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Colombian Peso Facing Major Devaluation on Petro Victory, Economists Warn

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Economists are warning that the price of the Colombian peso could immediately fall as much as 20 percent if communist candidate Gustavo Petro wins this month’s presidential run-off against populist candidate Rodolfo Hernández.

Petro, a former guerilla fighter in the Marxist terror group M19, topped the poll in last week’s first-round presidential election but fell well short of the required 50 percent to avoid a run-off. His policy proposals include raising taxes on high earners, dismantling the country’s vital oil industry in a bid to reduce greenhouse gases, and restoring diplomatic relations with the dictatorship in Venezuela.

“There is no more difficult question in economics than predicting the exchange rate,” Luis Guillermo Veléz, a renowned blogger and economics professor at the School of Business, Finance and Technology in Medellin, told El American. “What is certain is that there will be a significant devaluation due to the intensification of capital outflows and the slowdown in foreign investment. It is not unlikely that the exchange rate will reach 4,500 pesos per dollar at the end of the year.”

Meanwhile, the U.S.-based Colombian economist Alberto Bernal forecasts that after an initial devaluation of between 10 and 15 percent, the future strength of the currency will depend on who Petro appoints to his cabinet.

“If Petro wins the presidency, the peso could lose between 10 and 15 percent in an initial move, and from then on the move would be subject to his announcements,” added Colombian economist Alberto Bernal. “If he appoints a reputable finance minister the depreciation would be controlled, but if he keeps his promise to stop oil exploration, the currency could continue to depreciate even after the initial sharp depreciation.”

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Yet some economists believe that the growing demand for raw materials may act as an effective counterweight against the downwards pressure of a Petro premiership.

“There is much talk in the market about the possibility of a boom in raw materials, which for Colombia could even mean a revaluation of the currency,” said David Giraldo, a senior analyst at one of the country’s leading financial institutions. “So while a Petro presidency would have downward effects on the exchange rate, the force of the boom in commodities may prevail as the external effects may have a greater impact on a small economy such as Colombia’s.”

Despite Petro topping the poll, Colombian markets reacted positively to last week’s election results. However, there are also concerns over Hernandez’s own economic policy, with his spending plans in many cases matching those of his socialist opponent.

Hernández, a septuagenarian former mayor of the northeastern city of Bucaramanga known for his eccentric personality, won 28.2% of the votes, giving him victory over center-right candidate Federico Gutierrez for second place in a surprise result. After conceding the race, Gutiérrez endorsed Hernández over Petro, meaning the vast majority of his voters will likely back the 77-year-old.

Yet recent polling data from local media CM and by pollster Centro Nacional de Consultoria suggests a race that is currently too close to call, The poll found that Hernandez would win 41% of the vote, while Petro would win 39%. However, they remain within the margin of error of 2.8%. Meanwhile, 14% of respondents said they were undecided, while 5% said they would spoil their ballot as a form of protest.

Follow El American’s daily coverage of Colombia’s presidential election.