservative estimate given the performance this quarter.
Regarding the rest of the region, Uribe assures that “Latin America has experienced a heterogeneous economic recovery in 2021 and 2022, depending on the preconditions and the capacity to respond to the pandemic. Several countries have surpassed the level of economic activity prior to Covid-19 in 2021, for example, Brazil, Chile, Colombia and Peru”.
Despite such growth, Uribe acknowledges that there are risks that threaten such growth.
“The main risk now is the persistence of high inflation. Countries both in the region and in other parts of the world will struggle with high inflation and deteriorating growth prospects,” he said.
In addition, he explains that high inflation has brought with it a rise in interest rates, which makes the current situation even more challenging, and which is why the main tasks facing the region’s economies are “the persistence of high inflation, which has prompted the Federal Reserve to tighten monetary policy; the war in Ukraine, and the interruptions in supply chains associated with the ongoing pandemic”.
Uribe added that “the [FLAR] study is clear on the need for greater transparency on the evolution of the debt of non-financial companies, as well as greater access to their financial information”.
But, in addition, he says “it is also important to identify the destination of the resources obtained by these companies in the international market, and to monitor whether they are acting as financial intermediaries in the local markets”.
Along these lines, he explains that the support that FLAR can give to the economies consists of “supporting the balance of payments of its members through the granting of credits, and improving the investment conditions of the international reserves of the central banks”.
The FLAR also “promotes high-level discussion and technical dialogue among academics, technicians and authorities of central banks and finance ministries of the region, in order to promote public policies that support the macroeconomic and financial stability of its members”, Uribe said.
Translated from the Spanish by Adam Critchley