Colombian Peso Sinks Under Weight of Venezuela Crash

Dec. 1 (Bloomberg) — For five years, Mario Hernandez’s Bogota-based, leather goods-company sent record shipments of designer wallets, purses and shoes over the border to Venezuela. Demand got so hot, Hernandez says with a laugh, that he started signing autographs at stores and restaurants in Caracas.

That boom, part of a seven-fold surge in Colombian exports to its northern neighbor that helped drive the peso to a nine- year high in June, is coming to an end as Venezuela’s oil-driven economic expansion careens toward a bust.

“Time to tighten the belt,” says Hernandez, whose company, Marroquinera SA, has been exporting to Venezuela since 1985.

The looming slowdown in trade will deepen the peso’s 30 percent slide against the dollar since mid-June and make it the worst-performing currency in Latin America over the next year, Morgan Stanley and Goldman Sachs Group Inc. say. When Venezuela last fell into a recession, in 2002, Colombian shipments to its second-biggest trading partner sank 38 percent, helping spark a 21 percent rout in the peso.

There’s going to be “a major drop in Venezuelan demand for Colombian products,” said Boris Segura, a Latin America economist at Morgan Stanley in New York. “That’s a clear and imminent risk.”

Morgan Stanley predicts the peso will weaken 11 percent by the end of 2009 to 2,600 from 2,316 today. Goldman Sachs forecasts it will depreciate 9 percent over the next 12 months, more than any other currency in the region except the Argentine peso, whose exchange rate is managed by the government. Colombia’s peso will drop to 2,377 next year, according to the median of nine forecasts in a Bloomberg survey.

Murder, Kidnapping

Even at those rates, the peso won’t get near the record low of 2,986.8 reached in January 2003, when an increase in kidnappings by guerrillas curbed investment in the country. The currency strengthened since then, reaching a high to the dollar of 1,633 on June 18, as President Alvaro Uribe restored rule of law, cutting homicides and kidnappings more than 40 percent, according to Defense Ministry figures.

The peso is falling now in part because Colombia sends 17 percent of its $30 billion in annual exports to its neighbor.

Venezuela relies on oil for more than 90 percent of its international sales, making the country more dependent on commodities than any other in the region, said Alberto Ramos, an economist with Goldman in New York. Colombia also gets 24 percent of its exports from crude, which plunged 67 percent from a July record of $147.27 a barrel.

For Colombia, it’s a “double whammy of negative shocks,” Ramos said.

‘Seen This Movie’

Hernandez, 67, says he may cut advertising and inventories and borrow less to offset the slump in Venezuela, where Marroquinera gets 30 percent of its sales.

Venezuela will post “marginal” economic growth next year after expanding 11.8 percent on average since 2003, said Pedro Palma, an economics professor at the IESA business school in Caracas. President Hugo Chavez will be forced to reduce government spending after tripling it over the past four years, Palma said.

Chavez, 54, may also devalue the government-set 2.15 bolivar-per-dollar exchange rate, crimping demand for Colombian exports, Palma said. The bolivar trades at 5.15 per dollar in an unregulated, parallel market, a sign investors are anticipating the government will devalue the official rate.

“We have seen this movie several times,” said Palma, a University of Pennsylvania-trained economist who’s tracked Venezuela’s boom-and-bust cycle for three decades. “Every time we see the movie, we expect that this time it’s going to end differently: ‘This time oil prices are not going to drop.’ We’re just making the same mistakes.”

‘Feel the Pinch’

The economy shrank 1.7 percent on average per year from 1980 to 1984 after expanding at an annual rate of 5.1 percent during the oil boom of the 1970s. Economists predict growth will slow to 2.6 percent next year, according to the median of eight forecasts in a Bloomberg survey. VenEconomia, a Caracas-based research firm, is more bearish, predicting a 2 percent contraction.

The country can still dominate Colombia because Venezuela’s gross domestic product totaled $228 billion last year, 33 percent more than its neighbor’s $172 billion.

“Under current oil prices, not even a miracle can save Venezuela from a crisis,” said Juan Pablo Fuentes, a Latin America analyst at Moody’s Economy.com in West Chester, Pennsylvania. “Colombia is already beginning to feel the pinch.”

Shrinking Pie

Fuentes forecasts the peso will weaken to 2,627 by the end of 2009 as Venezuela’s slump helps trim Colombian growth to 3.6 percent from an average of 6.4 percent over the past three years.

Exports to Venezuela may drop below $4 billion from a record $5.4 billion this year, said Roberto Cajamarca, head of research at the Colombian-Venezuelan Chamber in Bogota.

The trade boom forged an unlikely bond between Chavez and Uribe, who feuded for much of the past six years. When Colombian soldiers crossed into Ecuador to attack a guerrilla camp in March, Chavez sent 10 tank battalions to the border in protest and lashed out at Uribe, 56, calling him a Mafioso, a liar and a “lackey” of the U.S.

“The politics were very hostile, very complex and yet people on both sides of the border were engaging in a lot of cross-border investment and commerce,” said Alvaro Vargas Llosa, a senior fellow at the Independent Institute, a Washington-based policy research group. “Of course all this oil money coming into Venezuela had a lot to do with it.”

As oil revenue dries up, Hernandez, the designer-goods maker in Bogota, prepares for the slowdown. After posting five straight years of sales growth of more than 20 percent in Venezuela, he predicts the rate will slip to about 10 percent this year before collapsing to zero in 2009.

“The pie may shrink on us,” said Hernandez. “But we have to hang on to our slice.”

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

Last Updated: December 1, 2008 14:50 EST

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