The Exchange Rate’s Winners and Losers
This year’s aberrant, plummeting exchange rate has brought either financial joy or pain to almost everyone.
As of Thursday, $1 could be exchanged for ¢506, the lowest exchange rate value in nearly two years (based on rates for May 13, 2008 from the Central Bank). The value of the colón has appreciated ¢52 against the dollar since Jan. 1, and 78 colones since the peak ¢584 buy value in August 2009. In negative terms, the dollar has lost 13 percent of its value since last August.
While there is much speculation on the causes of the meteoric fall of the dollar in Costa Rica, one thing is clear: it has resulted in financial reconfiguring across all economic sectors and for everyone who uses the national currency.
On the most immediate level, rent payments and salaries have been significantly affected. If someone pays rent in dollars, landlords who convert the payments to colones are losing by the month. If the rent is set at $300 per month, for example, the tenant is paying the equivalent of ¢154,800. Exactly one year ago to the day, the $300 rent fee equalled ¢170,400. This is good news for the tenant, and bad news for the landlord.
“I am receiving less money for rent every month, but my expenses are increasing,” said Flora Vilches, who owns an apartment building in the Los Yoses neighborhood of San José. “Utilities’ expenses are higher.
Food prices are higher. Almost all of my expenses are higher, but I am receiving less money. I am extremely worried and have been extremely affected.”
Workers who are paid in dollars, after the conversion to colones, are taking home much less than just a year ago; while the employee’s company is improving financially, provided that its sales are in colones. For example, an employee making $500 per month will take home ¢253,000. One year ago at that same salary, the employee took home ¢284,000.
Oscar Ugalde, economics professor at the National University (UNA) and the Latin American University of Science and Technology (ULACIT), said that those “most negatively impacted” by the depreciation of the dollar are “workers whose salary is paid in U.S. dollars. … (If they) pay their rent, groceries or any other expense in colones, they have suffered considerably due to the appreciation of the colón.
They receive fewer colones for every dollar exchanged.”
The exchange rate fluctuations have also shaken the national economic landscape, most notably for banks and for the import and export sectors.
On the winning side, importers are enjoying the benefit of the colón’s increased strength. When importing goods, exchanges are typically made in dollars; and purchases made with the dollar are significantly cheaper than they were six or 12 months ago.
“The real winners right now are the importers,” said Juan Pablo Segura, a trader for the financial consulting firm Aldesa. “With the colón appreciation so close to the bottom of the exchange rate bands, importers are in the best position they can possibly be.”
National importers agreed that, compared to a year ago, the devalued dollar has provided financial benefits in terms of saving more colones, though many said the instability of colón has made their export providers more timid.
“We make purchases in dollars, so we are benefitting from the exchange rate,” said Manuel Gómez, who is in charge of imports at Autocamiones de Costa Rica, a Trucking company that imports car and truck parts and automobiles. “But because the dollar continues to be less valuable, people are waiting until there is more stability in the exchange rate to export. Last year, the exchange rate was up, but so were imports.
This year the exchange rate is down and imports are as well. It makes the fluctuations (in the exchange rate) relative.”
Gómez’s picture of the hesitant exporter rings true for Costa Rica. Usually, exporters sell their goods for U.S. dollars. The diminished value of the dollar leaves national exporters much shorter on colones than six months ago. If an exporter sold $100,000 worth of a goods today, they would make ¢51.6 million. Last October, $100,000 was worth ¢57.6 million. The ¢6 million difference equals nearly $12,000.
“The exchange rate has been very negative for business,” said Minor Cordero, the marketing and sales manager at Caribú Importadora y Exportadora S.A. in Cartago. “It creates a complicated situation for business, because not only are you losing money on the devalued dollar, but your competition is dealing with the same issue. If you offer a lower price than your competition, you will lose more because of the exchange rate.”
Exporters are not the only ones being battered by the drop in the exchange. The quantity of colones in national banks has fallen dramatically since the turn of the year. Because commercial bank holdings are in U.S. dollars, as the dollar depreciates, the banks lose assets.
Maurilio Aguilar, the director of risk administration at Banco Popular, revealed the extent of the damage caused by the fall in the exchange rate in an e-mail to The Tico Times. “The sustained fall in the exchange rate has resulted in a loss of ¢774 million (from Jan. 1) through March 2010.”
How Long Will it Last?
As the exchange rate creeps closer to ¢500 to $1, the looming question is: When will it go back up? Most economists cite the history of the exchange rate to predict that, within the upcoming months, the U.S. dollar will again appreciate and the exchange rate will turn and begin to crawl in the opposite direction.Segura predicts that the dollar will appreciate an estimated 7 to 8 percent before the end of 2010, which would put the value of the U.S. dollar back around ¢550. If this prediction comes true, all those currently frowning will begin to smile, while all those smiling might not be so cheerful. In six months’ time, winners and losers may again swap positions.
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