Colombia: After the vote, downward pressure to the Peso - Wells Fargo

According to analysts from Wells Fargo, risks of a wider fiscal deficit and the political uncertanity following the unexpected vote against the peace agreement in Colombia, could add further downward pressure to the value of the  peso (COP) against the greenback over the medium term.”

Key Quotes: 

“The unexpected vote against the 52-year-war-ending agreement between the government and the FARC guerrillas has sent negotiators back to the drawing table. Markets have reacted in disbelief”

“The initial reaction from financial markets to the surprise result has been telling, as the Colombian peso has weakened nearly 3 percent since the plebiscite result even as other Latin American currencies have generally strengthened during that time. Sharp weakness in the peso is likely in part a response to increased political uncertainty in Colombia. More specifically, the surprise result may undermine confidence in the government’s ability to pass key tax reform measures, expected to be enacted later this year.”

“Comprehensive tax reform has been flagged by ratings agencies and institutions, such as the IMF and OECD, as an integral part of the government’s broader plans for fiscal consolidation. The government has announced a formal target for its overall deficit of 3.3 percent of GDP next year, which would represent a narrowing from the projected figure of 3.9 percent of GDP this year. Given the surprise peace vote result and subsequent political uncertainty, risks appear skewed for wider deficits, which could add further downward pressure to the value of the Colombian peso against the greenback over the medium term.”