Dollar Decline Halts: Can Companies and Wage Earners Relax? - Expat Community

Dollar Decline Halts: Can Companies and Wage Earners Relax?

May 20, 2024 | Costa Rica, News & Articles | 0 comments

by Tatiana Gutiérrez Wa-Chong

Tourism, agriculture businesses, and exporters urge government action to balance the exchange rate.

The dollar’s price relative to the colón rose by ₡10 in the last month, from ₡504 to ₡514.

This slight increase offers some relief to businesses and wage earners who receive income in dollars, not because the currency has significantly recovered, but because the downward trend has finally moderated. Although it has decreased slightly in recent days, stabilizing below ₡510, abrupt drops seem unlikely.

The issue is that the dollar’s fluctuations do not compensate for the currency’s depreciation over the past year and a half, resulting in a more than 25% income loss since June 2022. As a result, operations are still on the verge of bankruptcy, and there is still a risk of mass layoffs, meaning that no one can truly relax if their income is in dollars.

If nothing extraordinary happens in the second half of the year, the dollar could close at ₡530 per unit, according to experts from the National University.

The recent and minimal rise in the dollar was driven by the Central Bank’s slight reduction in its monetary policy rate on April 26, cutting 50 basis points to 4.75%. It is expected that the Central Bank will make another adjustment in the coming months, further favoring the dollar’s appreciation.

Lowest Point
The dollar has experienced highs and lows over the past five years. However, it has never recorded such low values.

Date – Year – Price

May 14, 2020: 571
May 14, 2021: 617
May 14, 2022: 675
May 14, 2023: 541
May 14, 2024: 514

“A structurally negative differential between local and international interest rates makes investing in colones less attractive, causing the dollar’s price to rise. Additionally, the Federal Reserve’s tougher stance on controlling inflation is pushing up reference rates in the U.S.,” said Juan Pablo Arias, an economic analyst at the National Stock Exchange.

Simultaneously, there is a reported decrease in dollar supply and an increase in demand affecting this dynamic.

The increase could help exporting, industrial, tourism, and construction companies slightly improve their income while affecting those with dollar-denominated debt.

“The rise does not compensate for the reductions in the exchange rate. If you owe in dollars but your income is in this currency, you needn’t worry. However, if you earn in colones, you will face issues,” said Greivin Salazar, an economist at the National University.

Dissatisfaction with the exchange rate led thousands of business owners and workers in construction, tourism, agriculture, and exporting sectors to protest, demanding more government action from Rodrigo Chaves to avoid further layoffs.

Five Effects of a Stronger Dollar
The dollar influences the economy in multiple ways, such as impacting inflation, but also creating opportunities, businesses, and jobs.

Export Competitiveness: A higher dollar price relative to the colón could make exports more competitive internationally.

Tourism Impact: A stronger dollar allows the tourism sector to generate more income, preventing layoffs and encouraging investment.

Foreign Investment: Costa Rica becomes more attractive to investors who earn in dollars but incur expenses in colones.

Inflation Impact: An increase in the dollar’s price can raise the cost of imported goods, contributing to overall inflation.

Pressure on Dollar Debt: Individuals or businesses with dollar-denominated debt may face higher payments, making it harder to meet financial obligations.

Insufficient Dollar Appreciation
The downward trend of the dollar has stopped, but the currency’s price is still unsatisfactory for productive sectors, which warn of being on the brink of bankruptcy.

Gerardo Corrales, Economist, Economía Hoy: The global inflation control is taking longer than expected, keeping interest rates high, especially in the U.S., leading to the Central Bank’s minimal monetary policy rate reduction. While this affects the exchange rate, it is insufficient, resulting in layoffs and an unsustainable situation.

Elizabeth Morales, Deputy Manager, Coopecaja: The rise in the dollar’s price could be due to economic agents’ expectations following the Central Bank’s recent monetary policy rate reduction, prompting currency movements to boost consumption. However, this is not sustainable long-term, so the exchange rate may not continue to increase.

Adriana Rodríguez, General Manager, Acobo Puesto de Bolsa: A dollar near ₡500 is already causing losses for businesses, suffocating profit margins, so it’s crucial to support the growth of the foreign exchange hedging market.

Daniel Suchar, Independent Financial Analyst: The reported dollar price increase will be sustainable in a very conservative and slight manner. The monetary policy rate adjustment pressures the exchange rate upwards, but the reduction is insufficient, keeping the dollar cheap and affecting businesses and wage earners in that currency.

Grettel Vásquez, Economic Studies Analyst, Scotiabank: The slight exchange rate increase is due to various factors, such as a moderation in dollar supply and a slight demand increase, along with possible changes in economic agents’ expectations following recent monetary policy rate reductions.

José Antonio Vásquez, Finance Director, Banco Nacional: The rise is not to be trusted. Exchange rates are volatile, so protecting debts and expenses in the same currency as income is essential for budget stability. For businesses, maintaining or analyzing currency hedges to cover financial flows and leveraging favorable moments to build liquidity reserves is recommended.

Reference

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