Costa Rica Central Bank May Impose More Currency Controls

Costa Rica’s central bank is “very likely” to impose more currency controls to stem the flow of capital from developed markets that has driven the colon higher, President Laura Chinchilla said.

“It is very likely that the the bank will have to announce some measures on their own in the coming days,” Chinchilla said today in an interview in Davos, Switzerland, where she is attending the World Economic Forum. “I wouldn’t dare anticipate what kind of measures.”

Chinchilla, 53, has called capital inflows from developed markets seeking higher yields “weapons of mass destruction” against the nation’s economy. Her government submitted a bill to Congress this week that would raise taxes to 38 percent from 8 percent on foreign investors who transfer out of the country profits from capital inflows.

The colon fell 0.1 percent to 501.80 per dollar at 2:30 p.m. local time. The colon has gained 1.4 percent against the dollar this year through yesterday, the most among Latin American currencies tracked by Bloomberg after the Chilean peso. A stronger currency hurts exporters by making their goods more expensive.

Emerging Markets

The government’s moves are a part of an accelerating trend in emerging markets from Asia to Latin America to address appreciating currencies. Currencies in Colombia, Poland and Romania reached their strongest levels this month since at least February 2012, while Thailand’s Finance Minister Kittiratt Na-Ranong said last week the currency was “not at a good level.”

The government added to capital flows in November with a $1 billion bond sale. The yield on the securities maturing in 2023 rose 1 basis point, or 0.01 percentage point, to 3.86 percent. The government will sell another $1 billion in bonds in May or June, Finance Minister Edgar Ayales said on Jan. 17.

Costa Rica has lured investors including Hewlett-Packard Co. and Intel Corp., as well as medical device manufacturers, partly on the basis of its open economy, educated workforce and free trade agreement with the U.S. The country’s $40 billion economy is the second biggest in Central America, after Guatemala.

The World Bank ranked Costa Rica’s economy 110th out of 185 in terms of ease of doing business. The country was ranked 51st in “trading across borders.”

“Short-term capital seeks to make money fast,” said Chinchilla, who has a Masters degree from Georgetown University in Washington. “The types of controls that we are using are ones that focus on that kind of investment. We cannot send a message that harms foreign direct investment, which has been a very important part of our economic development.”

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