In the first two months of 1997 an economic state of emergency was announced in Colombia and the currency tumbled. Then, barely a week after the emergency was over, a blow-out $1 billion global bond was issued that catapulted the country out of the second division of emerging markets into the ranks of investment-grade borrowers.
All this, and yet Colombia has problems few investment-grade borrowers have seen. The US government has kept Colombia decertified as punishment for alleged non-cooperation in the war against drugs and sanctions are possible. Domestic terrorist groups have staged assaults in jungles not far outside the capital, Bogotá. And 800,000 striking government workers hit the streets a week ago, demanding higher wages.
The economic state of emergency was implemented in mid-January in an attempt to get a grip on a fiscal deficit spiralling out of control. The deficit budgeted for 1997 was $4.5 billion 4% of GDP and that figure looked unlikely to be met.
The deficit, however, was only part of the problem: there was also the appreciation of the peso. Although the central bank was printing money regardless, the currency stubbornly refused to depreciate.