As world financial markets whirled from the latest crises in the U.S. lending and insurance sectors, Costa Ricans’ recent eschewing of Wall Street troubled sectors appears to have paid off.
Following Monday’s bankruptcy filing by investment bank monolith Lehman Brothers then Tuesday’s near demise of insurance giant AIG, stock markets in the U.S., Europe, Russia and Asia dropped to decade lows as central banks funded billion dollar bailouts.
Costa Rica, meanwhile, was calm.
“The Banco Nacional doesn’t have any investments with Lehman Brothers,” says Violeta Fernández, the bank’s corporate relations director, underlining Costa Rica’s financial independence.
Some international banks linked to Lehman have recorded multi-million dollar losses.
“Costa Rica is lucky,” says Rudolf Lucke, an economist at the University of Costa Rica. “We’ve been slow to get involved in the American stock market, and that’s why we’re not in this hurricane. Chile, Argentina, Brazil and Mexico will be more affected. They’re much more linked to America’s financial market.”
Eric Vargas, strategy director at Aldesa, an investment consultant firm in Costa Rica, says that he has steered investors to more low-risk, long-term investments like Procter & Gamble, Colgate, Wal-Mart and U.S. treasury bonds.
“Since the credit crisis began in August 2007, we’ve been advising our clients to stay away from American financial stocks,” Vargas says.
Lucke is also realistic. “The possibilities are very high that certain Costa Rican institutions have investments related to Lehman. But that’s not something you talk about,” he says.
On Tuesday, the Costa Rican Stock Exchange (BNV) rose 0.34 percent. “We haven’t seen a direct reaction in the BNV,” confirmed Silvia Zúñiga, the press secretary at the BNV.
“The BNV is affected more by the domestic interest rates than by the American stock market,” says Lucke.
“One possible consequence of the crisis will present itself if international investors abandon emerging market debt (EMD) bonds for more stable instruments,” predicted Zúñiga. EMD bonds are issued by companies in developing countries, like Costa Rica.
They are traded on the BNV.
Second round effects of the bigger markets’ troubles, however, are inevitable. Costa Rica’s economy depends largely on North American investment, trade and tourism.
The U.S. is Costa Rica’s No. 1 market for exports.
Domestically, the lending market has never been very liquid, but now, as the Central Bank tweaks the interest rate to catch up to an estimated 15 percent inflation – the highest since April of 1997 – borrowing money is expensive.
Yet a conservative monetary policy may have saved Costa Rica from the speculative lending crisis in the United States. Here, stringent limits have been set on the amount of money banks can lend in proportion to their reserves. Costa Rica’s federal reserves, for example, total about $3.9 million. This is the highest they’ve been since December, when they were at record levels.
Vargas expects to see even more spending paralysis. Currently, domestic interest rates are lower than inflation. Consumers feel they are better off spending their money than saving it. This can create inflationary pressure that, coupled with an undervalued dollar, leads to more importing than exporting. This threatens the Central Bank’s reserves. The Central Bank’s reserves diminished about 20 percent in the last five months. Foreign direct investment – fast becoming a precarious last resort – had helped fill this gap.
Vargas envisions higher interest rates and an adjusted exchange rate, measures that might help bridge this discrepancy in the long run but will likely have short-term malignant effects, like a recession.
“It’s cleaning up everything that was wrong in a very harsh manner,” says Lucke of the financial crisis.