Colombian peso falls sharply after peace deal is voted down

Colombian pesos exchange
Meridith Kohut | Bloomberg | Getty Images
Colombian pesos exchange

The Colombian peso fell more than 2 percent against the U.S. dollar on Monday after a peace treaty that would've ended a 52-year war was rejected by voters over the weekend.

The Colombian currency was on track to post its worst trading day against the greenback since July 26, when it fell 2.66 percent.

"The rejection of the proposed peace deal was not expected nor discounted by the market as recent polls had indicated a roughly 2-to-1 Yes-No margin," Alberto Ramos, head of Latin American Economics at Goldman Sachs, said in a Sunday note to clients. "A weaker [Colombian peso] and political uncertainty created by the No camp victory is likely to limit room for the monetary authority to cut rates in the near term."

Stocks in Colombia also sold off, with the iShares MSCI Colombia Capped ETF (ICOL) shedding more than 3 percent. The index, however, is up roughly 21 percent for the year, outperforming the broader iShares MSCI Emerging Markets ETF (EEM).

ICOL (blue) and EEM (green) in 2016

Source: FactSet

Colombians narrowly voted down a peace deal with the Revolutionary Armed Forces of Colombia (FARC), a Marxist group that finances itself in part through the narcotics trade, in a referendum on Sunday, plunging the nation into uncertainty and dashing President Juan Manuel Santos' painstakingly negotiated plan to end the long-running war, which has claimed many thousands of lives.

The surprise victory for the "no" camp poured cold water on celebration from the White House to the Vatican, at what had seemed to be the end of the longest-running conflict in the Americas.

Matthew Taylor, adjunct senior fellow for Latin America studies at the Council of Foreign Relations, said one of the main reasons the plebiscite was voted down was the low voter turnout, a consequence of the apathy surrounding it. The "no" camp won by 50.21 percent to 49.78 percent and voter turnout was just 37 percent.

"A lot of people agreed with certain parts of the referendum but were against others, and that led to apathy and gave the 'no' vote a chance to win," he said, adding that reaching a new peace deal may not bean easy fit.

"There aren't that many concessions the FARC can make," he said. "President Juan Manuel Santos and [FARC commander in chief] 'Timochenko' had said that, if this deal was voted down, there wouldn't be another peace deal. Now they're backpedaling," saying they're willing to negotiate. But "moving forward this leaves government negotiators pretty hamstrung, because they don't know what Colombian voters would be in favor of."

Opponents of the pact believed it was too lenient on the FARC rebels by allowing them to re-enter society, form a political party and escape jail sentences. Opponents want a renegotiation of the deal with rebel leaders serving jail time and receiving no free seats in Congress.

For decades, the FARC bankrolled the longest-running conflict in the Americas through the illegal drug trade, kidnapping and extortion. The conflict took more than 220,000 lives and displaced millions of people. At one stage, the FARC was positioned close to the capital and the state was on the verge of collapse.

—Reuters contributed to this report.