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Central Bank Revalues the Colon

November 22nd, 2007

So sweet!

Back on August 12, 2007, I wrote a post entitled “The Colon Vs The Dollar – Watch your money!” In that post, I cautioned my readers that the weakening dollar could not long stand firm against the Costa Rica colon. I urged readers to move their funds from their dollar accounts (in Costa Rica banks) to colon accounts as I anticipated that the Central Bank had to act soon to bring the dollar down and increase the value of the colon.

Last night, they did just that. The colon has been revalued to about ¢497 and ¢498.39 to the dollar.

So what is the effect of this? Here are some examples:

First, it means that people with money in Costa Rica dollar accounts lost about 4% of the value of their accounts last night. This is true also of CD accounts. Sadly, those who are here seeking residency (pensionados and rentistas) have lost that percentage from any US dollar accounts they opened as deposits for their residency requirements.

Now let’s be clear on the word “lost”. You lost money only if you intend to use those dollars to buy goods and services in Costa Rica. If you were to withdraw those dollars and return to the US for example, you lost nothing. The US did not devalue the dollar. Costa Rica did!

A standard $60,000 rentista deposit is now worth only about $57,800 or so. I say “or so” as each bank in Costa Rica can still set the exchange rate as they see fit, so long as it stays within Central Bank guidelines. Either way, the money is gone.

If, however, you had your money in a colones account, your money now buys about 4% more than yesterday. If exchanging for dollars, you now need shell over only about 498 colones to get one dollar. If you have CD or deposit accounts, they buy 4% more when they are cashed in.

If you are working here in Costa Rica and you receive your salary or wages in colones, your paycheck just got bigger! Example: Your ¢300,000 paycheck now is worth about $602.00. Yesterday, it was worth about $580.00.

However, if you are paid in dollars, something that has been happening more and more frequently in the past couple of years, you just got hosed (unless your employer is really nice), as you just took a about a 4% pay cut.

I also feel that this will not be the end. The true exchange rate should be, in my opinion, now closer to about 460 colones to the dollar. I think the Central Bank simply could not make that large a change in one shot.

However, I think there is a good chance more adjustments are coming. I am expecting that these may be made in increments of 4-5% each until the proper exchange rate is reached.

I do not think that the next change will be in the very short term (2-3 months) BUT, if you read the August Post, I stated. “It is now my opinion that sometime within the time period of from 4 to 8 months from now…” Well clearly I missed that but came close. Almost 4 months! Therefore, when (and if) the next change comes, I think we should be looking at January-March, 2008.

For the almost fifty persons who wrote to me after the August post and told me you were making the switch, felicidades! For some of the others who thought I had lost my marbles (see some of the comments after the August post) , I hope you at least had your money in euros.

What to do now?

I believe we need to wait and watch a bit to see how the banks in Costa Rica value the dollar. I am 99% sure it will stabilize around ¢500 to the dollar (except at Scotia Bank of course!). If it continues to remain solid, then I believe the Central Bank will make at least one and perhaps two more adjustments.

Polite comments welcome as always!


9 Responses to “Central Bank Revalues the Colon”

  1. Saratica on November 23, 2007 6:16 am

    People with their money in dollars everywhere in the world, not just in Costa Rica, just took a 4% hit. If they are coming to Costa Rica, visiting, buying property, ziplining, paying rent… all that stuff just went up in price by 4%.

    Everytime I use my BN card (dollar account) to buy stuff at Hipermas or Auto Mercado, everything in that store now costs me 4% more. BUMMER.

    Dollars are bad news, no question, but most people won’t realize it until it completely crashes.

    So do we change that dollar account to colones (have an account) or to euros (have an account)… what is the exchange rate between euros and colones? (I’ll ask my moneyman, Hal, but he’s asleep at the moment.)

    There was something else brilliant I was going to say but I’m going to have to have more coffee! Que tenga un buen dia, amigo!

  2. Saratica on November 23, 2007 6:21 am

    You said, “except at ScotiaBank, of course”… what do you mean by that? They will stay at 520 (that would be nice) or they will go to the lowest colon value and stay there…? Please elucidate.

