Costa Rica's export sector wants to regain competitiveness through devaluation of the colon, but the Central Bank insists that the exchange rate is at the right level.
An article in Nacion.com reports on the pressure put on authorities at the Central Bank (BCCR) by exporters, to devalue the local currency which would increase the competitiveness of Costa Rican exports, which in the past year fell by one billion dollars.
Overvaluation of the local currency against the US dollar is hurting the competitiveness of Costa Rican exports.
Strengthening of the Costa Rican Colon against the dollar US is directly affecting export companies that generate costs in colones and receive dollars, which when converted into colones in Costa Rica are worth less than abroad. Added to this is the devaluation of the dollar against the euro, creating a negative effect on companies that sell their products in Europe.
The stability shown by the exchange rate between January and March explains the 12.5% growth in the loan portfolio in dollars.
From a Blog by Aldesa, 'Pulso Bursátil':
Last year, after a rise in the exchange rate, Costa Ricans started to borrow in colones and save in dollars. However, recent data shows that the current behavior is the opposite.
Although credit in colones is the fastest growing year on year, the dollar-denominated debt is showing an upward trend. During the first three months of the year, dollar credit rose at an annualized rate of 12.5%, a performance which contrasts with the 2.7% rise seen in colones.
The Central Bank is considering changing the methodology for calculating the exchange rate market benchmark, with the aim of improving price formation and reflecting the generality of transactions.
The the monetary authority's aim is to "... improve the process of price formation in the foreign exchange market and, once that is achieved, an amendment will be proposed so that the methodology for reference exchange rates reflects what happens with the generality of transactions, and not just some of them. "
The Central Bank of Costa Rica has officially eliminated the exchange rate band which has been in place since 2006, and let the exchange rate float, reserving the right to "participate in the market to prevent violent fluctuations".
From a statement issued by the Central Bank of Costa Rica (BCCR):
The Board of the Central Bank of Costa Rica (BCCR) set out in Article 5 of the session 5300-2006, October 13, 2006, establishing a system for an exchange rate band with effect from October 17, 2006. The scheme was announced as part of the process of a gradual and orderly move to a floating system, a condition for improving the monetary control of inflation.
"The exchange rate bands are completely irrelevant for making economic decisions and the formation of expectations among economic agents."
From 'Pulso Bursátil', a blog by Aldesa:
Costa Rica: Facing a Managed Float?
The volatility of the exchange rate (measured by the standard deviation of 15 days MONEX) is at the lowest level of the year and similar to the levels recorded in December 2013, when the exchange rate was quoted at the "floor" exchange rate bands.
In its review of the macroeconomic program for 2014-2015, the Central Bank projects, as the most likely scenario, an annual inflation of around 6% at the end of 2014, and slightly less than 5% by the end of 2015.
The document issued by the Board of the Central Bank of Costa Rica places emphasis on keeping the inflation target at "4% with a tolerance of ± 1 percentage point for the remainder of the period from 2014 to 2015."
The Libertarian Movement Party has again presented an initiative to establish the dollar as the only currency, in order to avoid, among other problems, the negative effects of exchange rate fluctuations.
The bill to be submitted for discussion in the Legislature provides, among other things, that "... the legal tender will also be the dollar and that 'acts, contracts and obligations under any other legal currency, abroad, will be valid, effective and enforceable in the contracted currency, even if payment must be done through the courts. '"
The central bank chief said that if conditions are right, it could "migrate" to a managed floating exchange rate system.
After taking measures such as eliminating purchases by the non-financial public sector in the Monex wholesale market and intervening in the market to minimize volatility and increase stability in the exchange rate, Olivier Castro, president of the Central Bank, "..
In the last 30 days the price of the dollar against the Colon went from 557 colones to 540.4 colones in the Monex wholesale market.
The decision to remove the non-fiinancial public entities from the wholesale market and less demand for foreign currency in recent weeks are the reasons for the drop of 17 colones in the price of the dollar.
"... The non-bank public sector stopped purchasing foreign exchange in Monex on 11 June.
In an attempt to limit exchange rate volatility, the Central Bank has determined that non-bank public companies can no longer trade currencies in the Monex wholesale market.
As explained by the entity, the foreign exchange requirements of the Non Banking Public Sector will not be served directly by the BCCR using international reserves.
From a press release by the Central Bank of Costa Rica:
A reduced demand for dollars by the nonfinancial public sector could be the reason behind the reduction of 7.5 colones in the price of the US dollar this week.
Since the last central bank intervention in the wholesale foreign exchange market on June 10, the dollar has shown a downward trend, being quoted at ¢ 546.47 per dollar at the close of June 20.
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.
A proliferation of articles, reviews and editorials on the exchange rate is the best example of the prevailing concern in a market waiting for a clear definition of the exchange rate policy by the Central Bank.
Editorial
In recent weeks, and while the President of the Central Bank of Costa Rica (BCCR) is denying it , warnings have been given over interventions in the foreign exchange market by the monetary authority.
From May 2013 to May 2014 the balance of deposits in dollars increased by 15%.
Up to May this year the balance of current accounts in dollars totaled $3.107 billion and in savings accounts $1.673 billion, 15% and 10% more than in May 2013, respectively. Moreover, certificates of fixed term deposits in foreign currency placed with financial institutions, cooperatives and the Central Government in May 2014 show an increase of 80% compared to the same month last year, according to a central bank report.