The Central Bank of Costa Rica (BCCR) maintains its concern about the high growth of credit in foreign currency, after revising upwards its closing forecast for 2024 and 2025 in its most recent Monetary Policy Report (IPM) of July.
During the IPM presentation conference on July 31, Róger Madrigal, president of the issuing body, explained that the differences in the new projections of credit to the private sector, which includes loans in colones and dollars, were imperceptible compared to the report from the previous April.
However, the official pointed out that the growth forecast for foreign currency credit was adjusted upwards for 2024 and 2025 compared to the April report. Madrigal described this as “a problem” and suggested the possibility of the BCCR proposing regulatory changes to the National Council for the Supervision of the Financial System (Conassif).
“That is a problem (the increase in credit in dollars) that, sooner or later, the Central Bank will have to, from what it does in Conassif, promote some reforms in that matter,” said the senior official. In response to a question from The NationThis Thursday, August 1, the Central Bank reported that it has not yet evaluated proposals.
READ MORE: Falling exchange rate boosts dollar loans
José Luis Arce, economist and director of FCS Capital, said that clients who take out loans in dollars usually do so taking advantage of the fact that, once the expected depreciation of the colon is considered, loans in foreign currency imply lower rates and less “heavy” amortization tables.
“The problem is that it is not clear that people are thinking about exchange rate risk, that is, the possibility that strong fluctuations in the exchange rate could affect the payment capacity of these families and companies. This exchange rate risk can affect the stability of the financial system,” Arce said.
Last June, Madrigal also said that the authorities supervising the financial system should carry out an evaluation of the current rules for granting loans in dollars to debtors who have income in colones.
In this regard, Arce explained that there are regulatory provisions that banks must apply when lending to companies and families with foreign exchange exposure. Entities must make estimates and provide more capital for credit operations in dollars, in order to internalize the risks and be prepared to face them.
Rise in projection
For 2024, the Central Bank projects that credit to the private sector will grow by 7%, i.e. 0.6 percentage points more than in the April IPM. However, in national currency, an increase of 5.6% is estimated (0.6 pp less than in the last report) and 10% in dollars, exceeding by 3 pp the previous forecast, which was 7%.
For its part, the issuing body estimates an increase in credit to the private sector of 6.7% for 2025, 0.6 pp more than in April. The dynamics with currencies are maintained, as an increase of 6.1% in colones (0.9 less than the last IPM) and 8% in dollars is expected, exceeding by 4 pp the previous forecast of 4%.
READ MORE: Róger Madrigal: Dollar credit standards must be reviewed
Last year, foreign currency credit experienced strong growth, closing in December with an increase of 11% compared to the same month in 2022. This performance continued in 2024, as there have now been six consecutive months of double-digit year-on-year variations, around 12%.
As of June of this year, the dollarized balance of credit operations in dollars to the non-financial private sector reaches $14,959.38 million, according to data from the Central Bank. The amount exceeds by $1,650.22 million the $13,309.16 of the same month in 2023.
This behavior led to an increase in the relative share of foreign currency in the total credit portfolio of 1.3 and 0.5 percentage points (pp) compared to what was recorded a year ago and at the end of 2023, respectively, according to the IPM.
ABC culpa al BCCR
Ronulfo Jiménez, an economist at the Costa Rican Banking Association (ABC), commented that the growth of credit in foreign currency is the responsibility of the Central Bank itself, as a consequence of its decisions to maintain the reference rates in colones “unnecessarily high.”
In the last two monetary policy decisions, the Central Bank left its reference rate unchanged at 4.75%, where it has remained since April. Previously, it reached a maximum level of 9%, where it was from October 2022 to March of last year.
The ABC economist also attributed this behavior to the Central Bank’s “exchange rate policy.” “These decisions by the BCCR have established incentives for companies and individuals to prefer borrowing in dollars and not in colones,” said Jiménez.
In the most recent IPM, the issuing entity highlighted that the greater demand for credit in dollars is consistent with the relative increase in the cost of credit in colones, which, according to the Central Bank, increases the exposure of the financial system to exchange rate risk.
According to Jiménez, the current prudential regulations that financial institutions must comply with contain all the necessary elements for institutions to adequately address the risk of granting loans in dollars to non-generators.