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Thursday, June 1, 2023

Hang On to Those Greenbacks

A U.S. dollar buys quite a bit less in Costa Rica after a surprise move by the Central Bank allowed the colón to gain more than 4% in value.

One dollar now buys an average of 496.21 colones, compared to 516.76 a week ago.

Despite the dollar’s weakness here, some economists are advising against changing longterm dollar investments to colones, saying the colón’s value remains uncertain and could go back down again in the next year or two.

“You don’t have to accept the loss today by changing to colones,” Luis Mesalles, the president of economics think tank Academia de Centroamérica, told The Tico Times.

Even so, the drop in the value of the dollar has created some short-term winners and losers. Costa Rica’s exporters – most of whom sell their products in dollars and pay their expenses in colones – are getting the short end of the stick.

The winners are importers and anyone who buys their wares. The lower cost of imported goods could even help cool Costa Rica’s inflation rate, which remains one of the highest in the region at over 9%.

The current flap in the exchange rate comes after 13 months of calm. In October 2006, the Central Bank instituted a dollarcolón exchange policy that attempts to keep the price of a dollar in Costa Rica between an upper and a lower limit.

When the price of a dollar gets close to either limit, the Central Bank buys or sells currency on the local market to influence the supply and demand – basically, controlling the price.

Central Bank president Francisco de Paula Gutiérrez has compared the limits to training wheels, and the eventual goal is to open the “band” gradually until the exchange rate floats freely on an open market, without Central Bank intervention.

For a variety of reasons, a free-floating currency would be a step toward reducing inflation.

But the exchange rate has yet to do much floating. Except for a few weeks in October, the price of a dollar in colones has pushed downward, requiring constant intervention from the Central Bank to keep the

colón from gaining value.

On the night of Nov. 21, the Central Bank relented, dropping the inferior limit of the band – or the “floor” – suddenly, by about 4%.

The exchange rate went with it, the value of the dollar plummeted as the value of the colón went up.

“People were saying the exchange rate had to go down,”Mesalles said. But the timing “took most people by surprise.”

Costa Rican banks – who may set whatever exchange rate they like – responded erratically in the days after the change, with the sale price of dollars varying from bank to bank by as much as 22 colones.

Within a few days, the market had reached an equilibrium, and as of press time the average price to buy dollars was 502.38 and the average price to sell dollars was 496.21 according to the Central Bank.

Ana Toyana, an economic analyst with Costa Rican finance company Aldesa, said the value of the dollar in the Costa Rican market will likely continue to push downward against the new limit set by the bank.

Simply put, more dollars coming into the country from tourism and investment during December and January mean a greater supply of dollars. Greater supply means lower price, so the value of the dollar will continue to be weak.

Toyana cautioned, however, that the dollar supply could shrink next year as Costa Rica begins to feel the effect of the economic slow-down just beginning up north. As the United States tightens the purse strings, fewer dollars will make their way to Costa Rica, and their value could go back up.

“For those who lost today in the short term, in the long term they could recover their loss,”Mesalles said. “It’s not necessarily a loss for them.”

One sector that is certainly experiencing a loss, however, is the export sector that Costa Rica has come to depend on in recent years for an increasingly large slice of its income.

Service companies, for example, earn dollars from the work they do for foreign companies, yet the salaries they pay their workers are in colones – whose value just went up 4%.

Agricultural exporters also have most of their expenses in colones and income in dollars, and some that have sold their production for a few months in advance have been left holding the bag.

Chamber of Exporters president Mónica Araya said the change took exporters by surprise and that exporters were worried – but not only because of the exchange rate.

“We understand that this is an effort the government is making to reduce inflation,” she said. “Our main concern is that, while this happens, the competitiveness of the country has been going backwards.”

Foreign Trade Minister Marco Ruiz expressed similar concerns last week, and President Oscar Arias recently created a new cabinet position dedicated to increasing Costa Rica’s competitiveness (see separate story).

Araya and a group of exporters met with Arias Thursday to express their concerns.



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