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The Colon Vs The Dollar – Watch your money!

August 12th, 2007

For many years I suggested here in this blog, in The REAL Costa Rica and elsewhere that the smart person living in Costa Rica (or for that matter anyone who keeps money here), should always pay using colones, but keep their money in a dollars account. There was a good reason for this. The colon was, for many years, on a system of scheduled devaluation that made holding colones a losing proposition.

I am now doing a 100% change in that position. If this subject interests you, read on…


When I first arrived in Costa Rica, the colon was valued at about 372 colones to the dollar. I watched it devalue every day until last October, 2006 when the Central Bank changed its policy and allowed the colon to float against the dollar, thus allowing the market to determine the exchange rate. I blogged about this here. The Central Bank permitted both the state and private banks to set their own exchange rate.

At the time, I had no idea exactly what would prevail, but after ten months, I am amazed that that the colon has maintained total stability against the dollar. If you look at the exchange rate chart in that October post, you will see the exchange rate today is within 1-2 colones set by the banks in October 2006! Incredible…

So why the change in position?

It is becoming more and more clear that the correct exchange rate against the dollar should be (depending on your source) somewhere around 464-468 colones to the dollar. The Central Bank has been making noises about this for some time now as have the World Bank and others. This makes perfect sense if you think about it as the dollar here in Costa Rica has not seen any devaluation even though all other major currencies (The Euro for example) have reflected this devaluation. Why would the dollar be worth the same here when it is worth less in nearly every other country?

It is now my opinion that sometime within the time period of from 4 to 8 months from now, the Central Bank may very likely set the exchange rate to somewhere in that range (high 460’s). See why below. This will devalue the dollar against the colon and THAT will have a profound effect on those of you with dollar accounts or CD’s here in Costa Rica.

Just some of the effects will be:

  • You will be able to buy dollars with fewer colones.
  • You will receive fewer colones when you exchange dollars. Not good.
  • Anyone receiving a salary or other income in colones will receive a windfall increase in pay or income.
  • The cost of tourism will increase accordingly as the dollar will buy less as it does now in numerous other countries. The Euro is a great example.
  • Money kept in a dollar account will be worth about ten percent (10%) less overnight.
  • Those who have their social security benefits sent to Costa Rica will find they will have less buying power.

The Central Bank has for some years been very concerned about dolarization (see other Post) and this change would not only resolve that issue completely, it will have a profound effect on the national debt.

The national debt is currently running to about $10 billion, and has become a huge problem for Costa Rica. To retire this debt would require a payment of almost $3.000 per person, a staggering number given that that is about the average yearly income for a family in this country. In fact, the servicing of this debt is so expensive that only a small portion of the country’s income is actually being spent on maintaining Costa Rica. This helps explain the poor roads condition, insufficient policing (crime), and numerous other issues with the country’s infrastructure. Thus it is easy to see why it is truly is a possibility that the the Central Bank may take this action. This in turn, would likely allow the country to borrow at lower interest rates.

So what if the Central Bank does not do this? Well before October 2006, if you held colones, you watched as your money devalued daily. Not a happy condition! But since October 2006, this is no longer an issue! The currency is stable.

So as you now have a choice, why take the chance? You have nothing to lose and a lot to gain.

Therefore, it is my opinion that the smart person now hold colones and not dollars. If the Central Bank does revalue the colon, you stand to make a windfall of about 10% if your money is in colones! If they do not revalue, who cares? You really lose nothing as the colon is now stable against the dollar.

Comments welcome!

Follow-up and related posts have been made.

To see them please click http://blog.therealcostarica.com/category/banking-in-costa-rica/


30 Responses to “The Colon Vs The Dollar – Watch your money!”

  1. ricky wilson on August 13, 2007 11:32 am

    ok, I am a little confused, are you suggesting that you keep your money in USD account, and then converting it ti c olones to pay your bills, ect.
    also, do you recommend banking with the government bank or private banks. I am on social security and also receive a VA pension. I have heard that it takes a while for these direct deposit funds to post, which would present a problem for me.
    thanks for any feedback

  2. Global Voices Online » Costa Rica: The Colon vs. the Dollar on August 13, 2007 7:15 pm

    [...] REAL Costa Rica Blog warns readers about the value of the US Dollar vs. Costa Rican Colon and suggests that the smart person would keep the money in the lcoal currency. Share [...]

  3. Tim on August 13, 2007 7:46 pm

    Ricky… Please read it again carefully!

    I am suggesting that you keep your COSTA RICA money in a COSTA RICA COLONES account. Your US bank is not important.

