The Board of Directors of the Central Bank of Costa Rica (BCCR), the National Council for the Supervision of the Financial System (Conassif) and the General Superintendence of Financial Institutions (Sugef) agreed on Monday, March 16, 2020, on monetary and financial policy measures to mitigate the economic impact of coronavirus and associated disease (covid-19) in the country.
Rodrigo Cubero, President of the Central Bank, indicated that “as a whole, the measures are aimed at reducing the share of current and potential credit operations and, thereby, mitigating the impact of the coronavirus on the cash flow of households and companies ”
Monetary policy measures
The Board of Directors of the Central Bank, in session 5921-2020, reduced the Monetary Policy Rate (TPM) by 100 basis points, to place it at 1.25% per year, as of March 17, 2020. In addition, it agreed to reduce the gross interest rate on overnight deposits (DON) at 0.01% per year as of March 17, 2020, and those of the Permanent Credit Facility and the Permanent Deposit Facility of the Integrated Liquidity Market at 2.00% and 0.01%, respectively. The decision was based on the analysis of the expected trajectory for inflation and its determinants, the risks in that forecast, and the lag with which the monetary policy measures take effect.
The international spread of covid-19 has impacted and could impact, through various channels, world economic activity. Thus, the disruption of value chains by containment measures has affected the production of goods and services in many countries. Furthermore, the loss of income associated with these disruptions, and uncertainty about the impact of the virus, could affect private demand; that is, consumption and investment. Global aggregate demand could also be affected by high volatility in international financial markets, particularly in the last week. Thus, international financial organizations are revising downward their growth projections for the global economy in 2020.
On the other hand, in recent weeks, oil prices have fallen significantly, as a result of a price war between some major oil exporters and the lower demand expected as a consequence of the coronavirus. The price of West Texas Intermediate, a relevant benchmark for Costa Rica, has fallen about 36% so far this month.
Given these events, the central banks of several advanced economies have reduced their monetary policy rates, and very significantly in the case of the United States.
The Costa Rican economy, which has a high degree of commercial and financial integration with the international economy, is exposed to these global economic effects of the coronavirus. In particular, in the following months the Costa Rican economy could be affected by logistical delays in obtaining supplies, less foreign demand for our goods and services, a drop in tourism, and the direct and indirect effects that containment measures may have on the internal demand.
In this environment, the downside risks to economic growth and inflation are heightened, with respect to what is contemplated in the Macroeconomic Program 2020-2021. In particular, the Central Bank forecast models suggest that inflation would remain below the midpoint of the target range in the following two years. The inflationary expectations of the economic agents are also contained.
Based on this, the Board of Directors unanimously agreed today to reduce its Monetary Policy Rate by 100 basis points. The President of the Central Bank, Rodrigo Cubero, stated that “this monetary policy measure is intended to continue to pressure down interest rates in the market, and thereby alleviate the financial situation of households and companies. Since March 2019, the Central Bank has been implementing an expansive monetary policy, and has generated conditions of ample liquidity in the financial system, in order to support economic activity in a context of projected low inflation. The additional reduction agreed today in the TPM, together with the actions also taken today by Conassif and Sugef, allow creating more favorable credit conditions to face the economic impact of the coronavirus ”.
Measures taken by the Conassif and the Sugef
The National Council for the Supervision of the Financial System (Conassif), aware of the situation the country is experiencing in the face of the challenge of the coronavirus, has taken the necessary measures, from a prudential point of view, with the aim of improving access conditions to the credit, timely and prudently addressing potential debt service problems, mitigating the economic impact, reducing the impact on unemployment and ensuring financial stability.
In this sense, the Council approved to extend to June 30, 2021, the measure that allows renegotiating up to two times in a 24-month period the agreed conditions of the credits, without these being considered a special operation, and therefore, without that said adjustments have negative effects on the risk rating of the debtors in the Credit Information Center (CIC).
The previous measure was expanded to cover loans of more than 100 million colones, since previously it applied only to debts less than that amount.
Additionally, loans of 100 million colones or less that to date have had two readjustments within the last 24 months, may readapt their operation once again during the period ending June 30, 2021, without qualifying as an operation. special.
For its part, the General Superintendence of Financial Entities (Sugef) adjusted the minimum accumulation of countercyclical estimates to place it at 0%, with which the financial entities will be able to transfer to credits, the resources that they would dedicate to said estimates.
For the President of the Conassif, Alberto Dent Zeledón, “these measures will help people and companies that could face problems in the payment of their debts as a result of the impacts of the covid-19, so that they will be able to readjust their debts up to two times in a period of two years, without implying a deterioration in its risk rating, and without jeopardizing the financial stability of the country ”.
From the Sugef’s point of view, the Superintendent, Bernardo Alfaro Araya, indicated that “the adjustment in the definition of special operation will imply that financial entities will be more willing to offer and negotiate credit adjustments, since they will not represent higher cost by not having to make credit estimates until the two readjustments are exceeded within 24 months. Likewise, bringing the accumulation of countercyclical estimates to 0% will imply that financial institutions will be able to expand their resources for credits. ”
The Central Bank, the Conassif and the Superintendencies will continue to be vigilant of the impacts on the national economy derived from the covid-19, with the objective of taking any additional measures that may eventually be required to mitigate its effects and maintain the stability of the Costa Rican financial system.