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Colón expected to gain on dollar

For the first time since 1984, the colón is on pace to appreciate against the U.S. dollar for the second year in a row. Since Nov. 1, the colón has appreciated 12 colones against the dollar, falling from a buy value of ₡509 per dollar to ₡497 on Nov. 23. On Jan. 1, $1 was worth ₡507.

The month of December is expected to bring further appreciation of the colón. Traditionally, given the increased amount of colones in the marketplace during the holiday season, demand for colones is higher than at other points of the year. Costa Rican employees also receive annual aguinaldos (Christmas bonuses), the equivalent of one month’s salary, during December. National income tax payments, paid in colones, are due by Dec. 15, and annual vehicle circulation permit payments, or marchamos, are due before Dec. 31.

“The exchange rate has been dropping, which is exactly what is to be expected near the end of the year,” said Hernán Varela, risk adviser at the consulting firm Aldesa. “Consumers and businesses are changing dollars for colones to pay aguinaldos, payroll and taxes. Most businesses pay the majority of their taxes at the end of the year, which pushes the exchange rate lower.”

Varela said that he expects the exchange rate to continue to slide until mid-December, followed by two more stable weeks to end the year. Given those predictions, it is likely the exchange rate will finish 2011 at a lower value.

Effects of the Bands System
The current mark of ₡497 is nearly equal to the value of the exchange rate on Jan. 1, 2006. In October 2006, the Central Bank changed the exchange rate system from mini-devaluations, where the colón experienced daily depreciations, to the current “bands system,” which allows the amount of colones and dollars in the national market, stock market and banks to dictate the daily exchange rate. The mini-devaluations system was created by former Central Bank President Eduardo Lizano in 1984.
Since moving to the bands system in October 2006, the buy value of the exchange rate has risen to as high as ₡594 in August 2009, and dropped to as low as ₡490 on several occasions. In 2008, the exchange rate experienced its largest depreciation, jumping from ₡495 to ₡550. During 2010, the colón experienced its largest annual appreciation of ₡51 against the dollar, falling from ₡558 to ₡507. If the exchange rate finishes 2011 below the ₡507 value, it will be the third year since 2007 that the colón has appreciated.
Does that mean the colón is gaining strength as a currency?
“The colón has been stronger in recent years because the amount of dollars in the national economy has been very low,” Varela said. “The large companies that enter the national economy in the telecommunications and insurance markets are bringing in a lot of dollars that have to be exchanged for colones. This results in many more colones in the national economy, meaning the exchange rate goes down.”
Varela predicted that as the initial investments of new companies slow, the colón will gradually begin to depreciate by mid-2012. He also said that although the exchange rate has experienced its most stable year in the last decade, the volatility of the bands system should not be underestimated.
“With stability in the exchange rate, it has been easier for companies and investors to make projections on what the value of the colón will be,” Varela said. “But the bands system is also accompanied by fluctuations. It will begin to vary once again.”


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