Saturday 12 June 2021

Hello, Devaluation! Central Bank ‘Got Tired’ Of Spending Reserves To Curb Rise In The Dollar

President of the Central Bank: Uncertainty due to the country's fiscal situation increases the purchase of dollars

On Wednesday, October 31, 2018, the dollar exchange moved from one to the next in a way it has never done before, up ¢10 colones in the wholesale market (Monex) and ¢15 in the retail market (banks).

The dollar exchange reference rate posted this morning by the Banco Central Costa Rica (BCCR) – Central Bank – is ¢613.01 for the buy and ¢620.76 for the sell, ¢9.81 and ¢10.02 higher than yesterday, respectively.

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At the banks, the sell rate was between ¢611 and ¢617 and the sell between ¢627 and ¢630. On Wednesday, the sell rates at the banks was between ¢613 at the state banks and ¢615 at the private.

See here the most up-to-date exchange rates at all financial institutions as reported to the Central Bank.

The president of the Central Bank, Rodrigo Cubero, said the uncertainty of the country’s fiscal situation increases the purchase of dollars.

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El Financiero (EF), Costa Rica’s premier financial newspaper, says that in a moment of doubts about the price of the dollar that shows an aggressive behavior upwards in recent days, people and companies are looking for answers to understand the reasons why the colón is depreciating with respect to the US dollar.

Sergio Morales, EF’s finance editor, spoke with Rodrigo Cubero on Wednesday for answers on the question of the moment: what happens with the change?

Cubero explained that there are two groups of factors that explain the atypical increase in the price of the dollar. Global factors such as the increase in interest rates in the United States, which has been applied consistently by the Federal Reserve for a year and the increase in international oil prices hit the exchange rate in Costa Rica.

“It has to do with the increase in the interest rate in the United States that has put some upward pressure on the currencies of emerging market countries such as Costa Rica, Colombia and Peru. Another global factor that weighs is the increase (of the dollar) in the price of oil that affects the exporting companies that must use more dollars to buy oil,” said the head of the Central Bank.

Within the domestic economy, Cubero is clear in pointing out that the uncertainty about the country’s financial situation and the doubts that surround the approval of the fiscal reform weigh directly in this abrupt movement in the price of the dollar.

“The particular situation of uncertainty about the direction of public finances, and above all, what the market perceives as the possibility of approval or non-approval of the Ley de Fortalecimiento de las Finanzas Públicas (tax reform bill), has a weight in this rise”, he said

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La Nacion reports, “The uncertain fiscal situation of Costa Rica has stopped being a chronic evil; threatening yes, but to the naked eye painless. The problem of public finances is very delicate and the losses begin to become more and more evident as many presaged that it would happen from past times, as the palliatives were ending. One of the manifestations of what I say is observed in the foreign exchange market, where the price of the dollar rises (now it can be said, like the foam), in the wholesaler, and therefore in the slates of financial institutions.

Central Bank president explains

In a press conference Wednesday afternoon, Cubero explained that the increase is due to the reversal of the position of the Ministry of Finance, since traditionally this had been a net seller of foreign currency, to now be a net claimant of dollars and that change amounts to many hundreds of millions in the last six months and This explains to a large extent the pressure that has been placed on international reserves. The other culprit is the fiscal deficit and its lack of solution since everything pushes these imbalances.

“What we have seen in terms of the use of reserves in the last three months has been a radical change in what has been the participation of the non-banking public sector, which previously bought foreign currency from the Central Bank but at low magnitudes to what was the total of transactions in the exchange market and now the purchase of foreign currency by the non-banking public sector has become very strong”.

For Cubero, prudence and calm are part of the factors that should also improve for this rise to stop, but at the moment it is not.

There is a strong demand of dollars and little supply, the net result of the purchase minus the sales of dollars in the windows of the banks are negative in US$152 million in October, which affirms the situation of a market desperate to find dollars.

Central Bank got tired of using reserves

The message resonates more and more clearly. The Central Bank got tired of using its international reserves (dollars in its power), to stop these movements, and is letting the announced flexibility occur.

From the end of March to date, the Central Bank used almost US$1.550 billion to “soften” the increases in the exchange rate of the dollar (by intervening directly in the Monex, or quenching the thirst of the non-banking public sector).

Although it has continued to intervene directly, the amounts applied do not seem to be sufficient to prevent the devaluation of the colon from accelerating. Consequence: the dollar appreciated ¢26 colones in October.

¡Hola devaluación!

Hello, devaluation! The result of the devaluation may have a strong impact on the financial system. Almost all (97%) of the credit in dollars are in the hands of companies that earn in colones. The Central Bank president is urging financial institutions not to lend in dollars to those who do not generate income in that currency.

On example is Recope, the state refinery that uses dollars to purchase the import of fuels. We can expect a sharp increase in the price of fuels.

The rise in the dollar will affect many services, in particular, those that quote in dollars but collect in colones. An example is cable and internet services, subscription to online services like Netflix and many more.

Read more (in Spanish) at: El Financiero, La Nacion, La Republica


How does this devaluation affect you? Use the comments section below or to our official Facebook page.

 

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FACT CHECK:
We strive for accuracy in its reports. But if you see something that doesn’t look right, send us an email. The Q reviews and updates its content regularly to ensure it’s accuracy.

Ricohttp://www.theqmedia.com
"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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