The Central Bank has implemented a bold dollar-purchasing program in order to help strengthen the peso and curb appreciation. In what ways will this program help improve the competitiveness of Colombia’s currency and increase its current exchange rate? How do you see this progressing over the next 2-5 years?
URIBE: The international reserve purchases are aimed to keep an adequate level with regards to our international reserve indicators. We have been monitoring the situation and we think there is a high probability of having an exchange rate misalignment. We do not have an exchange rate target at all. We have been focusing on accommodating international reserves. Last year, we purchased roughly $5bn. For 2013, we have announced the purchase of at least $6bn up until September. We are going to define the amount of international reserves we will need in the future. We have to decide if we want to keep on this path according to the behaviour of some valuable and significant situations in the economy.
In what ways is Colombia becoming more involved in the global economy? What policies has the Central Bank recently implemented in order to help facilitate foreign trade and investment?
URIBE: Foreign direct investment and trade have been increasing as a proportion of GDP. Colombia has also signed many Free Trade Agreements with countries like the US. Furthermore, we have experienced a strong increase in FDI and Colombians are now investing more abroad. For example, Colombian banks are the main owners of banks in Central America. This has been a recent trend for Colombian banks and financial institutions investing abroad. This is an example of how Colombians are investing abroad and foreigners are investing in Colombia. The main contribution that we can make for the insurgence of the economy in the world is keeping inflation low and stable. We have the capacity for a counter-cyclical monetary policy. This has also contributed to the stability of other state entities. We have an economy that welcomes trade and investment. It is an open economy. We have a monetary policy and framework that has allowed us to maintain price stability. It has given us a counter-cyclical monetary situation that has been very effective. For example, we were the most successful economy in the region with regards to dealing with the Lima shock situation. The financial sector in Colombia is also very strong. The main message that I want to convey is that we have an open economy. We are focused on investment and we have macroeconomic stability.
The Central Bank has recently undertaken a policy of aggressive interest rate cuts. However, industry insiders have stated that further interest rate cuts might provide too much stimulus and overheat an already healthy economy. What impact have lowered interest rates had on consumer confidence and investor sentiment?
URIBE: We have been an inflation target regime. We want to keep the inflation rate at 3%. At this moment, inflation is around 2%, which is a little bit lower than 3%. We are expecting inflation to move closer to 3% during the first semester of next year. Also, we want to try to keep inflation and GDP growth at close to potential. We have calculated that potential is between 4%-5%. We moved forward with regards to our interest rate with those two purposes in mind. I think that we have been doing very well in recent years and we are going to continue on this trend in the future. We are expecting, as I said, that inflation will be around 3% and Colombian growth will be roughly 4.3% this year. Next year, we are expecting this number to grow even more.
We are expecting that inflation will be around 3% and Colombian growth will be roughly 4.3% this year. Next year, we are expecting this number to grow even more.
What impact will a normalization of US monetary policy over the medium term have on the Colombian economy? What actions need to be taken in order to counterbalance drops in commodity prices and rate hikes occurring in developed countries?
URIBE: I think that when you have an increase in the interest rate abroad, in particular London and the US, it is because of the right reasons. I hope that it is because the US is gaining traction and their economy has recovered. At that point, we will have some impacts in terms of capital flows. At the same time, we will probably have some positive effects in terms of trade because the US continues to be our main trading partner. The US has also positively impacted commodity prices. I think things are looking very positive and I hope that the US economy becomes involved in a normal way and recovers. This is going to be good for the US and for the entire world economy. We have a framework in place that allows us to provide the right responses for most of the potential external shocks. Our framework of inflation targeting, flexible exchange rate, strong financial sector, and sound fiscal policy will ensure that we are prepared to face shocks in the economy coming from the US and abroad.