  3. Tim on November 23, 2007 3:58 pm

    I am presuming that you did not read the August 12 post and get all your money into a colones account?

    I got some sweet emails today from those who did and they are most happy campers!

    Your comment about “People with their money in dollars everywhere in the world, not just in Costa Rica, just took a 4% hit.” is not correct. This change ONLY affects people who continued to hold dollar accounts AND who will spend that money here. If you withdrew it, it is the same dollar.

    As for tourists, we shall see. It is possible hotels will increase 4% (a NON event IMHO as nobody will change their travel plans for $40 more per $1,000 spent!) Just silly! Also, hotel rates are SO high now, they may not want to take the chance.

    What to do?

    I gave my further advice in this post.

    There WILL be in my opinion, more devaluations, so I continue to state **put your money in COLONES accounts**.

    Forget the Euro.

    It may not hurt you as much but it clearly will not help you. Besides it may go down!

    Finally, if you have never noticed, Scotia Bank always seems to “getcha”! While most banks were at 516/519, last week SB was posting 518/521. Kiss!

    Just s little present just for you.

    As for:

    “Dollars are bad news, no question, but most people won’t realize it until it completely crashes.”

    I am sorry Sara, but that is just nonsense. It will never happen. You have been reading too much left wing silliness.

  4. Saratica on November 27, 2007 6:31 am

    Tim, I read ALL your posts! Procrastination, doncha know. Only cost us 4% this time. A bummer at first, but it could have been worse. Like you, we expect this will happen at least once more.

    On the plus side, we won’t take a hit when we pay our rent in dollars.

    When I said “it cost everyone in the world” I meant everyone who is coming to Costa Rica. If you have your money in dollars and spend it here – and tourists don’t keep their money in colones preparing to visit here – everything you do, buy and eat here now costs 4% more.

    Euros are better than dollars and colones in the short term, certainly. But no unbacked paper money will be good for long. And I’m willing to bet you $5 – er, 10,040 colones – that is true.

    The dollar is already worthless paper, but nobody is willing to own up to it. The colon, the money used by a developing nation, poorer than poor, has gone UP in value over the dollar! This is history making.

    On Friday, SB was at 504/497 which was prudent of them, I thought! They may edge out of whack over time to take advantage, but they haven’t yet.

  5. Tracy Abarca on January 22, 2008 10:32 pm

    Hi I plan on moving to Costa Rica in April. My parents were both born there as where I was born in Houston, TX. I just recently nationalized myself so that I may further my education I plan on going to the University ULACIT, for Dental School. My husband is moving with me as well and we are seeking employment for him he does not speak any Spanish nor has his “papers” Is there anywhere or anyone he can speak with about being a great English speaking asset to their company, maybe yours, ha ha. Please let me know if you can help. Thank you very much. Sincerely, Tracy Abarca

  6. Tim on January 25, 2008 3:03 pm

    Not sure what this has to do with banking… but here is my reply.

    By “nationalized” I am presuming that you now possess a cedula de identidad that is given to a CITIZEN of Costa Rica. If you have that, read below. If you do not, you may not work here at all, regardless of your parents birthplace.

    Presuming you do have your cedula, then you may work but your husband my not in ANY capacity. However, if you definitely have the cedula, you can remarry your husband and he can apply for automatic permanent residency which does allow him to legally work here. That process takes about 17 months during which time he cannot work. Regardless, if he does not speak very decent Spanish, I cannot imagine anyone hiring him even if he does have his Permanent Residency.

  7. Ed Reames on May 11, 2008 6:28 pm

    Your thoughts on this past week’s movement of the Colon Vs The dollar.

  8. Tim on May 14, 2008 8:42 am

    A fine question indeed and one that I shall address today in a short post.

  9. Ed Reames on May 18, 2008 1:09 pm

    The Tico Times article would point to speculators as you noted in your post.

    http://www.ticotimes.net/business.htm

    I have decided to take a straddle position on the two currencies.

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