    You can pay any COSTA RICA bills from that COLONES account. Do NOT keep your money in a dollars account in COSTA RICA.

    I recommend a State Bank.

    I suggest you read this:

    http://blog.therealcostarica.com/2007/08/05/banks-in-costa-rica/#more-212

    and then go to http://www.therealcostarica.com and read about banking here.

    If you cannot understand what I am writing, you might want to get another person to read it as I just have no idea how to make it more clear for you.

  4. Ronald Delavega on August 20, 2007 5:21 am

    Hi Tim

    Maybe I am incredibly dense, but if the Colon is now around 370 to a Dollar, and according to you it might go to 400 plus Colones to a Dollar, Does not that mean that I would be getting MORE Colones to a Dollar? And if that is so, does it not make sense that I keep my Costa Rica money in Dollars?

  5. Tim on August 20, 2007 7:31 am

    You are not dense… this is complicated stuff… though I have no idea where you got your figures. :)

    The colon today is at 516-520 not 370. It has not been 370 for years.

    It is my opinion that the central bank very well might revalue the colon to about 465 or thereabouts and that would mean you would get less colones for a dollar.

    If your account is in dollars, that means it would lose about 10% of its value. If in colones, it would cost FEWER colones to buy a dollar. and your could make a windfall of about 10%.

    My point being there is no downside now as the colon has been at the same exchange rate for almost a year… so why take a chance?

  6. Ronald Delavega on August 21, 2007 6:11 am

    Gotcha Tim
    Ron

  7. John on August 25, 2007 5:07 pm

    Tim, I have not vacationed in 10 years and I want to blow it out. Where is the u.s dollar strongest at this point in time? Safety obviously is an issue but I want to blow it out in Central or South America for a week. What do you suggest?

    Very appreciative,

    John

  8. Tim on August 25, 2007 6:08 pm

    I have clearly been out of the states too long. I have no idea what you mean by blow it out.

    Right now, Costa Rica is a deal as the dollar buys way too much compared to other countries.

    If you are asking travel advice… you really need to talk to Costa Rica travel agent and tell them what you want.

  9. crhomebuilder on September 10, 2007 6:24 pm

    RE: Colones vs Dollars. The Global GDP was around 3.4% All countries. Latin America was above the averge for the last few years leading the global market at around 5.5% Asia non Japan and Eastern Europe were also above the average and above Latin America.

    Going back to 1978 there have been 4 changes in the movement of the dollar. The movements are usually long in number of years (decade) and steep in percentage decline or increase (between 40 to 50% either up or down). The dollar is currently down about 30% and has been in a downward directional for about 5 years.

    Some of the factors that control the dollar decline or rise – if it is not pegged by a country
    1. Treasury Yields (the longer treasury yields compared to alternatives around the world Higher treasury yields would lead to a strong dollar),

    2. The government/trade deficit (larger deficits would lend to a declining dollar)For instance with China since the majority of their goods are conusmed in the US they pegged their currency to the US dollar. About a year ago they unpegged but so since they are in such a trade surplus to the US they still need the yuan to be cheap to the dollar to export.

  10. Tim on September 11, 2007 7:41 am

    Well, here in Costa Rica, the exchange rate is set by Banco Central, the central bank of Costa Rica.

    You are correct that the dollar has lost over the past five years, but I think the figure is greater than 30%. Against the Euro alone, it is down maybe 18% this year.

    In any case, we agree that is is declining everywhere, EXCEPT Costa Rica, where it is being held in place artificially. That was the point of this post… to point out that sooner or later, in my opinion, the government here must act and if you have the misfortune of holding dollars, you will be on the short end of the stick.

  11. Bill on September 11, 2007 1:07 pm

    Understanding the value of your native currency in your native country is difficult enough for some folks; but understanding its value relative to other currencies is mindboggling for most. For anyone that is still scratchin’ their head over what Tim is saying – maybe this will help.

    As of the writing of this, one US dollar will buy about 516 colones. If you were to convert $1000 US into colones, it would buy 516,000 colones. If the following day (or at any point in the future) the Central Bank adjusted the rate to ¢465 per US dollar, your ¢516,000 would now buy you $1109.70 in US funds if you converted back to US dollars.

    Another way to look at it is that if today you purchase something priced at ¢516,000 it will cost you $1000 in US dollars. If the dollar was revalued at ¢465, that same purchase would then cost you $1109.70 in US dollars.

