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 Nacion.com 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).

Source: Nacion.com

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