The dollar is far from reaching an equilibrium point despite recovery in the last month. - Expat Community

The dollar is far from reaching an equilibrium point despite recovery in the last month.

May 31, 2024 | Costa Rica, News & Articles | 0 comments

by Esteban Arrieta

“The ideal value for the productive sector and debtors should be based on a fluctuating figure between ¢620 and ¢640,” said Daniel Suchar, economic analyst. Courtesy/La República.

Despite the exchange rate of the dollar stopping its decline in the last month and, more importantly, starting to gain value, this does not mean the emergency for the productive sector is over.

The U.S. currency is far from reaching an equilibrium point in the exchange market.

This equilibrium rate would allow companies associated with the export, tourism, and foreign investment sectors to operate without difficulties and retain current staff, while debtors could keep their debts up to date without major problems.

This equilibrium point would be above ¢620 approximately, according to financial experts.

The problem is that between May 2 and Thursday morning, the purchase of dollars went from ¢503 to ¢520, implying a recovery of only ¢17 per unit.

This recovery is ¢100 below that equilibrium point.

The improvement in the dollar’s value over the last month is related to the reduction of the Monetary Policy Rate (TPM) approved by the Central Bank; however, experts believe the state entity still has room to reduce that rate further to encourage credit and increase the dollar.

“The ideal value for the productive sector and debtors should be based on a fluctuating figure between ¢620 and ¢640. Prior to all this great fluctuation we’ve experienced up and down in the last year and a half, there were no major movements in the dollar, and people accepted it without problems. That’s what we call the equilibrium point (…) I think the Central Bank still has room to reduce the TPM further,” said Daniel Suchar, economic analyst.

The sharp drop in the dollar’s exchange rate over the last year and a half has made Costa Rica one of the countries with the highest appreciation of the local currency, according to Gerardo Corrales, economist at Economía Hoy.

In this sense, it is essential that the exchange rate returns to “normal” values to avoid affecting companies that receive their income in U.S. dollars.

Recently, it was revealed that a company with more than 35 years of existence in the ornamental plant export sector had to close due to the low exchange rate of the dollar.

Likewise, Standard Fruit Company announced the dismissal of more than 400 people for the same reason.

“One has to look for a neutral exchange rate. When the exchange rate was at ¢620, nobody talked about the exchange rate. When it started to rise to ¢700, dollar debtors who earned in colones started to get nervous and created alarm. Now that the exchange rate is barely at ¢530, it’s the exporters, hoteliers, and local producers who face competition with imports and react,” said Corrales.

Costa Rica is an economy heavily dependent on the external market, so a drop in the value of that currency has a significant impact.

In this case, record figures in tourism, exports, and foreign investment in 2023 have flooded the market with dollars, while the government is not buying in the local market to pay its debts, resulting in less demand for that currency and thus a lower price for the dollar.

Reference

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