Buffeted by Global Crisis, Colombia Devalues Currency

Colombia on Wednesday became the first Latin American nation to devalue its currency since the Asian crisis began, a move that could put added pressure on its Latin American neighbors to devalue as well.

But Wednesday at least, markets in Venezuela, the Latin nation considered most susceptible to devaluation pressures, seemed to shrug off the news of the de facto devaluation of Bogota’s peso.

Though it is Latin America’s fourth-largest economy, Colombia is not a big enough trading nation to force bigger neighbors like Brazil to devalue, said Jim Barrineau, a Latin American equity strategist at Salomon Smith Barney. And Mexico’s free-floating peso has already lost 10% of its value this year due to Asian-related pressures.

Buffeted by the global economic crises and domestic mismanagement, Colombia is struggling with growing trade and fiscal deficits exacerbated by declining oil and coffee revenues.

Colombia’s situation is similar to those of other Latin America countries that have been hurt by depressed overseas markets for the commodities they depend on to finance fiscal programs.

Colombia’s oil revenue will total about $2 billion less than expected this year, and coffee sales are down 40%, said Leonardo Villar, a Banco de la Republica board member. But the country has failed to make corresponding budget cuts to offset the loss in revenue, analysts said.

“Like other Latin countries, Colombia has been affected by adverse external shocks,” said ING Barings’ Fernando Losada, a senior Latin American economist in New York.

Colombia said it will allow the peso to lose a maximum of 26% against the dollar in 1998, up from a previous 16% limit. In so doing, Colombia hopes to make its assets more attractive to the foreign investors who have fled the country in recent weeks. The central bank has spent $300 million in reserves to defend the peso in that time, leaving about $8.8 billion in foreign reserves, Villar said.

Colombia’s peso closed Wednesday at 1,526 to the dollar, or down 6.2% from Tuesday’s close. Under the scheme announced Wednesday, the peso would be allowed to drop as low as 1,638.27 pesos per dollar by the end of the year.

A devaluation also is widely expected in Venezuela, which is suffering a much greater oil revenue shortfall and a budget deficit of more than $3 billion. Ecuador, Colombia’s neighbor to the south and also an oil exporting nation, is in a severe bind too.

Colombia’s devaluation adds pressure on both countries because the three are major trading partners and Colombians now have reduced spending power to buy Venezuelan or Ecuadorian goods. Nearly one-third of all Venezuelan non-oil exports end up in Colombia.

Yet Venezuela’s stocks rose 3.8% on Wednesday, boosted by falling interest rates, a new enabling law easing foreign investment and a successful sale of international bonds, said Francis Freisinger, a Merrill Lynch equity strategist. Venezuela’s bolivar fell only slightly from Tuesday’s close, but Freisinger said a devaluation is inevitable.

“I see the Colombian devaluation as a chronicle of a Venezuelan devaluation foretold,” Freisinger said.

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Times staff writer James F. Smith in Mexico City contributed to this report.