San Jose [TCRN] – The Costa Rica Government must decide whether sacrifices interest rates, exchange rates or inflation.
According to the Cathay Bank, if the Costa Rica Ministry of Finance decides to use the funds to cover the deficit and pressure the domestic market, the central bank will have to step in and buy the excess dollars to protect exchange rate. Therefore, the monetary authority would have to colonize these resources and this would impact on inflation.
Moreover, if the central bank chooses to fight inflation, they would have to issue monetary stabilization titles, thus, the Government would continue to compete for resources in the domestic market and that interest rates would keep rising. This situation goes against the issuance that debt would lower yields.
In the event that the Central Bank let the Costa Rica exchange rate float and allow the currency to trade below the 500 colones, the problem would be in export, tourism and service sectors would be impacted and affect the bases that support the local economy.
If we will stay the same, better not do anything, said the bank management adding that the most viable scenario for the placement does not impact yields the central bank would accept higher inflation, ie the goal of growth in the price of goods is not 5%, but up to 9%.
The major problem here is that Eurobonds are not a structural solution. The bank management thinks it’s best to achieve a consensus on a Costa Rica tax reform, but must be accompanied by a reduction in spending by the government.
For the experts, Eurobonds are only palliative for the short term, but long term fix requires a structural solution.
The Costa Rica News (TCRN)
San Jose Costa Rica