Colombia poll crisis drives down peso

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Republican presidential nominee John McCain arrived in Colombia on Tuesday amid a burgeoning political scandal that has spooked foreign investors and helped send the peso to a three-month low last week.

Faced with a Supreme Court challenge to the validity of the 2006 election, President Álvaro Uribe has called on Congress to allow a new election – a move that opponents say could help propel him towards a third term.

Supporters of the president are divided over whether he should seek a third term – something that would require a further constitutional amendment.

The prospect of a battle between the president and the Supreme Court further weakened investor confidence amid a sharp drop in the value of the peso, which sank nearly 13 per cent against the dollar last week.

The conflict between the court and Mr Uribe stems from the case of Yidis Medina, a former congresswoman sentenced to four years of house arrest for accepting jobs for allies in exchange for supporting a 2004 constitutional amendment that allowed Mr Uribe to run for a second term.

While it is not yet clear whether a “new” election would enable Mr Uribe to extend his term beyond 2010, few doubt he would win. His approval ratings hover around 80 per cent following his dramatic success in taking on the Farc guerrilla movement – backed by US financing in the form of Plan Colombia – which has led to rapid economic expansion and a long-absent sense of confidence among investors and consumers.

Until last week, a rapid appreciation of the peso had been a cause of concern for Colombia’s exporters and some economists. Guillermo Perry, of Fedesarrollo, a Bogotá-based economic think-tank, sees risk in Colombia’s high current account deficit and strengthening currency and advocates monetary policy easing.

Mr Perry, a former Colombian finance minister, says the central bank was right to tighten monetary policy in 2006 as a brake on inflationary pressures, but by mid-2007 there were already signs the economy was slowing and that the strong appreciation of the peso was beginning to hurt export businesses, even in established industries such as flowers. The flower exporters’ leading body estimates 9 per cent of its workforce has been lost since the peso rally began.

Last week the central bank seemed to address these concerns, leaving interest rates unchanged at 9.75 per cent despite rising domestic inflationary pressures, and announced on June 20 that it would begin to sell $20m (€12.6m, £10m) worth of pesos a day to stem the currency’s rise.

On June 26, the central bank also suspended a mechanism to control volatility on the foreign exchange market, a move seen as signalling it was not unduly concerned over the peso’s sharp fall.

Additional reporting by Peter Garnham

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