Exchange Rate Affects Costa Rican Tourism

The National Chamber of Tourism (CANATUR) explained the negative effects of exchange rate in the tourism sector.

Thursday, October 28, 2010

CANATUR's analysis determined that current exchange rate generates negative effects on the sector in four main areas: drastic changes in the rules of the exchange rate regime, loss of competitiveness in the tourism industry, planning difficulty due to high volatility and tariffs to exchange rate benefits.

Juan Carlos Ramos, President of CANATUR, explains that since the early eighties, Costa Rica opted for the mini-devaluation regime; prompting tourism companies to adjust to that structure in order to maintain business relationships with international companies. He also states that due to the implementation of the band system exchange rate, companies failed to earn the profit margin obtained with the previous regime.

Another concern is the loss of competitiveness facing the Costa Rican tourism industry with a falling exchange rate, as this means foreign goods become relatively cheaper, making Costa Rica a more expensive destination for tourists.

"Currently tourists are more conservative, spending 11% less in relation to the pre-crisis period, so the appreciation of national currency makes the country a more expensive destination for tourists, which could opt for more affordable travel options," argued Ramos.

Also, he is critical of Central Bank intervention as he believes the entity lists a band system optimal for an economy that should show a steady evolution in the exchange rate without unpredictable and sudden movements, yet, since the implementation of the band system, daily variations in the average exchange rate has shown volatility with ranges between -4% and 3% minimum and maximum. When the exchange rate was managed with the mini-valuation system it showed predictable and linear behavior.

Volatility affects businesses when planning projection of costs, revenues, taxes and other operating variables.

Ramos said about that "not only unfairly the sector is being subjected to an imbalance between revenues and operating costs, but now it must pay a tax for profits that are not really being generated, causing a serious financial blow to businesses which handle credits in Dollars.”

According to a survey conducted by the Costa Rican Union of Chambers and Associations of Private Business Sector (UCCAEP), 66% of tourism businesses and services and 58% of hosting companies surveyed, reported to be adversely affected by the exchange rate volatility.

"An insurance exchange must be implemented to diversify and transfer risk of possible fluctuations in the exchange rate, and seek efficient market coverage accessible to entrepreneurs who depend on the value of the currency," Ramos concluded.

More on this topic

Costa Rica: Farewell to Exchange Rate Bands

August 2014

"The exchange rate bands are completely irrelevant for making economic decisions and the formation of expectations among economic agents."

From 'Pulso Bursátil', a blog by Aldesa:

Costa Rica: Facing a Managed Float?

The volatility of the exchange rate (measured by the standard deviation of 15 days MONEX) is at the lowest level of the year and similar to the levels recorded in December 2013, when the exchange rate was quoted at the "floor" exchange rate bands.

Costa Rica: Exchange Rate Overwhelms Tourism Industry

February 2013

The National Chamber of Tourism said that the appreciation of the colon against the dollar is hitting the sector hard in terms of competitiveness as a tourist destination.

A statement from the National Chamber of Tourism (CANATUR) reads:

The country's monetary policy is asphyxiating tourism.

Devaluation Complicates Tourism in Costa Rica

November 2010

Two thirds of the country's tourism businesses have been negatively affected by the 15% increase in the value of the Colon.

The tourism industry in Costa Rica, which represents 7% of the GDP, receives most of its revenue in Dollars and pays most expenses in Colones. This puts them as one of the sectors most affected by the sharp appreciation of the Colon.

Costa Rican Tourism Affected by Volatility and the Fall of the Dollar

September 2010

Volatility in the foreign exchange market and a dollar priced under 500 colones are strongly affecting the Costa Rican tourism industry.

For example, lack of stability in the currency exchange rate is preventing tourism companies from evaluating how profitable an investment could be.

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