Colombia’s vulnerabilities: oil price, Donald Trump and dollar-debt

Colombia is another country whose vulnerability to the rising US dollar (UUP) stems from the fact that over 90% of the economy’s external debt is dollar denominated. If the US dollar appreciates further into 2017, this debt could become more and more expensive for this Latin-American (ILF) economy to repay.  Colombia currently holds about $40 billion in external debt, of which over 90% is US-dollar denominated.

Like Venezuela, the economy of Colombia is vulnerable to the price of oil, whose exports accounts for about 50% of the country’s total exports. According to Colombia’s largest bank, Bancolombia, “For 2017, we expect volatility in the Latin American exchange markets to remain high, reflecting political uncertainty, the advances of the Donald Trump government, the [U.S. Federal Reserves] price increases, and the uncertain trajectory of commodity prices.”

The peso’s slide may continue

The Colombian peso is already down by almost 50% over the past five years. The slide accelerated in mid-2014 with oil prices dropping, only to take a breather in February last year. However, the peso remains weak, and with President Donald Trump’s protectionist measures and monetary policy tightening in the US, we may see emerging market (EEM) currencies such as the Colombian peso remaining weak.

A stronger dollar, coupled with low oil prices could soften the Colombian peso further. A weaker peso could fuel inflation in the economy (by making imports expensive), which stood at 5.75% in December 2016. The economy runs a $1.47 billion as trade deficit (November 2016), and growth remains weak at 1.2% as of 3Q16, from highs of 6% in 2014. Unemployment in the country stands at 8.7% currently.

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Investment products

Despite the turbulence, funds such as the Global X MSCI Colombia ETF (GXG) and the iShares MSCI Colombia Capped ETF (ICOL) which have exposure to Chilean equity have returned 34% and 30.6%, respectively, over the past 1 year.

The economy is expected to grow 2 percent this year, close to the 1.8 percent estimated for 2016. Analysts and fund managers believe central bank stimulus measures may be required to keep the momentum.

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