Markets closed with the dollar at ¢518.34, ¢7.88 higher than the day before, after the Costa Rican Central Bank's (BCCR) decision to increase foreign exchange reserves.
Since the BCCR announced the news, the dollar's price increased steadily, reaching a high of ¢523,01 before finally closing at ¢518.34.
Rodrigo Bolaños, president of BCCR, said that, "in the coming days it will be interesting to see what direction the exchange rate takes because just the announcement alone has caused it move up by several colones," reports Nacion.com.
The monetary authority has launched a scheme to acquire international reserves, immediately causing the exchange rate to rise.
In his blog for Nacion.com the analyst Jorge Guardia highlights that this intervention represents a trimming and sprucing within the limits and a fundamental change in Central Bank (BCCR) policy that lacked due transparency.
Central America may be directly impacted by the slowdown in the recovery of the world economy.
For the time being, the region's measures of external and internal demand do not seem affected by the threat of lower growth rates for the economies of partner developed countries. Some central banks had raised their expectations but, in view of the risks, they are likely to revise their growth predictions back to original levels between 2.0% and 2.7%.
Aldesa highlights a significant weakening in economic activity, a downward trend in inflation and a growing fiscal deficit.
Significant Weakening in Costa Rica's IMAE
The Monthly Index of Economic Activity (IMAE in Spanish) for June closed 2.96% up year-on-year. After reaching a high of 6.09% in February growth has slowed. The slowdown is led by the manufacturing sector, for which year-on-year growth in June was 1.13% compared to 12.6% in January, blamed on free trade zone output. The construction sector still shows no signs of recovery.
Good news for importers and store owners, bad news for exporters. Governments cannot afford to ignore this problem.
The causes of the appreciation in the value of Latin American currencies relative to the United States dollar are varied. The main reason is the current weakness of the US economy and the low expectations of a quick recovery. In addition, Central and South American economies are doing well, boosted by high commodity prices and the way their financial systems withstood the last crisis.
Inflation deceleration and Risks to economic recovery.
The quarterly report from the Executive Secretary of the Central American Monetary Council (SECMCA) focuses on the region's inflation and recovery prospects.
Inflation, measured by year-on-year change in consumer prices, slowed in the second quarter of 2010 to 4.9%, compared to 2.9% in June 2009. This level is within the target limits set by the region's central banks.
Central American countries still need to improve their economic performance to reach investment grade ratings.
On its Quarterly Country Risk report for June 2010, the Central American Monetary Council (SECMCA), notes that Moody’s Investor Service improved the foreign currency risk ratings for Guatemala and Nicaragua. For Guatemala, the criteria for this improvement included a stable macroeconomic environment, backed by prudent fiscal and monetary policies, and for Nicaragua improvement in debt indicators and low fiscal deficits.
Monthly Index of Economic Activity (IMAE), exports, remittances, international reserves, exchange rates, inflation, tax collection, banking system, foreign investment, tourism and outlooks.
Oscar E. Mendizábal, editor of the Blog “Desde Guate” (From Guatemala), gathers and analyses the main factors influencing the Central American economy (except Panama) during the first six months of this year.
“Cherches la femme”: Who made profits when the dollar plunged in Costa Rica? Who is making them now with its sharp increase?
Nacion.com reported today, at 11:30 am: “The average price of the dollar in the wholesale market has increased over ¢10 when compared to yesterday’s close. It is now ¢535.88, ¢10.23 more than yesterday. From last Monday until today, the dollar has risen ¢27, after hitting a two-year low of ¢508.88 on Monday”.
Luis Liberman, Costa Rican Vice President-Elect, said the rally in the nation’s currency is “worrisome”.
Costa Rica’s colon has surged 11 percent against the dollar since Dec. 31.
The currency is benefiting from the so-called carry trade, in which investors borrow in nations with low interest rates to buy higher-yielding assets, Liberman said. Costa Rica’s benchmark rate is 5.75 percent, higher than near zero rates in the U.S., 1 percent in the euro-zone and 0.1 percent in Japan.
CINDE stated that the increase in the value of the Costa Rican colon versus the U.S. dollar is negatively affecting the country’s exporters and diverting foreign direct investment.
Alberto Trejos, president of the Costa Rican Investment Promotion Agency (CINDE), stated that the recent strong increase in the price of the Costa Rican currency is making exporters less competitive.
In El Salvador, the debate over the advantages and disadvantages of dollarization has been reignited, as the government is in need of resources for funding its programs.
President Funes has regretted that Dollarization has limited El Salvador from taking actions to combat the economic crisis. However, Augusto De la Torre, chief economist for Latin America and the Caribbean at the World Bank, repeated that dollarization is not an obstacle, and that in the case of Panama and El Salvador it has been key to relieve them from external pressures and exchange rate volatility.
Costa Rican analysts shared their insights as to what caused the Costa Rican colon to gain so much value versus the dollar.
Two explanations seem to be the most agreed upon:
1. Speculative capital enters the country to take advantage of high interest rates in Colones, as opposed to low yields in international markets.
2. Domestic investors are transferring their investments from dollars to colones.
After showing constant growth during 2007 and 2008, inflation indexes slowed down considerably in the second half of 2009.
The Executive Secretary of the Central American Monetary Council presented its 30th Regional Economic Update. In it, they calculate how much inflation was indirectly imported by the Central American countries.
For this, they elaborated indexes of the various components which explain price changes in the past years.