Monday 26 July 2021

What could be expected with the exchange rate in the coming weeks?

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The dollar has dropped, hovering the ¢600 mark after a high only a few weeks ago of ¢630. What could be expected from the exchange rate in the coming weeks?

The position of the Constitutional Court (Sala Constitucional ) with respect to the bill – Ley de Fortalecimiento de las Finanzas Públicas (file 20.580) – commonly known as the plan fiscal (tax reform) – gave the economy a respite, since it reduced slightly the uncertainty of families and businesses.

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However, pressures on the foreign exchange market and interest rates will continue in the coming months due to the high financing required by the Ministerio de Hacienda (Ministry of Finance) to be able to meet its obligations.

This conclusion was reached by the Observatorio Económico y Social (Economic and Social Observatory) of the de la Universidad Nacional (UNA), an entity that analyzed recent movements in the exchange rate.

According to the researchers at the UNA, pressures on the foreign exchange market will continue in the coming months, as the tax reform will not take effect until the second half of 2019 (at least with respect to the first tax revenues received regularly), and most taxes would not begin to be collected until 2020. This would continue to grow the fiscal deficit and public debt.

Likewise, in case approval is obtained by the Legislative Assembly to issue external debt (which requires 38 votes) it would take between 5 and 7 months to materialize, which means financing of the deficit would continue to be in the domestic market and, therefore, resulting in upward pressures on interest rates and the exchange rate.

However, if the government is able to raise dollars effectively by way of an external debt, two scenarios could occur: a) that the Ministry of Finance convert the dollars to colones to pay the needs in local currency, pushing the exchange rate downwards or b) that this situation be taken advantage of by the Central Bank and buy U.S. dollars to recover the reserves lost throughout this year to intervene in the market to stabilize the exchange rate, and in this way the exchange rate will not be altered.

In addition, the UNA researchers consider that it is very likely that the U.S. Federal Reserve will continue with the gradual process of raising its reference rate, which could translate into additional pressure on the behavior of the dollar exchange rate in Costa Rica, in case the adjustments in domestic interest rates are not made in a timely manner.

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Thus, the approval of the tax reform bill gives the economy a break, but there still lacks much to achieve stability in the public finances.

It is expected that volatility in the exchange rate will continue in the coming weeks, with a pause in December, as a consequence of a seasonal effect of the “colonization” of resources for the payment of taxes and aguinaldos (year-end bonuses), but with an upward trend.

 

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"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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