Monday 6 February 2023

Costa Rica Colon strengthens against the U.S. dollar

In recent days, the price of the dollar has begun to be lower compared to the value it had a year ago. How does this affect savings, debts and foreign trade?

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Dollar Exchange

¢567.55 Buy

¢576.23 Sell

4 February 2023 - At The Banks - BCCR

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QCOSTARICA (La Nacion) During October and the first days of November, the Costa Rica colon has remained strong against the U.S. dollar. The price of the currency on each day began to be lower than the price it had on the same day of the previous year, which generates a negative year-on-year variation.

For example, on November 3, 2022, the average price of the dollar in the Monex market was ¢627.72; 2.2% less than the price it had on the same day in 2021, which was ¢641.99.

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One of the implications of this behavior is that it makes the colon more attractive as a savings currency compared to the dollar, which is strengthened by the increase in interest rates in colones for savings.

For example, the passive rate (for savings) negotiated in colones, which is an average of the yields in the currency at different terms in the financial system, went from 3.53% in November 2021, to 9.41% at November 1, 2022.

In the case of savers in dollars, if a person receives income in colones and spends in colones, and has savings in dollars, the returns he/she receives now are enough to buy fewer goods and services than a year ago.

However, this is offset by the increase in interest rates. As a reference, the passive rate negotiated in dollars, which is an average of the yields in the currency at different terms in the financial system, went from 1.96%, in November 2021, to 2.96% at November 1, 2022.

Freddy Quesada, manager of INS Valores, commented that savers should also consider that at this time currencies throughout the world are losing value against the dollar, mainly due to the increase in rates by the Federal Reserve, which does more attractive to invest in that currency, considering the risk-return valuation.

“The attraction of saving in dollars or colones is linked to the term and objective of the investment, because although there are extraordinary opportunities for investments in dollars, the premium for investing in colones for short terms has also increased materially, so the element that tips the balance depends on the type of investor”, added Adriana Rodríguez, general manager of Acobo Puesto de Bolsa.

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For debtors in dollars, who receive income in colones, the appreciation of the colon benefits them because today they require fewer colones to buy the foreign currency they need to pay the installments compared to a year ago, assuming that the rate remains constant, but there are still to consider that the rate has increased.

As a reference, the average active rate (for loans) negotiated in dollars, in the financial system, went from 5.31% in November 2021 to 6.86% at 1°. November 2022.

Why has the colon strengthened?

Freddy Quesada cited three reasons why the colon has appreciated against the dollar: the increase in interest rates in colones, the decrease in the price of oil and the inflow of dollars from the Latin American Reserve Fund (FLAR), specifically, US$1.1 billion received by the Banco Central (Central Bank) on August 19.

The manager of INS Valores added that the Central Bank has implemented an aggressive increase in the monetary policy rate (TPM), which has motivated some investors to transfer investments from dollars to colones, which puts pressure on the sale of dollars. , mainly at bank windows.

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Regarding the decrease in the price of oil, Quesada indicated that in the last three months the price of crude oil has gone from levels above US$100 to around US$85, which lowers the purchase of dollars in the local market; and the entry of FLAR resources generates an expectation of abundance in the market, although deep down it is not required to make effective use of it.

Rodríguez, for her part, indicated that the foreign exchange surplus has resurfaced significantly, where September presented a historical record excess of dollars sold over those bought.

“This increase in market surpluses has various reasons, from speculative financial movements that encouraged the sale of dollars at perceived high levels, foreign currency sold to take advantage of the best interest rates in colones, the departure of pension operators from the retail market to the wholesaler, even the lower need for dollars from the non-banking public sector, which implies a lower need to replenish foreign currency from the Central Bank in the Monex wholesale market,” said Rodríguez.

Will the trend continue?

Both Rodríguez and Quesada explained that the price of the currency depends on many factors that can make it vary at any time in one direction or another.

Rodríguez explained that this year the price of the currency has had high volatility hand in hand with a particular economic context: sudden financial movements inside and outside the country, high inflation rates and high geopolitical tension.

“Any of these elements can influence the trend of the exchange rate to one side or the other, however, November tends to be a month with a greater supply of foreign currency, which can mitigate upward pressures in the short term,” Rodríguez considered.

Quesada, for his part, explained that Costa Rica is a small and open economy that could at some point be influenced by external situations such as political tensions, armed and commercial conflicts, among others.

In addition, a strong colon against the dollar could deteriorate the terms of trade of Costa Rican exporters, that is, the relationship between the price of sales made abroad and the price of their imports.

Article by Patricia Leitón was originally published (in Spanish) in La Nacion. Read the original here.

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