Thursday 28 January 2021

Pressure on dollar exchange begins to give ground: Will it be sustainable?

The exchange rate resumed a downward trend, despite uncertainty generated by fiscal situation

QCOSTARICA – After peaking on November 11, at ¢616.58 according to the Banco Central (Central Bank) average, the exchange rate seems to be losing ground, closing on Friday, November 21, at ¢605.99.

The pressures seem to have diminished, so much so that during the week that just passed, the intervention of the Central Bank in the Foreign Currency Market (Monex) was not necessary.

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This is the first week that the Central did not operate in that market, that is injected dollars,  since the third week of September.

On the contrary, the last week of October and the first two of November represented the moments of greatest tension with record interventions so far this year. A pressure that had been increasing since the end of September.

Will the exchange rate return to the previous “normality”, below ¢600?

The first thing to remember is the source of the pressure. Both the president of the Central Bank, Rodrigo Cubero, and various analysts have agreed that the adverse effects of the pandemic (lower inflow of foreign currency from tourism and foreign investment, for example) had to be added a very specific condition: the news that Costa Rica is pulling away from the help (loan) from the International Monetary Fund (IMF).

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The decision was made by the government on October 4. Immediately, pressures began to be felt that shot up the dollar exchange, when the markets and people were filled with uncertainty.

This caused that in October – for the first time in the entire year – the monthly sales of dollars made by banks and financial institutions to the public were greater than purchases.

People began to fear what could happen to their colones, and those who could decided to “dollarize”.

This dollarization impetus set the vicious circle in motion: the more fear and uncertainty that the dollar exchange would rise, the more people bought the dollar, and then to curb demand, there is greater pressure to increase the price. This is how fear becomes reality, as explained by economist Alberto Trejos.

Traditionally, the pressures of the end of the year are more towards a strengthening of the colon.

Aspects such as the payment of the Aguinaldo, the income of foreign exchange from tourism and the payment of taxes, make the exchange rate fall towards the end of the year.

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However, these are pressures that still remain. Tourism continues to generate little, there is still an impact on investments and it is expected that payments for bonuses and taxes will be lower due to the impact of the crisis.

For Francisco de Paula Gutiérrez, the former Minister of Finance, these are elements to take into account and that we can see an exchange rate close to ¢600 and that it ends up “moving” between that and ¢615 for the remainder of the year.

The Central Bank regularly conducts a survey of various representatives of the economic sector, especially the business sector, to measure their fears and projections in various matters, one of which is precisely the exchange rate.

Nothing more nervous than a US$100 bill

According to the responses of last month, most do not expect a strong devaluation of the colon, despite the uncertainty.

Thus, the six-month projection is that the exchange rate will increase on average of 1.8% to 2.9% in the coming 12 months.

In real terms, from April to October the variation was around 9%, although, since November 11, when it peaked, to last Friday, that percentage has already fallen by 1.7%.

The fear or confidence that the decisions made by the government in relation to the dialogue table and the IMF may generate in the coming days will play a transcendental role in determining the behavior of the dollar exchange, and determining whether the responses given by businessmen to the Central Bank end up being fulfilled or …

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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.

"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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