  12. Thor on September 13, 2007 5:26 am

    What options are available to a rentista in relation to the 60K U.S. that needs to be on deposit and converted at 12k per year? Are there viable hedging options?

  13. Robert Evans on September 14, 2007 11:51 am

    It has happened before but the likelihood of the Colón appreciating against the dollar is slim at best. The reason the dollar hasn’t depreciated against the colon, as it has against many other currencies, is that the colon has simultaneously devalued, so the cross-rate colon-US$ has remained remarkably stable.

    With investors recent awakening and growing in reluctance to accept the low spread offered between “safe” debt (Tbills, AAA corporate) and “risky” debt (Emerging market debt) the outlook for the colon does not look promising. Also, the demand for colones has been partially fuelled by real estate bubble money from the US which is clearly drying up.

    So, yes, the colon might appreciate against the US dollar, and if you’re the gambling type, go ahead and buy a bunch of colón denominated CDs. But if you want to sleep at night, stick with a real currency.

  14. Tim on September 15, 2007 9:03 am

    By real currency, I am presuming you mean the Euro? I hope so as for sure the US Dollar is suffering.

  15. waynei on September 17, 2007 2:08 pm

    If the colon were to adjust stronger against the dollar (from 510 to 470) than CR will have a difficult time competing with other central american countries for US business. Additionally if CAFTA were to be voted down then CR economy has no were to go.
    Still i like the idea of keeping more than 12k dollars in colonies. Thanks TG

  16. crhomebuilder on September 17, 2007 4:36 pm

    Colone vs. other currencies
    A wise man once told me that it’s all about supply and demand. A currency will strengthen if there are more buyers than sellers and weaken if there are more sellers than buyers.

    This is not to suggest that there is rational thought or reality behind either event, just that of expectation.

    In the scheme of things this may sound simplistic but, at times, the simplest answers appear to prevail.

    Time has proven that markets will move either one way or the other but, move they will.

    The logical question one might ask is how the Colone can stand fixed, within a narrow range, for such a long period of time.

    This lack of movement implies that there is an exact offset of buyers and sellers at all times and that is NOT rational.

    I would ask you to view the below website. You will note that currencies are always moving. Some more quickly than others but, move they do, be it up or down.

    With that in mind, a prudent investor might ask, how can the Colone remain firm within a small range for such a long time.

    http://quotes.ino.com/exchanges/?e=FOREX

  17. Tim on September 17, 2007 8:42 pm

    Supply and demand have little to do with this in terms that you are referring to. There ARE markets in real currencies (i.e. Euro, Dollar, Yen, etc), but there is no market for the colon and it is not traded.

    Just try going to even a New York bank and ask for an exchange of colones to ANY currency. Won’t happen. They will accept it for deposit only. In fact, the last time I was in the Miami Airport, they would not accept colones either, though that was 4-5 years ago.

    It has stayed the same because the various Costa Rica banks (but NOT the Central Bank) have pegged it as such. As it is not an international currency, there are no true market forces at work. The banks can assign any value they want, but clearly, they immediately figured out last year that the dollar was the currency that was losing value. Thus, no change at all in a year! This after MANY.MANY years of scheduled devaluations of the colon.

    Also, the country would benefit greatly from an exchange rate of even half the range I gave.

    My point was and is: As the colon is NOT changing at all, and it is certainly not likely to devalue given the weak dollar, you are perfectly safe holding colones! Further, there is at least a very reasonable possibility that the dollar could (and probably should) be devalued and if this happens, owners of colones accounts will be the beneficiaries!

    SO WHY TAKE THE CHANCE?

    More regarding tourism: This has NOT been the case with traded currencies like those above. The Euro has appreciated against the dollar at least 11% and other currencies even more!

    A 7-8% revaluation would not, in my opinion, have any impact on tourism. Why? Because the dollar has already been losing value EVERYWHERE but here! Travel is far more affected by the economy in the USA (still strong, but worrisome due to credit markets). A 7-8% increase in interior travel costs (note this would only affect IN COUNTRY expenses, not air fare etc as those have already increased), won’t keep anyone from visiting here.

  18. Robyn on November 10, 2007 9:56 am

    My husband and I are coming to Costa Rica soon to look around for a place to possibly buy. How would you suggest we bring money in to the country..( cash, cashiers check, etc. ) and how much are you allowed to carry with you?
    While were looking around should we convert it and keep it in a Costa Rican bank?
    Also do you have suggestions on how best to get your social secutiy and Va pension from the US once we settle here.
    Thanks so much for your advise.

