Colombia must prepare for eventual peso drop - central bank chief

MEDELLIN, Colombia Thu Aug 14, 2014 5:25pm EDT

MEDELLIN, Colombia Aug 14 (Reuters) - Colombian businesses should be prepared for the possibility of a "very strong" depreciation in the peso due to rising U.S. interest rates or some other external shock, central bank chief Jose Dario Uribe said on Thursday.

Uribe, who has been at the forefront of a fight to keep the strengthening peso stable, said the currency could easily again experience the kind of sharp drops seen during the 2007-09 global financial crisis.

"We all have to remember that just like the appreciation of recent years, so at any time - as we saw in 2008 and 2009 - there may be a very strong depreciation and so we have to be prepared. The business sector, all Colombians," Uribe told an industrial conference in Medellin.

"If an external shock hits the entire region, that will mean no more capital will enter, or it could leave Colombia. That means the peso will devalue," he said, citing an expected rise in U.S. interest rates next year as a possible trigger.

Uribe, who heads the seven-member central bank board, said the central bank would take steps to maintain liquidity in the event of such a shock.

The peso has gained against the U.S. dollar during the past decade, bolstered by heavy inflows of portfolio and foreign direct investment and generally positive investor sentiment toward emerging markets.

It currently trades at 1,883 per dollar, up 2.3 percent since the beginning of the year and 33 percent higher than at the end of 2003.

In a bid to protect the economy from external shocks and to accumulate international reserves, the central bank has bought billions of dollars on the spot market, helping ease the currency's rise.

Those efforts wiped out a 9 percent jump in the peso's value against the dollar in 2012.

Once a foreign investment pariah, Colombia has become one of Latin America's investment hubs, largely as the result of the government's successful counter-insurgency battle against previously-powerful Marxist rebels over the past decade.

It has also benefited from a flood of money away from the world's most developed economies, which slashed interest rates to bolster consumer spending and emerge from recession at the beginning of this decade.

A stronger peso hits Colombia's exporters and the industrial sector the most since salaries, pensions and healthcare benefits are paid in local currency, while overseas buyers pay in devalued dollars.

Colombia's government has encouraged companies to hedge currency risk, especially as the rich nations like the United States begin to lift rock bottom interest rates.

While the Colombian central bank will not target an ideal currency level, the government wants to devalue the peso to about 1,950 per dollar to reduce pressure on the economy, a level it says is balanced. (Reporting by Carlos Vargas, Helen Murphy and Nelson Bocanegra; Editing by Paul Simao)