Sunday 2 April 2023

Exchange rate to have “some stability” in the coming months

Miguel Cantillo, professor at the UCR School of Economics says the dollar should not continue to fall and that the current phenomenon is not surprising,

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Dollar Exchange

¢537.94 Buy

¢545.40 Sell

01 April 2023 - At The Banks - BCCR

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QCOSTARICA – Miguel Cantillo, a professor at the School of Economics of the University of Costa Rica (UCR), who is also a specialist in this matter, foresees that the dollar exchange rate will have “some stability” in the coming months, despite the abrupt changes reflected in recent weeks.

According to Cantillo, several factors explain why the colon has gained more strength than had been predicted at the end of last year.

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Among the various reasons, Cantillo points to direct foreign investment and the effect of the national premium on treasury bonds, which has fallen by around 20% since the middle of last year. This, coupled with a better fiscal situation, means that Costa Rica has improved its risk perspectives to invest. In addition to the above, the country offers interest of 9% on these bonds in short-term investments in Costa Rica and the United States, much higher than the 4.75% of US bonds.

The Eurobonos (Eurobonds) is another factor that injects dollars into the country and has pushed the dollar down, although the UCR economist clarifies that some billion dollars of these securities will remain in the reserves of the Blanco Central de Costa Rica (BCCR) – Central Bank of Costa Rica, which reduced its impact on the exchange market. Cantillo also argues that if the tax reform implemented by Costa Rica in recent years has positive effects, this will result in a stabilization of the exchange rate.

On the other hand, Cantillo argues that a small reduction in inflation (which is very similar to that presented by the United States), would cause an eventual drop in interest rates, which would be close to the figure of between 5.25% – 5.50% handled in the United States, although the national rates will always be above this margin. This scenario would reduce the national and foreign attractiveness of investing in colones and would push the dollar exchange up a bit.

However, the economist points out that this effect would be mitigated by the entry into the country of some 50 new foreign companies, according to the figures of the latest BCCR Monetary Policy Report for 2022.

In addition, the reactivation of tourism must be taken into account: according to data from the Instituto Costarricense de Turismo (ICT), last year the country received 2,349,537 visitors, which means 75% of the number of people who arrived in the year prior to the pandemic. This still leaves room for growth in this sector by 2023 and the corresponding higher dollar income.

In the midst of this panorama that is to some extent uncertain, the expert advises investors to know and learn about the movement of the exchange market, as well as the lending policies of the banks, before making any type of investment.

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Despite this irregular behavior, the truth is that the national currency has strengthened against the US currency at the beginning of 2023, reaching levels similar to those it was before the pandemic and leaving in oblivion, for now, values close to ¢700 colones set last year.

The reference sale of the dollar, according to the Central Bank, is located at ¢562.13, which represents a decrease of ¢16 in the last week and of ¢38 so far this year.

Exporters such as banana growers, industrialists, and coffee growers, among others, recently joined the concerns of the country’s export and tourism sector, due to the losses they perceive due to the current behavior of the dollar exchange.

How much could the dollar go up or down?

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Weeks ago, the Central Bank asked the sectors and the population to have “tranquility” about the behavior of the dollar.


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