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Friday, January 29th, 2016  |  USD: Buy 531.29 / Sell 543.92
20 years

Dollar gains on Costa Rica’s Colón; Central Bank intervenes

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June 2nd, 2015 (InsideCostaRica.com) The dollar gained 0.7% against Costa Rica’s Colón, or ¢4, in recent days, the result of increased dollar purchases by banks and public institutions, according to Costa Rica’s Central Bank.

 

The biggest gains occurred on Friday, when the Central Bank intervened by selling $7.3 million into the market to halt the dollar’s gains.

 

Economists say the increase in dollar purchases by banks and public institutions are typically for the payment of foreign debts and payments for imported goods, which are predominantly paid in dollars.

 

The trend is not expected to continue, according to experts, in part because of some $1 billion that will enter the local currency market the second half of this year as a result of bond issues on international markets by the Ministry of Finance.

 

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  • Ken Morris

    So much for the hands off policy of the Central bank, which promised only to intervene to prevent volatility. The colón moves less than one cent and it’s stopping the movement, even though CR and China stand alone in the world with overvalued currencies–and everybody knows this.

    Fuck the Central Bank. Really. This is an illegal tax on those of us with dollar incomes.

    • Larry Worsham

      They could look at Cuba and Venezuela to see how good this is for the local population.

      • Ken Morris

        Yep. The thing that’s standing out to me is that the Central Bank simply lied about its policy–after insisting that its policy criteria had to remain secret.

    • ohmama

      There is just so much wrong with your statement. If anything the renmimbi is under evaluated, at least that is the view of the US, second the central bank is not out to fuck you and they are probably purchasing dollars for a justifyable reason, like they need to pay for shit and its not a currency deflation attempt and maybe that’s wrong in your opinion but none the less central banks do their best to stabilize the economy and they don’t like to micromanage.

      • Ken Morris

        You would seem to be right that I was mistaken by writing that the currencies of both CR and China are “overvalued.” What I should have written is that both are “manipulated”–the one overvalued and the other undervalued.

        But I don’t understand the “so much” more you say that is wrong about my statement, and would honestly appreciate it if you would explain since I’d like to understand.

        I realize that CR’s Central Bank is not out to fuck me personally, or to fuck others with dollar incomes. Although there may be more to it, its objective is to enable the government to be able to make payments on its foreign debt. Since the government collects taxes in colones but pays debts in dollars, it has an obvious incentive to overvalue the colon relative to dollars. That this results in fucking over those of us with dollar incomes as well as exporters is probably not its intention, but it is the result.

        I also realize that the Central Bank doesn’t like to micromanage, and months ago issued a statement that it will not attempt to micromanage the exchange rate. Yet, let the exchange rate move .7% after a year of holding steady and many years of being off market valuation, and it all the sudden decides, yes, to micromanage.

        Would you seriously argue that the current exchange rate is accuate? If not, would you seriously argue that maintaining an inaccurate exchange rate is mere stabilization?

        Honestly, if you have a justification for the Central Bank’s intervention (after promising not to intervene in order to allow the currency to float) I would like to hear it.

        • ohmama

          i am not really knowledgeable about this situation enough to render expertise. I felt what was wrong about your statement though was your entire characterization of the bank and stating this is a tax, blah blah. I don’t see a move in the currency and frankly the colon is pegged to the dollar so i dont see any “intervention’ here. The economy here is tiny and i think they are trying to do the best they can under the circumstances. Personally, i would opt for this situation rather than let the colon float and see major swings in the valuation of the colon and that would give U$ holders more power and fuck the working class which this country has made great strides in preventing their marginalization to a greater degree than other places around here.

          • Ken Morris

            Thanks. Economics was never my strong suit–I only had the micro/macro sequence in college and read occasional books after that–but I’ve recently been on a campaign to understand the subject and have read 10 additional books on it over the last six months or so.

            Anyway, the more I look at currency valuations the less I believe that manipulating them is a good idea. The problem is that while the manipulations help some groups, they hurt other groups, so the government ends up playing favorites. Then, if the manipulations go on long enough, they will eventually fail anyway, usually very fast and creating a crisis.

            There is no way that I can look at the value of the colón today and not suspect that it is either being manipulated or something else is going wrong. The possibilities besides government manipulation are frankly money laundering and cooked books by the multinationals regarding their intrafirm exports. We know that money laundering is big in CR, just don’t know how big, and also know from an external report that the reported infrafirm exports are off by around $800 million a year. But besides this, we know that the government has an incentive to overvalue the colón, owing to its debt, and now know that the Central Bank will intervene to prop up the colón if it moves less than one cent, even though its recent policy statement said that it would not do this. It therefore looks like, whatever else is going on, the Central Bank is actively intervening to shore up an overvalued currency.

            How do I know its overvalued? Well, the price I pay for tacos chinos has risen over 60% during the same period that the value of my dollar has risen 6%, and the same thing has happened to bus fares, etc. Neither does purchasing power parity make any sense, when locally produced goods cost more in dollars than equivalent goods in the US. Meanwhile, currency experts say that the colón is overvalued.

            Now, does this help the Tico working class? It would seem to if they are paid in colones, but some are paid in dollars and have been really hurt. But even those paid in colones are being hurt by overpriced goods and high interest rates in colones.

            More importantly, propping up the value of the colón now is playing with fire in the future. Unless I miss my guess, CR is heading for a massive overnight currency devaluation that the Central Bank won’t have the funds to prevent. Right now, while I don’t know the exact number (nobody does), my guess is that the colón is overvalued by around 15%. If a currency crisis comes, we can expect a devaluation about twice this much. If this happens, the working class, including especially working class pensioners, are going to take an immediate involuntary pay cut. It won’t be pretty.

            My crystal ball tells me that the government may have about two years to avert this kind of crisis, but that the political compexion of the legislature isn’t suited to fixing the problem within this time frame. Unfortunately, I’m therefore seeing a major forced currency devaluation on the horizon, together with other economic woes.

            To view the Central Bank’s actions now as “stabilization” is therefore I think to take a dangerously short term perspective. It’s as if the ship is taking on water and the Central Bank is only stabilizing the rate at which it is sinking, rather than preventing it from sinking.

            Although I suspect that the Central Bank doesn’t feel that it has another option at this point. Letting the colón float just a little bit now could well put the government in the position of being unable to meet its payroll and defaulting on debt. Not good. But by not allowing the colón to float, the Central Bank is probably just postponing a more serious crisis.

            Meanwhile, those of us with dollar incomes (a group that includes many Ticos) are paying for this dangerous delay via what is in effect an illegal tax, and I personally don’t like to be subsidizing a plan that I’m pretty sure will fail.

            Or at least this is where my thinking leads me, and since I’m new to economics, I welcome any criticisms of where my thinking is wrong as well as other lines of though I haven’t considered.

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