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UPDATE 1-Costa Rica to propose capital controls to combat hot money flows
January 15, 2013 / 11:21 PM / 5 years ago

UPDATE 1-Costa Rica to propose capital controls to combat hot money flows

By Isabella Cota

SAN JOSE, Jan 15 (Reuters) - Costa Rica will this week propose capital controls to Congress in a bid to tackle a recent surge in financial inflows that threaten to boost the currency and destabilize the economy.

The move makes Costa Rica the latest emerging market economy to seek barriers to foreign investment to check an appreciation of its currency, which makes exports less competitive.

Low interest rates in developed economies have encouraged investors to seek higher returns in Costa Rica, where the benchmark interest rate is currently at 9.05 percent.

Costa Rican President Laura Chinchilla said on Tuesday investors had turned “capital into real weapons of mass destruction,” that threatened the financial stability of the country.

“If we have to go to war, then we will go to war because we are not going to put at risk the macroeconomic stability that has been so difficult to reach after the crisis,” she said, citing an expression recently popularized in South America which refers to the battle for currency stability.

One proposal would involve raising the tax rate for foreign investors buying Costa Rican government bonds.

“The surcharge is an additional 25 percent on top of the 8 percent they already pay,” Vice President Luis Liberman told a news conference. “It’s substantial.”

He declined, however, to say whether this proposal would mean calling for a 33 percent tax rate for foreign investment.

Another proposal seeks to drive down interest rates by requiring savings of large state-run institutions to be deposited exclusively in public banks, according to an official statement.

In Brazil, a number of taxes - including on short positions in FX derivatives, on foreign purchases of local debt and on credit card purchases abroad - have been used to stem the overheating real in that country’s so-called currency war.

Costa Rica’s central bank has bought $150 million in the last 15 days to maintain its exchange rate within a set band. The colon traded around 497.60 per U.S. dollar on Tuesday, but reached as high as 511.70 on Jan. 2.

Costa Rica, a Central American country of 4.5 million known for its beaches and high-quality coffee exports, has a fiscal deficit of 4.5 percent of gross domestic product.

The proposals will be sent to Congress on Thursday and are expected to be discussed next Monday.

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