Risk of Devaluation in Costa Rica?

Credit growth in dollars is causing concern about possible risks of devaluation and a rise in interest rates.

Friday, December 6, 2013

Nacion.com reports that: "Guillermo Quesada, President of the Chamber for Banking and Financial Institutions said that banks have been proactive and have already taken steps to address the risks."

"The president of the Central Bank is concerned about the further widening of the gap between total external liabilities of banks (debt that banks have bought in from outside) and assets (its holdings in the currency)."

Stress tests and other assessments are being undertaken by banks before granting credit in dollars to companies or individuals that do not generate income in that currency.

In addition to the potential risk of devaluation of the colon against the dollar, companies must also consider in their credit risk analysis potential increases in interest rates, a scenario that could occur if the U.S. economy continues to recover.

"An increase in international interest rates could lead to a foreign exchange outflow from our country and a subsequent raise in the dollar, says Nacion.com."

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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.

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Central America and the Devaluation of the Chinese Yuan

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Costa Rica: Exchange Rate Margin Drops 30%

June 2014

The movement could respond to the lower volatility of the exchange rate seen from the beggining of administration of Luis Guillermo Solis on May 1st this year.

The margin between buying and selling dollars at the counters of financial institutions has declined from 13 to 10 colones colones in the last eight days, after several weeks of constant central bank interventions in the wholesale forex market, movements which the market interpreted as efforts to stabilize the price of the dollar against the colon and prevent it rising beyond what is deemed appropriate by the authorities at the Central Bank.

Further Devaluation of Costa Rica's Currency Projected

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It has been noted that the Costa Rican Colon could depreciate 20% more against the dollar in the U.S. and with that correction the exchange rate will reach 650 colones per dollar during 2014.

The accelerated depreciation of the colon against the dollar in the first months of this year could continue throughout 2014.