The Mystery Of
the Devaluating
Dollar in Costa
Rica
By John Holtz
For months now
there has been a
Costa Rica
mystery gone
un-answered and
even less;
justified.
The mystery is:
“How come the
Dollar has
devalued so much
in this country
while
appreciating
against so many
other world
currencies, hard
currencies, but
not the “off the
radar” Colon?”
As the Executive
Director of the
“Center for the
Studies of
Modern
Management”, I
should have a
logical answer
but if the truth
be known, I do
not. However, I
have done some
research and it
turned up to be
worth the effort
and rewarding.
A Costa Rican
transactional
(Business)
lawyer and MBA
named Lic. Jose
Pablo Mata told
me that we are
seeing the
phenomena known
in Spanish as
“Capitales
Golondrina” or
the capital of
the swallow that
flies from good
deal, to good
deal and has no
loyalty except
yield.
That explains
what is
happening. But
we need to also
know why?
Maria Laura
Viguez, the
Costa Rica
Financial
Advisor for one
of Panama’s
boutique asset
management
groups, Geneva
Asset Management
filled in the
“why” part.
And the
International
Monetary Fund
(IMF) offers up
a macroeconomic
scenario that
explains the
entire thing.
According to
Viguez, the
government of
Costa Rica has
fallen short on
its ability to
fund so many
promised
infrastructure
and public
projects
resulting from
the Great
Recession and
resulting in
limited tax
income money.
So, the Central
Bank and its
affiliates
decided to take
on another
source of income
other than taxes
and duties: Make
the Colon a
passive
investment
contract
irresistible to
all those US
Dollars sitting
on the sidelines
with not much to
do but worry!
On April 20th,
the IMF said,
“In emerging
markets (That’s
us), capital is
flowing to Asia
and Latin
America,
attracted by
strong growth
prospects,
appreciating
currencies, and
rising asset
prices, and
pushed by low
interest rates
in major
advanced
economies
(That’s the US
and Europe), as
risk appetite
continues to
recover.”
As Viguez said,
“which would you
rather have? A
short term USD
account earning
a couple of
percentage
points or buy
Colons and then
purchase 30 day
CDs at 8.5% up
to 10%?” I do
not need to be a
Bloomberg
economist to
answer that
question, do
you?
Jose Pablo Mata
says, “When the
developed
markets up their
rates, the
currency people
will fall back
from “soft”
currencies such
as the Colon,
or, if the
government of
Costa Rica drops
passive interest
rates, the USD
will rise again.
Mata estimates
three to six
months down the
road that the
USD will
appreciate 6%
from its current
level and
perhaps 5% more
by year end.
Viguez tends to
agree because
she sees US
interest rates
becoming more
attractive and
the swallow
going to
less-risk
currencies,
especially if
Europe and
Greece have to
raise yields to
sell bonds in
Euros.
Now, this is
excellent
economic jargon,
but what is
happening in
Costa Rica, as
far as I am
concerned, is
the formula for
failure! Feel
free to argue.
This, almost
daily,
appreciation of
the Colon only,
and I mean only,
creates a new
treasure chest
for the
government and
its programs as
well as the
importers of
finished goods
and materials.
That’s it!
(Except perhaps
RCEOPE who goes
from Dollars to
Colons with the
help of ARESEP
and legal price
fixing.)
Exporters are
shut out,
according to
CADEXCO’s and
Sergio Navas who
in a Spanish
language
newspaper
interview,
openly
petitioned the
Central Bank to
intervene and
lower the Colon
value.
Foreign
investors, such
as Speirs and
Associates, who
we have hosted,
were taken back
by the costs of
doing business
in Costa Rica
from electricity
to simply buying
a club sandwich
which now costs
more here than
in California.
(Pizza is about
the same!)
Recall please,
Costa Rica has
signed free
trade agreements
with the United
States, China
and more
recently Europe
reducing or
eliminating
duties and those
duties
collected, are
in USDs.
We export raw
materials.
Point being,
manufactured
goods create
jobs and
exporting
pineapples does
not.
Construction
projects,
tourism are all
calculated in
devalued Dollars
but the costs of
doing business
are paid out in
Colons. We, the
people, lose big
time. The costs
of importing
have been
reduced but not
the retail price
of products
being sold which
is called
“phantom
inflation”
because it never
sees the
official charts.
In the end,
there are only
two ways to make
a profit:
Increase income
or cut costs.
The answer?
Lower the Colon
interest rates
and accept
economic reality
that we need to
operate on a
global scale and
not just one
that that will
temporarily
enhance national
interests while
chasing away
business because
Costa Rica is
too expensive.
Being
competitive is a
long term
solution and
should not
succumb to
immediate income
needs.
John Holtz is the Executive Director of
theCenter for
the Studies of
Modern
Management
www.modernmanagement.org and can
be reached at:
[email protected]. |
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