Thursday, 9 July 2020

What can we expect for the dollar exchange with the ‘coronavirus effect’?

Though impossible to make predictions, the Central Bank indicated at the beginning of the month that there was "a growing uncertainty".

The dollar exchange rate is currently under strong pressure, towards a rise driven by situations such as the fall in tourism and exports, which decrease the amount of dollars available in the country; while, on the downside, it is driven by the fall in oil and import prices, which imply less demand for the currency.

Though impossible to make predictions, the Central Bank indicated at the beginning of the month that there was “a growing uncertainty”

Knowing how the price of the dollar will behave is an impossible prediction to make. However, economists agree that the country has enough tools to neutralize a too violent fluctuation.

The exchange rate has maintained a growing trend since March 14, when it was at ¢567.68. Since then it has climbed to ¢582.05 on March 26 for a cumulative increase of ¢14.37 in 12 days.

- paying the bills -

What about the exchange rate?

The price of the dollar is governed by supply and demand. So their cost goes up when fewer dollars are available to people who are looking for them; and it goes down when the dollar amount is more satisfactory for the market.

The drop in tourism and exports, for example, implies a lower availability of foreign exchange in the country; while the fall in the price of oil and imports imply less need for them.

According to the ex-Deputy Minister of Finance and academic of the National University (UNA), Fernando Rodríguez, this implies that the exchange rate undergoes a “balance” effect, in which some effects are fairly offset by others.

For Rodríguez, the main impact for the Costa Rican economy, yes, would come from tourism. In other words, we are talking about an upward effect, since that sector is totally stagnant – in “zero season” and prevents the arrival of more dollars in the country.

- paying the bills -

“Obviously, dollars are not coming in for tourism, and that could turn the balance somewhere. It is perhaps the strongest pressure there can be on the exchange rate, because the variations on imports and exports are partial, regardless of how much they go to be affected, but tourism not.” he said.

However, the economist assured that this upward impact could be offset by the entry of international credits managed by the country, such as the US$500 million with the Andean Development Corporation (CAF) recently approved by the Legislative Assembly.

Along with the $ 500 million loan with CAF, the Legislative Assembly is preparing to approve a second loan for US$380 million with the Inter-American Development Bank (IDB), and both could increase the availability of dollars in the market.

Likewise, entities such as the Acobo Financial Group have reiterated that the Central Bank maintains its commitment to maintain a balance in the exchange rate, and intervene if necessary to “avoid violent fluctuations”.

As mentioned, it is impossible to make predictions, but specialists such as Acobo’s economic analyst, Luis Diego Herrera, assure that the dollar “has shown stability” so far in 2020, and stressed that “the financial institutions show a positive balance”.

This indicates that banks buy more dollars than they sell and that implies that there is “enough supply of dollars in the economy.”

- paying the bills --

Rodríguez, for his part, affirmed that, although the Central Bank could not completely stop a trend of the dollar (up or down), the entry of international credit resources could be a combination tool that helps to moderate the pressures towards the rise implying impacts as strong as the complete brake on tourism.

Regarding the economic movements caused by the Covid-19 pandemic, the Central Bank indicated at the beginning of the month that there was “growing uncertainty about global macroeconomic performance in light of the risks introduced by the outbreak”, but that “it would closely follow these events in try to take the necessary measures in a timely manner.”


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