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Most of the public’s savings and credit are dollarized. Last month, 37.5% of deposits in the financial system and 32.9% of private sector credit were dollarized. Other times, these percentages are closer to 50%.
45 years ago, mismanagement Monetary Policy The implementation of BCCR has led to high inflation Loss of value This marked the beginning of using the US dollar in internal transactions, and Tico also learned that it was better to use two currency options than to manage only one, although currently BCCR handles inflation control better.
If income is in colones, there is a risk of being trapped in dollar debt. In recent months, the growth of dollar credit balances has exceeded the growth of colon credit balances. BCCR has stated Worry Given this fact, he noted that individuals and companies with income in colones who borrow in dollars face the risk of having to repay their loans if the exchange rate rises.
The BCCR is right to be concerned about such risks and their impact on the financial system.
Once we understand what BCCR gets right, we can now look at what it gets wrong.
First, the BCCR itself and its monetary policy have encouraged the growth of dollar credit in recent months. I am not going to delve into this issue because Daniel Ortiz and Luis Liberman have already done so in a paper titled “BCCR is paying the price for its mistakes” (August 23, 2024).
Second, the BCCR tells us a half-truth that it only exposes non-dollar generators to dollar credit risk. This risk does exist, but if individuals and companies borrow colones at a variable rate, they are also exposed to risk due to interest rate fluctuations.
Therefore, credit seekers must choose between borrowing in U.S. dollars and being exposed to the risk of fluctuations in the U.S. dollar exchange rate and interest rates or borrowing in colones and being exposed to the risk of fluctuations in the colones interest rate.
By showing concern only about the risk of debt in U.S. dollars, the BCCR implicitly sends a wrong message, as if the risk only exists when the debt is denominated in dollars, but not when it is denominated in colones at a floating rate. In the end, what matters is the volatility of loan payments in both cases.
What are the tools to address BCCR concerns? The General Supervisory Authority for Financial Entities (Sugef) requires financial entities to carry out an exercise simulating how debtors would repay their debts in an adverse scenario of low economic growth, rising interest rates and types of changes.
This tool belongs to the toolbox of prudential supervision and allows us to check whether entities have sufficient capital and adequate provisions for bad debts in crisis situations.
The monetary policy toolbox for controlling inflation should not be confused with the prudential regulatory toolbox for controlling risks in the financial system. The second box should not be used to reduce global dollar credit balances, as the BCCR Chair has publicly suggested.
The tools in this box are designed to achieve adequate risk management, including credit risk for portfolios denominated in colones and dollars. To do otherwise is contrary to law and sound financial practice.
In the end, you don’t need to know much about economics, as just two common sense concepts will allow you to navigate correctly. First, solve problems by addressing the causes of the problem, not the effects. Second, don’t confuse tools, as a hammer is for driving nails, not for placing screws.
The author is an economist.
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