Financial Sector: Preference for Liquidity Increases

Preventive reasons for unforeseen expenses in the context of the pandemic and low liable interest rates are some of the factors that explain the increase in the balance of short-term savings instruments in the Costa Rican market.

Wednesday, July 8, 2020

In the context of the spread of covid-19 and the restriction of several productive activities, the broad money supply (including cash held by the public and highly liquid financial instruments in national and foreign currency) showed a 35.7% year-on-year growth rate in June 2020, considerably higher than the 2.7% recorded in the same month in 2019, while the balance of term instruments fell, reported the Central Bank of Costa Rica (BCCR).

See "Financial Services: Business Potential in Central America"

The official report published on July 2 states that "... The greater preference for highly profitable assets is estimated to be due, among other things, to the following:

(i) preventive reasons, in order to meet costs not foreseen in the context of the pandemic, as well as the limitations introduced by health containment measures;
ii) the distribution of the Bono Proteger (Law 9840) and the withdrawal of the Labor Capitalization Fund (Law 9839); and
(iii) the low liability interest rates, which reduce the opportunity cost for savers to hold more liquid assets.

This phenomenon reported in the Costa Rican financial market could generate difficulties for banking entities.

José Luis Arce, director of FCS Capital, explained to that "... This issue introduces several complexities, on the one hand it constitutes a barrier to the possibility of banks to extend credit and greater complications for their liquidity management."

Arce added that "... companies, families and institutional investors maintain resources in very liquid instruments to face the cash demands of the situation, in a context of falling sales, income and potential withdrawals."

See full BCCR document (in Spanish).

More on this topic

Financial System: Warning by Bill

October 2020

In the Honduran Congress there is a bill that seeks to prohibit banks and finance companies from capitalizing interest on payments not made from March 2020 to December 2021, a measure that worries the sector.

The initiative was sent by the Executive to the National Congress months ago.

El Salvador: Loan Portfolio Downwards

August 2020

Given the outbreak of covid-19 and the imposition of restrictions on economic activity, between February and June of this year the amount of loans granted by the banking sector reported a 1.2% drop.

Data from the Superintendence of the Financial System (SSF) indicate that between February (the month before the beginning of the health and economic crisis) and June of this year, the credit portfolio contracted by $149 million, from $13.276 million to $13.127 million.

Financial Sector Forced to Innovate

July 2020

The current business scenario ended up breaking down several barriers, and now there are more customers who demand the online services of financial institutions, which are challenged to facilitate digital processes and in turn apply strict security standards.

In the last four months, in most Central American cities, bank clients have moved away from the bank's service points, because between the home quarantines decreed due to the spread of covid-19 and the preference to avoid attending places where large numbers of people can congregate, consumers are choosing to look for ways to carry out transactions digitally.

Honduras: Rise in Savings During Confinement

June 2020

In the scenario of the health crisis and the decreed quarantine, it is reported that as of April, the balance of savings deposits of individuals amounted to $5,283 million, 15% more than the same month in 2019.

At the beginning of the year the authorities of the Central Bank of Honduras (BCH) estimated that for this year deposits in the financial system would increase by about 8%, however, this figure has almost doubled.