Greenbacks or Colones? Experts Weigh In

February 15, 2008
Buying property is a substantial investment and inevitably contains a certain level of risk. This is especially true in a foreign country where there is the issue of an unfamiliar currency to deal with.
In Costa Rica, with its highly dollarized economy, this is less of an issue than it might be. But has the recent weakness of the greenback thrown a wrench into matters? When buying property here, which should it be: dollars or colones? Is there an advantage to using one over the other?
Historically, many Ticos preferred to be paid in dollars if possible, according to Les Nunez, a real estate agent based in Playa Hermosa, in the northwestern province of Guanacaste, who has 12 years of experience in the country.
“In the old days, a lot of Costa Ricans were limited in terms of the number of dollars they were able to secure, so it was a good thing for them to be paid in dollars,” Nunez explained.
However, he added, “Those days are long gone. Now with the colón being pegged properly against the dollar, there isn’t any real advantage to it. The thing is, people just relate to the dollar more easily.”
According to Randall Alvarado, credit services manager with Scotiabank, long-term confidence in the dollar is the deciding factor.
“The dollar is a reference currency, it is much stronger than Costa Rican money,” Alvarado said. “It is not a question of recommending it – if you have an income in dollars, it is not convenient and even pointless to use a different currency.”
But what about those who are not paid in dollars?
“It does depend on the client’s income –with the recent appreciation of the colón (TT, Nov. 30, 2007), obtaining financing in colones has become attractive as well,” Alvarado said.
But, he added, “In general terms within the financial system, lending portfolios are continuing to tend toward the dollar; it is a question of the long-term stability of international interest rates.”
If it is just a question of confidence, then surely the dollar’s recent weakness must be having some impact. Are people moving to the colón because of it?
According to Nunez, some people have.
“The U.S. dollar has been pummeled, and it is not a pleasant thing to find your buying power here has suddenly been eroded,” he said. “But I think it is a bit of a knee-jerk reaction.”
Alvarado agreed, saying that if a tendency exists at all, the fall in the value of the dollar may be causing only “a tiny percentage” of Ticos and foreigners who earn colones to think twice before converting to dollars. The conversion into dollars may perhaps be slowing slightly, he said, but it is certainly not being reversed.
“The behavior of the colón over the past four months could just be temporary,” he speculated. “When the U.S. economy bottoms out and begins to pick up again, and the dollar regains the strength it has always had, the behavior of the colón will become irrelevant. That could change … but we would have to wait for the colón to reach a certain level of long-term stability.”
So would there ever be a reason for a foreigner to buy property in colones?
“Will the U.S. greenback ever bounce back? That’s the million-dollar question,” Nunez said. “In the short term, I suppose (moving to colones) probably makes sense, but I am not a currency trader.”
Alvarado was even less convinced, saying, “Perhaps, at least at the moment, if you are a North American or a foreigner and looking to diversify your risk, but…”
It seems the issue, therefore, is not a lack of confidence in the colón, but rather an overriding faith in the dollar. Buying a house always contains a certain element of risk; the consensus seems to be that there is no reason to add to that risk by taking a gamble, however small, on the currency markets.
 
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