The dollar exchange dropped almost ¢5 colones overnight, going from ¢578.21 for the sell and ¢589.05 for the buy on Monday, to ¢572.15 and ¢578.29, respectively, this Tuesday.

On the Monex market, the dollar traded at ¢575.55 on Monday, ¢3.32 lower than Friday’s close, almost ¢8 colones from the previous Monday and ¢38 colones from February 6 when it traded at ¢613.87.

The Central Bank (Banco Central de Costa Rica) says the decrease responds to a greater amount of foreign currency (dollars) in the market.

According to the inflation report, published by the Central Bank on July 8, in the first half of this year, there was a surplus (purchases of foreign currency to the public exceeded sales) by US$812 million.

“That surplus was particularly high in April and May, months in which the result was higher than the average for the period 2007-2018,” the Central Bank confirmed.

Where do the dollars come from?

According to economists Norberto Zúñiga and Dennis Meléndez, the told La Nacion there are currently incentives for investors to bring capital from abroad to Costa Rica and place them in financial instruments.

“The main factor that explains the supply of foreign currency is related to the higher premium, adjusted for risk, which is recognized internally by government placements in dollars, but mainly in colones,” Zúñiga said.

The biggest risk-adjusted premium is influenced by several factors: lower international interest rates, especially in the United States; the rates in Costa Rica are still high, the 5% appreciation in the exchange rate, which stimulates the investments in colones and the lower risk once the fiscal reform was approved.

Why so low?

The Central Bank also mentioned the confidence factor as one of the reasons for the greater availability of foreign currency in the market, in its most recent Inflation Report (Informe de Inflación).

Today, Tuesday, July 16, legislators are expected to open second debate on the Eurobonds bill, which would allow the Government to receive US$1.5 billion dollars from abroad for the rest of the year.

Economist Dennis Meléndez explained that if the investors predict that the dollar will fall, they sell them today with the expectation of buying them later, cheaper and earning the revaluation.

“Anyone who considers that interest rates will fall brings capital, converts them to colones, buys securities in colones and waits for rates to go down and sells the securities and obtains capital gains,” Meléndez added.

The entrance of the Value Added Tax (VAT) – Impuesto al Valor Agregado (IVA) in Spanish – leads to greater investor confidence and less pressure on the exchange rate.

“What we are currently seeing is the reverse process of what we went through in the second half of last year. The tax reform opened financing sources to the Treasury, both in dollars and colones, and this has been reflected in greater supply and lower demand in our currency market. The change in expectations about interest rates in the United States has also weighed on that balance,” explained economist Alberto Franco.

For his part, Zúñiga added other factors in the greater availability of dollars such as: lower financing in foreign currency from the private sector (fewer dollar loans) and the loss of dynamism in imports.

However, Zúñiga considers that the significant exchange rate appreciation observed this year does not seem to be justified in light of the behavior of the monetary reserves.

The economist called attention to the fact that the drop in the dollar does not do well to the reactivation of the economy because it affects the export sector and stimulates imports instead of domestic purchases.