Until recently Washington’s closest ally/client state in South America, Colombia is now under new management. And that management has a different perception of US influence in Latin America and the wider world.
Just over a month ago, Colombia’s recently elected left-wing President Gustavo Petro ruffled a few feathers by lambasting the US-led war on drugs from the podium of the UN General Assembly in New York. He also condemned the NATO-Russia proxy war in Ukraine, which raised serious questions about Colombia’s position as NATO’s only Latin American partner. Then last Wednesday, during a visit to Urabá Antioquia, close to Colombia’s northern border with Panama, he set his sights on US economic policy:
An economic crisis is undoubtedly brewing. The United States is practically ruining economies around the world. The German economy has already been destroyed by the war [in nearby Ukraine]. The Russians, Ukrainians and Europeans, first and foremost, have unleashed a war upon their own continent, which is a war for gas, for energy. And as a result of that war the European economy is sinking.
Powerful Germany is entering recession. And who would think it? England, which one day was the world’s dominant colonial power, is mired in a deep economic crisis. In Spain, the residents of towns and cities are up in arms. The same in France. And in the United States decisions are being taken to protect the United States, sometimes without thinking about the consequences elsewhere.
The Growing Pains of a Global Dollar Shortage
Petro places much of the blame for the “looming economic crisis” on the US Federal Reserve, whose aggressive interest rate hikes of the past seven months have propelled the dollar to its highest level since the year 2000.* Raising rates draws capital toward the US economy and away from higher-risk emerging markets. As capital inflows push up the dollar’s value, capital outflows pull down emerging-economy currencies, which makes it much harder for governments and companies to service their US-denominated debt.
The US Ambassador to Colombia, Francisco Palmieri, responded to the accusations by urging Petro not to look for culprits for the worsening economic conditions around the world, only to shift the blame to Russia seconds later:
We must not think about where to lay the blame. We must focus on how to work together to improve and foster the development necessary for economic growth…
Russia’s aggression against Ukraine is a major threat to the global economy. Within the United States, we are also experiencing economic challenges, as are many of the countries in the world.
As the IMF noted last week, the dollar has appreciated 22% against the yen, 13% against the Euro and 6% against emerging market currencies since the start of this year. That the currencies of rich economies like Japan, the UK and the EU have, as a whole, fallen faster against the dollar than emerging market currencies is testament to the severity of the current global dollar shortage. As the Korean economist Keun Lee notes, “while US monetary policy is hardly the only factor in causing that shortage, it is undoubtedly making matters worse.”
The Federal Reserve is hiking rates right now to try to keep a lid on inflation at home, even though high inflation in the US is largely the result of global supply chain pressures. But in doing so, it is exporting inflation to the rest of the world by driving up the value of the dollar. And that is piling yet more pressure on already cash-strapped governments.
Many emerging market crises of the past were caused or exacerbated by a rapidly strengthening dollar. To try to stop their currencies from nosediving and thereby contain rising prices, national central banks are responding to the Fed’s aggressive hikes by tightening their own monetary policy. This squeezes yet more life out of the economy by making it even harder for heavily indebted consumers and businesses to service their debts.
With inflation at multi-decade highs in many places, dollars growing increasingly scarce globally and yields surging on sovereign bonds, governments, particularly of energy-importing countries, are also having to rein in their spending.
“The coffers of Latin American economies are being bled dry,” said Petro. “All of our currencies are falling, not just the Colombian peso.”
The Colombian peso has been on a downward spiral against the dollar since 2012. Having lost almost two thirds of its value in that time, it is now just a whisker from crossing the 5,000-to-USD threshold.
New Management, New Relationship
Until June this year Colombia was Washington’s staunchest ally/client state in South America. The country is home to seven or eight formal US military bases (depending on who you read), and is by far the largest recipient of US aid in the region, having received $13 billion since 2000.
But in June a political earthquake took place. For the first time since Colombia won independence in 1819, a majority of voters elected a left-wing government. Led by Petro, a veteran politician and former guerrilla, that government is determined to shake things up.
It wants to demilitarize public life in Colombia, a country that has been at war with itself for over 60 years. It also plans to ban the forced eradication of coca and decriminalize and regulate domestic cocaine sales. As if that were’t enough, it has its sights set on reforming the agrarian sector, phasing out oil and coal production, and introducing a more progressive system of income and wealth taxation.
Needless to say, opposition to these policies is fierce among Colombia’s financial and business elite, who own most of the country’s media. Two months into his presidency Petro has already walked back his commitment to phase out oil and gas production, which has helped to soothe investors’ nerves a little. Against the backdrop of the global energy crisis as well as the fact that oil and gas provide roughly a third of Colombia’s export revenues, all of it in much-needed dollars, the move didn’t come as much of a surprise.
But it is in his fiscal reform agenda that Petro faces the stiffest opposition. On the campaign trail Petro complained that Colombia’s current tax system has a clear bias in favor of the extremely rich. He also pledges that the lion’s share of the increased tax burden will be borne by the “4,000 largest fortunes in Colombia,” adding that his government will not target productive companies but rather unproductive assets, including dividends and transfers abroad.
