Costa Rica: Colón strengthens further to a level not seen since January 2017 in March
The Costa Rican colón traded at CRC 548 per USD on 10 March, marking a 4.4% appreciation from the same day of the previous month. Meanwhile, the currency was up 7.9% year-to-date and 18.5% year on year. As such, the currency appreciated to a level not seen since January 2017. The appreciation was broadly driven by improvements in the trade balance, decelerating inflation and upgraded credit ratings.
In February, Costa Rica’s trade balance made a notable improvement, with the deficit narrowing to levels not seen since September 2021. An increase in exports throughout the month, coupled with a decline in imports in the same period, supported the currency. Moreover, the government’s fiscal consolidation efforts led to recent rating upgrades from both Fitch Ratings and S&P Global—from B to BB- and from B to B+, respectively—boding well for colón demand via sounder investor sentiment. Furthermore, inflation decelerated notably in February, increasing the colón’s purchasing power.
This recent FX strengthening is the continuation of a longer appreciation cycle, which started in June 2022 and was driven by the Central Bank’s more aggressive monetary policy relative to the Fed, foreign investment in key high-value sectors, a strong tourism revival and new funding from the IMF. Going forward, the colón is likely to lose some ground. While the Central Bank of Costa Rica is projected to cut rates, the Fed is set to continue tightening amid continued upbeat labor market data. This will pressure the colón somewhat by year-end.
On the outlook, analysts at the EIU commented:
“We expect the appreciation of the colón against the US dollar to peter out imminently. Nonetheless, the Eurobond issuance planned for 2023-25 has reduced uncertainty as regards Costa Rica’s ability to meet its external debt obligations. This will help to secure foreign inflows and moderate the rate of depreciation against the US dollar.”