Monday 6 February 2023

2022 closes with the most atypical behavior of dollar exchange in recent years

During the first semester, it reached a historical peak of ¢700, and six months later it fell below ¢600

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Dollar Exchange

¢567.55 Buy

¢576.23 Sell

4 February 2023 - At The Banks - BCCR

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QCOSTARICA – The war between Ukraine and Russia, the cost of fuels and the recovery of tourism were factors that influenced such a wide range and the extraordinary speed at which the movements in the dollar exchange rate occurred.

The behavior of the dollar exchange during 2022 is considered one of the most atypical in recent years, characterized by going in two opposite directions in each semester: in the first the dollar exchange was very close to reaching ¢700, and the second part, after more than two years, its price fell below the ¢600.

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“The factors that explain both movements have to do with the price of fuels, the interest rates in colones that were negative during the rising period, the returns between investing in colones and investing in dollars, then the Central Bank reverses that alignment of interest rates and makes saving in colones attractive, which relieves pressure on demand,” said Ennio Rodríguez, president of the College of Economic Sciences.

Likewise, the presidential elections and the first actions of Rodrigo Chaves led to unusual changes in economic matters.

“This year has had behaviors quite different from those that have been electoral years, the first case is that in February and April the dollar exchange rate did not have strong volatilities as it did in 2018, 2014, and even 2010; then, when Rodrigo Chaves took the presidential sash, he issued a quite wrong statement about international reserves and the exchange rate skyrocketed to ¢700, which is once again atypical, not because of the statements but jointly because people got very nervous and until the president of the Central Bank denied all this, he calmed the waters,” explains Daniel Suchar, financial analyst.

In addition to the above, the drop in tourism and the wait for foreign direct investment (fdi) to accommodate the new government motivated the behavior during the first six months.

In mid-June when the dollar exchange reached its maximum selling price at ¢691 and buying at ¢698; since then the dollar exchange began a downward trend that has been maintained to date, reaching its lowest value with a buy of ¢579 and sell of ¢588 between on December 23.

During this period the variation exceeded ¢100 colones.

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There are a number of factors that explain this coming and going, among which are the Russian invasion of Ukraine, the price of fuels, the behavior of the pension funds and the role of the Central Bank of Costa Rica.

Also, the drop in recent months in the cost of oil and, above all, the recovery of foreign tourism, which has been stronger than expected, injected dollars into the market, causing the exchange rate to deflate.

“In the second half of the year we have a very important economic recovery, all sectors of the economy, excluding public construction, are showing growth, the exchange rate also had a quite pleasant thermometer at levels of uncertainty, negativity and anxiety. All this cleared up as the economy was recovering and of course, the issue of foreign direct investment that began to continue bringing more investors to Costa Rica either due to Nearshoring, digital nomads, among others,” Suchar added.

On the other hand, the reversal of interest rates was a key element that pushed the recovery towards the end of the year.

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“With the rise in interest rates in colones, it makes saving in colones more attractive for pension operators and Costa Ricans, which contributes to reducing the demand for dollars. These factors are what make Costa Rica, contrary to what many economies in the world experience, see the appreciation of the colon,” Rodríguez commented.

Finally, the implementation of economic policies that give greater openness to the commercial part and greater flexibility to do business, coupled with an international economic recovery where many companies have turned to Costa Rica and external financing, including Eurobonds, caused the pressure on the exchange rate was falling little by little.

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