Colombian peso heads for worst week in three years

BRASILIA: The Colombian peso headed for its worst week in nearly three years on Friday after a much weaker-than-expected fiscal outlook, while broader Latin American assets also weakened after Federal Reserve Chair Kevin Warsh’s remarks lifted rate-hike bets.

Colombia’s peso slipped 1.5 percent, and was on track for its biggest weekly loss since October 2023, down more than 5 percent, after the government’s budget bill revealed a fiscal outlook far worse than markets had anticipated.

Analysts warned it may need support from multilateral lenders, including the International Monetary Fund (IMF).

Recently elected President Abelardo De La Espriella’s administration, tasked with rebuilding the economy after a recent earthquake, proposed a 2027 budget of 639.4 trillion pesos (USD203.6 billion), above the previous government’s estimate of 575.7 trillion pesos. Goldman Sachs said the wider deficits reflected a more realistic picture of Colombia’s fiscal position rather than a retreat from fiscal discipline, though it remained cautious on the medium-term outlook.

“While the magnitude of the upgraded deficits surprised relative to the administration’s earlier guidance for a leaner budget, we do not read them as evidence of diminished resolve for fiscal restraint,” said analysts from Goldman Sachs in a note.

MSCI’s Latin American equities index fell 1.2 percent, while its regional currency index slipped 0.7 percent. Both benchmarks were heading for weekly losses.

Markets also digested Warsh’s Jackson Hole remarks, in which he reiterated his focus on bringing inflation back to the central bank’s 2 percent target, while offering little guidance on future policy moves. Traders subsequently added to bets on a September rate hike by the US central bank.

The dollar rose 0.6 percent to a two-week high, extending a recovery from sharp losses last week when US Treasury bond-buyback plans revived talks of “dollar debasement” trades.

Brazil’s Bovespa dropped 0.2 percent, on track to snap a seven-session winning streak, while the real weakened 0.9 percent. Fiscal worries remain in focus as President Luiz Inacio Lula da Silva said late on Thursday that Brazil’s rising public debt would not concern him in a potential new term. Lula, who is seeking reelection in October, blamed part of the increase on the country’s 14 percent benchmark interest rate.