Transfers abroad make for an interesting target given the propensity of wealthy Latin American businesses and families to move their money overseas, particularly to Miami, whenever a government of even mild left-wing persuasion comes into power.
Petro’s government desperately needs to raise more tax revenues to be able to meet at least some of its spending commitments. It also needs to service Colombia’s debt load, which grew substantially during the pandemic. Interest rates on that debt are also rising sharply. Benchmark bond yields are at their highest in nearly two decades. The country’s sovereign bonds have lost almost 24% in dollar terms since Petro was elected in June, four times the average for emerging markets during that period.
In his speech last week, Petro urged large Colombian companies to consider the country’s general welfare before sending their money overseas:
“The dollars that were generated in Colombia, through the export of coal and oil, both of which are public property of the nation, are leaving…
“We, as a government, have granted, through contracts, permission for private companies, such as Ecopetrol, to exploit those assets… in exchange for royalties and the payment of taxes. We have proposed that if the international price (of energy) rises, as has happened, a larger amount of money should flow into the national coffers”.
But Colombia’s largest corporations and richest families do not appear to be in much of a sharing mood. In fact, many of them appear to be pulling their money out of the country as quickly as possible, which is exacerbating Colombia’s dollar shortage.
JP Morgan Chase Chimes In
While Petro blames the Fed for the plunging peso, most of the mainstream press in Colombia lay much of the blame on Petro’s government, in particular its insistence on raising taxes on large companies and high net worth individuals. And they are able to back up their claims by citing the “expert” insights of large US banks like JP Morgan Chase, as Semana did on Friday:
According to [JP Morgan], what is happening in [Colombia] is the result of a disorderly market that needs a “major circuit breaker”, since the country is going through a self-perpetuating crisis of confidence that prevents it from coping with the surging greenback. It is worth noting that the Colombian peso is the sixth most devalued currency in the world this semester.
Colombian local assets have deteriorated materially in recent weeks in response to declining confidence domestically, a weak fiscal and external accounts position, and a hostile global environment; in other words, it is a perfect storm,” said the bank, which expects Colombia’s central bank to raise interest rates by 150 basis points for October, which would leave them at 11.5%.
That “perfect storm” is being exacerbated by a massive pile-on of hedge funds betting against the Colombian peso. As Bloomberg reports, many of them are from Brazil:
Trading desks in Rio de Janeiro and Sao Paulo are piling into short bets on the peso, wagers that not only pay off when the currency weakens but can also exert downward pressure. They see storm clouds gathering over their Andean neighbor, and predict the nation’s fiscal and current account deficits will leave it extra vulnerable to a global economic slowdown.
Limited Room for Maneuver
Since Petro’s election, it was always clear he would have limited room for maneuver, firstly because he only has one four-year term in which to institute all of his government’s proposed structural changes. Also, he does not have a full majority in either of the two legislative chambers, meaning he depends on the support of one of the dozen or so opposition parties in Congress. On top of that, he faces the fierce opposition of Colombia’s plutocracy, which has essentially ruled the country for the past two centuries.
He also has to keep the foreign policy establishment in Washington, aka the “Blob”, more or less on board. Through its billions of dollars of military aid to Colombia, its arms sales and its military bases in the country, the Blob has a significant amount of sway over Colombia’s military, which in turn has a significant amount of sway over Colombian society.
Granted, there are a number of key policy areas on which Petro’s government and the Biden administration are likely to find a degree of agreement, including the green energy transition and the war on drugs. But Petro’s insistence on hiking taxes on the super rich and large corporations, on redistributing land and on reestablishing close diplomatic ties with neighboring Venezuela are unlikely to endear him to the Blob. Nor is his habit of launching stinging critiques of US policy.
Those criticisms are most likely intended for domestic consumption, particularly among Petro’s own base, which is fiercely anti-gringo, according to a recent piece by El País. Since taking office two months Petro has paid host to both US Secretary of State Anthony Blinken and the director of the US Office of National Drug Control Policy, Rahul Gupta. Hours after heaping scorn on NATO’s role in the Ukraine war, Petro met up with NATO Secretary General, Jens Stoltenberg, in New York for what was described as a “fruitful encounter”. Then last Friday, two days after blaming the US for the looming global economic crisis, Pedro met up with the CIA Director William J Burns in Bogota.
It is not clear what was said in that meeting, but afterwards Petro, a former guerrilla, tweeted: “In the past we might have been enemies; I gave him a hammock and a bag of panela” (unrefined whole cane sugar, typical of Central and Latin America).
This is a reminder of just how much times have changed in Colombia. But it also underscores the fine line Petro and his government must walk in trying to bring meaningful change to a country torn apart by war and plagued by rampant inequality, while also keeping the wolf from the door. As Sandra Borda, a professor of international relations at the University of the Andes, told El País, “the US has a margin of tolerance. They understand that speeches such as the one at the UN and the one last Wednesday are not important, but that margin is not limitless.”
* Interestingly, Petro didn’t mention in his speech how US and EU sanctions on Russia are also ruining economies around the world by creating acute scarcity of key commodities and supercharging inflation.