Less Uncertainty, Better Outlook

After Costa Rica's Constitutional Chamber prepared the path for tax reform in the Congress, the dollar's price against the local currency stopped rising, and positive reactions were reported in the risk outlook.

Tuesday, November 27, 2018

Last November 23rd, Court IV issued its judgment, so the law project has a free way to move forward more quickly during the coming weeks in the Congress.

Before the judgment was issued, an uncertainty scenario was generated that caused, among other things, a strong depreciation of the Colon against the dollar, a rise in interest rates and a general concern about the economic future in the short term.

On November 26th, in the first session of the Monex wholesale market, after the announcement of the Constitutional Chamber, a reduction in the weighted exchange rate of ¢2.27 was reported, falling from ¢609.30 to ¢607.03.

In the November 27th session, the exchange rate continued to fall, declining from ¢607.03 to ¢603.13, which is equivalent to an absolute variation of ¢3.90.

See Monex market figures.

Regarding the exchange rate reaction, José Antonio Cordero, director of the Research Institute in Economic Sciences at the University of Costa Rica, explained to Nacion.com that "... the events of November 26th in the market are an indication that effectively, at least one group of participants who trade in the exchange markets are a little quieter."

On the other hand, Fitch Ratings, Euroasia Group and Nomura, agree that the constitutional court's judgment reduces Costa Rica's perception of credit risk.

Carlos Morales, analyst director of Sovereigns of Latin America at Fitch Ratings, said that "... It is relevant in terms of reducing risk. We expect its approval and the final impact on the fiscal deficit (...). We do not yet have a decision on the country's rating, we expect the resolution of other issues such as (government) financing and liquidity pressures. In addition to witnessing the repayment of the Central Bank loan."

The firm Nomura reported in a statement that the resolution "... represents the first major commitment to fiscal discipline." On the other hand, Euroasia Group "sent a note to its clients in which it highlights that the Government was prepared to issue Eurobonds and obtain credit lines from international organizations."

View Nacion.com publications "Dollar fell ¢2,27 on a quieter Monday day" and "Progress in fiscal plan achieved positive reaction from financial markets".

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More on this topic

Alleged Stability in the Foreign Exchange Market

December 2018

Following the Constitutional Chamber's judgment on the tax reform, the exchange rate in Costa Rica temporarily stopped rising, but it is expected to restart upward trend in the coming months.

According to figures from the Central Bank of Costa Rica (BCCR), from mid-August to the first week of November, the Colon depreciated rapidly.

New Warning to Costa Rica

November 2018

Fitch Ratings reported that the country is under observation and for now maintains the rating at BB, awaiting what happens with the fiscal reform and the payment of government debt at the end of the year.

Fitch Ratings, a U.S. risk rating agency, reported on November 15th that Costa Rica would be close to a sovereign rating downgrade because of the country's public finances situation.

Fiscal credibility and sovereign risk

January 2010

Fitch Ratings warned that although Central American sovereigns have resisted the global crisis pretty well so far, they now require fiscal consolidation in order to maintain their credit ratings.

Fitch‐rated Central American sovereigns have thus far withstood the destabilizing effects of the global economic and financial crisis, despite monetary and exchange rate policy challenges.

Fitch: Latin American Sovereign Outlook 2009

March 2009

Fitch expects that Latin America’s real GDP will contract by 0.9% in 2009, with Brazil’s economy stagnating at best and Mexico contracting by over 2%.

Latin American economies have recoupled with the crisis in the developed economies. Since September 2008, Latin American countries have been buffeted by stronger external headwinds, as evident from the fall in regional currencies and stock markets and from widening bond spreads.

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