In efforts to lower interest rates and attract foreign investors, El Salvador is attempting to salvage economical problems with the recent currency change from the El Salvadoran colon (SC) to the U.S. dollar.
Some sources say it will help the financial markets develop and others say the recent earthquake that claimed more than 1000 lives will devour an estimated U.S. $1 billion in damage costs and the country's fiscal efforts will prove to be futile.
The change in currency is expected to lower interest rates and one source said the rates have softened since Jan. 1, 2001, when the currency change became effective. Additionally, the change will also eliminate the currency risk, which could attract foreign investors.
According to a source at the Banco Central de Reserva (BCR), the change in currency will reduce the cost of financial transactions and will make them easier to complete.
The source also said various players will enter the market and the number of operations is expected to increase. With regard to the securitization market, the source noted that it is advancing; however, the standards for transactions have not yet been fully developed.
Other sources say that the currency change will force banks throughout El Salvador to become more efficient since they will not be able to depend on BCR. One source stressed that the $1 billion in damage costs is just that - an estimate. The amount could easily rise, and therefore the effects of the recent monetary integration, which fixed the exchange rate to 8.75 between the dollar and the colon, may not be seen in the financial market anytime soon.
While both the U.S. dollar and the colon are currently accepted in El Salvador, the U.S dollar is the legal tender in the country and is used in all financial transactions. Standard & Poor's Rating Agency has converged the country's long-term local currency rating to the same rating as the foreign currency rating of BB+ from BBB+ and the outlook remains stable. Fitch has the same rating as S&P for the country, and Moody's Investors Services has maintained the local country rating of Baa2. Moody's foreign currency for the country is currently Baa3.