While the colon has benefitted from strong consumer and business confidence, firms should prepare for COGS pressures to mount
In 2024, the Costa Rican Colón (CRC) experienced one of the strongest appreciation rates worldwide, comparable to the GBP, CHF, and JPY. Despite optimistic consumer and business confidence for Q1 2024, the lack of a corresponding increase in productivity requires firms to manage expectations. Currency appreciation will lead to higher operational costs, as already seen in the agricultural sector, with banana producers dismissing hundreds of workers in May. Businesses operating in export-dependent Costa Rica may face challenges related to reduced cash flow due to the stronger currency.
Overview
The CRC saw a rapid, historical appreciation from CRC 678 in June 2022 to CRC 486.5: USD in April 2024 – the lowest exchange rate in 14 years. As of June 2024, the rate has risen to CRC 525:USD. As a floating currency, consumer, producer, and investor confidence played a role in the appreciation. S&P and Fitch both raised Costa Rica’s credit rating after the implementation of strict fiscal policies that limited the growth of public expenditure and prioritized the consolidation of national debt. This increased confidence in Costa Rica’s market was further bolstered by the continued support from international financial institutions such as the IMF, which – along with strong tourism performance – helped sustain the strong CRC performance.
The Costa Rican economy has experienced all-around growth, evidenced by a low unemployment rate, an increase in the labor force participation, and a rise in purchasing power parity. Furthermore, Costa Rica’s GDP growth is driven by Free Trade Zone (FTZ) manufacturing of medical and technical equipment, semiconductors, as well as consistently high tourism levels, which together represented 41% of GDP in 2023. The speed of the CRC appreciation, however, gave no buffer time for supply-side productivity in export-dependent Costa Rica. Costa Rica’s biggest trade partner is the United States, meaning that profits for many firms originate in USD and once converted into the appreciated colón put pressure on overall profit margins.
Our View
Due to the Central Bank of Costa Rica (BCCR)’s hands off approach and continued monetary easing policies, we forecast an exchange rate of CRC 535:USD for 2024 and CRC 544 for 2025. Investors must acknowledge the appreciating colón and the reduction in competitiveness that this can produce, especially for those operating outside FTZs. Both inflation and unemployment are likely to stabilize and rise, with projected year-over-year rates of 1.0% and 10.3% for 2024, respectively, and 2.4% and 9.7% for 2025.
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