Ecuador & the Dollar


Ecuador uses the US dollar as its currency and many readers have asked me what impact a falling greenback might have on life and the ecnomy there.

When Merri and I first arrived in Ecuador in 1997, one U.S. dollar purchased about 3,000 Ecuadorian sucres. Then Ecuador’s currency took a disastrous nosedive and within a year 7,000 sucres were required to get one greenback.

By late 1998 the decline exploded, leaving the sucre in free fall. In February 2000 one U.S. dollar was worth 25,100 sucres. The currency had nose dived 67% through a disastrous 1999. This night when Merri prepared the group’s hotel bill, the sucre had reached rock bottom. The value of the sucre had plunged 20% more in less than a week to 29,000 sucres per dollar.

The collapse of the currency created national financial ruin. The economy shrank 7%. Inflation topped 60%, the highest in Latin America in 1999. The country ran out of gas. The biggest banking scandal in Ecuador’s history made $700-million disappear from more than 750,000 accounts. This brought the failure of more than a dozen other banks and triggered a political and economic crisis that brought the entire country to its knees.

For expats with U.S. dollars, living became extremely cheap: A hotel room that had cost $50 in 1997 cost $5 in 2000!

Many businesses, especially hotels, began to realize this and put their rates in U.S. dollars, which was raised nightly. Even so, all of us who held dollars and other currencies cleaned up!

That year saw the end of the sucre, Ecuador’s 115-year-old national currency. There was a de facto dollarization (like hotels linking their rates each night to the dollar) in many sectors so Ecuador’s government took a step (that no country its size had ever attempted) and adopted the U.S. dollar.

Dollarization stopped corrupt Ecuadorian politicians from using printing machines to finance their follies. Inflation fell from the highest in Latin America (over 100% in 1999) to the lowest, 3.3% last year. But what happens if the dollar falls?

Let’s look at the impact to those living in a nation when its currency is beyond its control and is falling in value.

The most important lesson of purchasing power is that “The currency of the country where you live does not matter much. The currency of your pension, your investments and savings is what counts.”

If you live in a country with a weak currency and your investments or pension income is in a stronger currency, then your cost of living normally falls. For example if you live in Ecuador but invest in currencies that rise against the dollar, this is good!

When the dollar was first introduced in Ecuador, staples such as bread overpriced: it went from 60 cents to a buck—same with a 35 cent shoe shine. Prices reverted when people refused to pay the inflated price.

Now years later, expats living in Ecuador can enjoy a really good meal at a top quality restaurant for $5. Medical costs are very low, transportation is just plain cheap and so too are labor and housing.

The falling dollar helps create business opportunity. One friend who owns a flower exporting business explains: “The flower business in Ecuador has been good due to the dollar fall versus other Latin America currencies, especially the Colombian peso. Colombia is one of Ecuador’s largest competitors in roses and bananas, two of Ecuador’s largest exports.”

The cost of Ecuadorian products becomes lower even in the U.S. when compared to products from countries (such a Colombia) where the currency has strengthened against the dollar.

As the dollar falls versus other Latin America currencies, Ecuadorian products become less and less expensive in global terms.

Dollarization helps expatriates in Ecuador who are stuck with U.S. dollars. Prices of local products and services in Ecuador remain stable in dollar terms. Even if an expat is retired and has a U.S. dollar based pension, basic inflation will remain lower than in the U.S. because labor costs are so much lower in Ecuador. Food, clothing and basic shelter will remain less expensive than in the US.

Products coming from the US will also remain stable in US dollar terms. If the dollar falls to the yen and euro, Japanese and German cars, Chinese computers and Italian designer ware will cost more in the U.S. and Ecuador. Global commodities, cement, steel and such will also rise in price but these cost increases will remain relative in both these countries.

Recent financial bailouts around the globe suggest that we will see inflation everywhere. In Ecuador the inflation should be about the same as America. Price increases probably will be not accelerate as fast as if Ecuador had its own currency. In some instances, inflation may even be less than in the U.S. because Ecuadorians will not demand as much from their government as Americans during an economic crunch. Plus Ecuador is not paying the cost of a hugely expensive war.

Until next message may all your investing be good.

Gary

Join us in Ecuador!  See our schedule of 26 courses, tours, mingos and expeditions we’ll conduct in 2009.


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