Exporters see threat in dollar exchange rate
Since passage of a free trade agreement with the United States five years ago, Costa Rica has had more success exporting than any country in the region.
In a recent article in the daily La Nación, economist Ennio Rodríguez catalogues the benefits: Exports to the U.S. are up from $4 billion in 2008 to $11 billion in 2011; Costa Rica’s share of exports to the U.S. from Central America and the Dominican Republic – at 36 percent – is by far the largest of any area country; and the export mix has been transformed, from once primarily agricultural commodities to now 75 percent electronics, optics and medical equipment.
Despite these accomplishments, all is not well with Costa Rica’s exporters. The biggest problem is something new in Costa Rican economics: foreign exchange rate stability as a threat.
With the colón-dollar exchange rate stuck at the Central Bank’s floor of ₡500, and the U.S. Federal Reserve printing billions of dollars to try to stimulate the economy, the medium-term question for Costa Rica is how long the Central Bank will be able to hold the ₡500 rate and keep the colón from appreciating.
A fixed exchange rate hurts exporters because the colón equivalent of their unit sales remains stagnant, while colón costs increase with local inflation. Though price increases in colones mostly have been tamed by the Central Bank in recent years, even low colón inflation, coupled with Costa Rica’s uncomfortably high payroll taxes, can put significant margin pressure on exporters if the exchange rate remains fixed.
If the colón were to rise against the dollar, the survival of local exporting companies would be threatened, and multinational companies would experience margin deterioration that could tempt them to relocate.
To get exporters’ take on this problem, The Tico Times spoke with Monica Segnini, president of the Chamber of Exporters (CADEXCO). The 44-year-old mother of four has grown up among exporters. In the 1980s, her father founded Grupo Desacarga, a customs processing and transport company that gives logistical support for imports and exports.
Segnini has a degree in public administration with a specialty in foreign trade from the University of Costa Rica, and has served for 10 years on the CADEXCO board of directors.
TT: Let’s start with the recently approved Eurobonds Law [which authorizes the Costa Rican government to issue up to $4 billion in bonds on the international market].
MS: We’re very worried about that. The first tranche will be for $1 billion, maybe this year. The government has assured everyone that they will use the money to refinance maturing debt as much as possible, to keep the dollars from being exchanged into colones and pressuring the exchange rate downwards. But experts tell us that with the way things are shaping up, in the medium term it will be difficult for the government to hold colones at 500 to the dollar.
So what would be a good exchange rate for exporters?
We have run numbers. The exchange rate necessary to offset colón production price increases over the last few years would be 580 to the dollar. The pressure on costs really shows, especially for local, traditional exporters. Pineapple growers now need eight export boxes to cover unit costs that were formerly covered by only five boxes.
Or tubers [mostly yucca]. There’s a tuber exporter from San Carlos who is a CADEXCO member. We’ve run numbers with them. A 10 percent drop in the exchange rate to ₡450 to the dollar would saddle them with ₡85 million [$170,000] in monthly losses. Their survival would be threatened, and right off the bat, they’d have to lay off 40 percent of their workers to try to break even.
Both these examples are agricultural exporters. But Costa Rica has moved to mostly high-tech exporters. How would they be affected?
The tech exporters are multinational corporations that set up plants in Costa Rica to take advantage of our well-educated work force. By the way, this is a Costa Rican competitive advantage that is reaching a limit. There just aren’t enough qualified engineers and programmers and technicians to go around, and tech companies are starting to poach employees from each other.
To get to your question, the Costa Rican branches of these tech exporters set up in industrial parks and operate as cost centers. In the U.S. market, where they sell their products, they have pricing power that helps them offset rising Costa Rican costs due to local inflation and a fixed colón-dollar exchange rate. But on the other hand, there is nothing keeping them here except their sunk costs compared to the eroding production-cost advantage, so they could leave if they wanted to.
CADEXCO has a strategy of trying to develop linkages from local suppliers, to anchor these companies more firmly in Costa Rica. As an example, there’s a high-end tripod manufacturer [for camera and video tripods] in the Cartago industrial park that started out importing all its parts. But over the years, local mechanical engineering companies have upped their quality of specialty nuts and bolts and metal parts production, to the point where a significant portion of that company’s parts are now locally supplied. It would be much harder for this company to leave Costa Rica than one that brings in all its inputs from outside the country.
Are there other possible linkages for other types of Costa Rican suppliers?
Yes, take stents. Stents are very small-diameter tubes used in catheter surgery and placed inside human hearts to open up blocked arteries. This is an ultra-high-tech product. A stent a couple of inches long costs $5,000. There’s a stent manufacturer in Costa Rica. It turns out that the most modern stents are made from organic filaments from cattle. Well, beef was once a significant Costa Rican export, and there are still a lot of cattle farms. So this would be a natural for the cattle industry. But all the technology and certifications necessary are of course a huge investment challenge. Here at CADEXCO, we try to help in these processes as much as we can.
Any final word on the exchange rate problem?
We realize that a stable exchange rate is a benefit for price stability and the Costa Rican public. But there’s definitely a trade-off for exporting and export employment. CADEXCO is here to try to find win-win solutions.
You may be interested
Costa Rica immigration offices to remain closed until OctoberAlejandro Zúñiga - September 19, 2020
The Immigration Administration on Friday said its main and regional offices will remain closed until October due to the coronavirus…
Pic of the Day: Hopping into the weekendAlejandro Zúñiga - September 19, 2020
Happy weekend from all of us at The Tico Times! [caption id="attachment_62085" align="aligncenter" width="740"] (Courtesy of Brian Kubicki)[/caption] [caption id="attachment_111342"…
Top dental clinics in Costa Rica meet patient needs in the age of COVIDVayolla Quiros / Goodness Dental - September 18, 2020
The Centers for Disease Control and Prevention (CDC) released its guidelines for dental settings in response to the COVID-19 pandemic.…