COSTA RICA: Currency Issues Hit the Headlines
Currency issues have burst into the Costa Rican headlines. After more than two years of a relatively stable managed exchange rate, the Central Bank in recent weeks implicitly changed its intervention rule, allowing for greater volatility. In just the first 23 days of May, the wholesale exchange rate (Monex) increased 4.2% (up to 595.28 colons per dollar), a large percentage compared with 1.9% observed in the January-April period. The Bank has also been active in the Monex market, selling $150 million in May 16th-May 23rd period, clearly an insufficient amount to avoid colon depreciation.
The Central Bank announced an intervention program of up to $1.0 billion to stabilize the market, The day of the announcement (May 25th), the Bank put an offer to sell a large amount of dollars below previous day´s closing and the average rate decreased to 587.92 colons per dollar, with the Bank selling just $1.0 million for the purpose of stabilizing the market.The story repeated May 26th, when the average rate closed at 581.44 colons per dollar and the Bank sold $5.4 million. Until now, the Bank has not indicated its comfort level for the exchange rate.
The Central Bank also has increased its policy rate, to try to stave off a rise in inflationary expectations due to the stronger depreciation, and to move the balance in favor of demand for domestic currency deposits.The policy rate was kept at 1.75% from January 2016 to April 6th, 2017, when it was increased to 2.25%.Since then, it has been changed three more times, and now stands at 4%.
The Guatemalan exchange market is in a totally different situation: in surplus, with strong appreciation pressures during the first months of the year.The Bank of Guatemala, following its intervention rule, has purchased $942 million, taking net international reserves up to $9.8 billion as of May 23rd.Bank intervention has maintained the exchange rate at 7.33-7.34 quetzals per dollar for the past three months, down from Q7.52 per at yearend 2016.Given inflation differentials, the decline in the exchange rate is reflected in a real appreciation of the quetzal which, as of April, is estimated at 8.9% y/y and 1.2% ytd.
In El Salvador, Congress reformed some budget lines, to address the missed payments of pension certificates in April, which were finally made before the end of that month. Rating agencies then upgraded sovereign debt, though to one step below March levels. Economic activity has slowed persistently since October 2016, supporting our short-term outlook so far. The only driver of growth would be family remittances, but these are insufficient to counter negative factors, such as uncertainty and lack of confidence due to the erratic government decisions on fiscal matters and debt payment commitments. The fiscal deficit reversed its 2016 drop as soon as more debt was approved by the government in November 2016. Inflation and interest rates are rising slowly, as part of the international process of adjustment, and no surprises are expected for the foreseeable future.
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