  19. Brian Warren on November 22, 2007 3:14 pm

    If you follow trends, you are bound to get burned. A smart investor doesn’t start by looking what has been “going up” recently. He tries to measure perceived value to real value.

    Put another way: Everything being equal, a declining dollar is just as likely to indicate that it will RISE in the future as fall. “Past performance is not indication of future results”.

    The richest investors have all made their money investing in things when no one else would. “Be wary when everyone else is greedy. Be greedy when everyone else is wary.”

    Applied to the dollar/colón scenario, you should buy colones only if you are very sure that A) the colón has truly been artificially devalued to the dollar and B) the Central Bank really will change the exchange rate.

    Or, you might see the dollar as an excellent investment, seeing as how it is such a bargain right now.

  20. nick andrix on May 20, 2008 7:29 am

    how many costa rican money makes one usa dollar $1.00

  21. Steve on May 21, 2008 6:30 am

    approx 500 colones = 1 dollar

  22. Paul Gehl on July 15, 2008 2:44 pm

    Wow what a bad call on the dollar. Why would someone want to bet on such a small economy with no oil. Expect the Colone to fall more from the 540 to $1.

    The huge load of debt behind the Euro and Yen makes the US$ the place to be in times of trouble. Always has always will be.

  23. Tim on July 15, 2008 3:58 pm

    You are responding to a post made in August 2007. A couple of months later, the dollar fell sharply and those who listened and placed their money in colones made a nice windfall. There is STILL not reason for the dollar to be this strong and what is happening in June 2008 is nothing more than manipulation. It is not backed by any reasonable actions or activity.

  24. Ted on July 21, 2008 10:18 am

    so does this theory still apply in july 2008. the colone is strong against the dollar once again, should i switch my dollar account to colones??

  25. Tim on July 21, 2008 10:53 am

    You have it backwards… the colone is WEAK against the dollar in July 2008. One dollar buys MORE colones than last December. About 60 more colones per dollar.

    Now to your question and a good one… I have no idea.

    Regardless of the prior comment, the influencing factors do not apply here. In fact, looking at the EURO which was about 127 to the dollar in December 2007 and is around 150 today, the colon should be stronger as the dollar dropped. The dollar has dropped against world currencies but is stronger against the colon. THAT of course makes no sense and the reason they give (a shortage of dollars) is silly. Hell, if they needed dollars, they could buy them with Euros!

    So given the apparent manipulation and the banks unwillingness to allow the dollar to seek a value normally, keep your money in dollars. You made a nice profit last week if you had your money in a dollars account.

    Some folks think a EURO account would be a good idea, but I just have no idea though it seems to be a stronger currency than the $ in recent months…

    Also, realize I am NOT a financial pro and not giving advice… so you are on your own. As what is happening here makes no sense anyway…. you’re on your own as am I.

  26. Travis on August 17, 2008 8:36 am

    I am a commodity trader in the US. My parents live here in Costa Rica. The recent strength in the dollar vs the colon (currently $1 = c547) could potentially be a great opportunity for foreign residents in Costa Rica. My parents periodically moved dollars to Costa Rica and then convert them to colones as they need them to pay their living expenses.

    I have recommended that they look at what they spend over one year, then take a percentage say 30% of that total and convert it into colons. Then use a portion of these colons each month to cover a portion of their living expenses.

    This is a simple hedge. They know they will be here for another year and will need to buy colons each month to pay expenses. If the dollar strengthens more vs the colon, they well get a better exchange rate on the 70% they have not “hedged”. If the dollar weakens vs the colon, they will win on the 30% they already converted to colons. It’s a conservative way to lock in a portion of the recent strength in the dollar.

  27. Philip on July 31, 2009 7:50 pm

    just back from CR; 580 colones to $1 – what do you suggest now as far as accounts? Colones or dollars and why?

  28. debbie warboys on March 29, 2010 9:58 pm

    I would be interested to know what you are thinking now about the exchange rate. My ex husband took out the mortgage to our condo in colones. 3 months ago the mortgage dropped down to $66,000 and then just like that my debt is now $74,000 because the dollar improved. Personally I think it is going to keep get stronger and the colon will lose more value. want to sell my condo, is it a good time now? I dont think I can hold on to it for a few years to see what happens….

  29. Tim on March 30, 2010 12:32 pm

    Sorry… I am out of the advice business as this fluctuation makes NO sense whatsoever. I wish you luck though!

  30. sydney mulder on September 7, 2011 4:21 pm

    does any one has any new advise relative to today, Sept. 2011????

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