The Volatility of The Colombian Peso

A thing which makes investing in Colombia tricky is the volatility of the Colombian peso, regardless if your base currency is dollars, euros or any other more stable one. The USD to COP rate has during the last 20 years been anything from 1700 to 4000 depending on the period. Hence during what stage you transfer your funds to and from Colombia is of uttermost importance; even more so in comparison to other currencies and markets. 

If we look at the USD to COP graph from a 20 year perspective we can see that there are two peaks where it would have been profitable to transfer from dollars to Colombian pesos. The first one we have during the beginning of 2016 when the rate went up to around 3400. During this time we had a historical event which can be argued to have had a weakening effect on the Colombian peso and that is the precursor to the Colombian presidential election of 2018.

Gustavo Petro leading in the polls

During this time the left leaning candidate Gustavo Petro was becoming all the more popular in the polls, which can be argued to have had a dissuading effect on foreign investors. During this time there was also the buzz about the peace deal with the FARC, which might also have had a negative effect on the Colombian peso.

I am basing this conclusion on the traditional view that a more left leaning government and society will be bad (or at least less profitable) for foreign investors. Hence keeping up with historical events in a country might enable you to make better FDI decisions and increase your knowledge in regards to volatility of the Colombian peso.

The second peak of the Colombian peso

The second peak during recent years has been during the coronavirus epidemic, which during the end of 2019 was at around the same levels as during 3400 and which then went up to 4000 during the world wide lock-down. Investments were then taken out of the country since during times of crisis such funds often flock to more stable currencies such as the dollar and the euro.

Hence when everyone else is trying to get their capital out of the country, it would serve us better to think more in the long run and have a calmer approach and actually invest during these times since we will get more for the money. The psychological effect on both stocks and exchange rates is often the strongest one and the one which causes most people to lose their money; they pull out of the market at the first sign of trouble instead of having a well developed model of how they will act in each case.

Now if we historically would have wanted to liquidate our company and bring the funds back from Colombia anytime between mid 2009 and mid 2014 would have been a good choice since the dollar was relatively weaker in comparison with the Colombian peso during the aftermath of the 2008 financial crisis. The times between the aforementioned peaks would also make good points of exit if one would have invested during 2016.

Furthermore one should be aware that the Colombian banks often have quite high transfer and conversion fees, which should be taken into account when choosing the time to invest and pull back the funds.

Colombia is an emerging market and as such the currency is, as mentioned, quite volatile and strongly affected by political and historical events. Staying informed of such historical events and trying to predict their outcome therefore becomes paramount, especially when compared to other economies.

Johan Bengtsson
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