How the Falling Dollar Will Benefit Ecuador

Friday, Oct. 24, 2008

Read more about how to protect your assets offshore in International Living Postcards—your daily escape

Dear International Living Reader,

Picture this...the vacation of a lifetime: a huge salmon sun burning its way into the warm azure sea; an empty beach and warm evening breeze beckons you to take a stroll...

This is paradise perfected...except for the hotel bill of 194,000 million sucre per night.

This really is a true story. In 1999, my wife Merri and I conducted a real estate tour along Ecuador's coast. Many International Living readers joined us, and the tour was perfect...warm climate, plenty of sun, sand, and sea enjoyed from luxury hotels. Prices were unbelievably low. Attendees bought beachfront and ocean-view properties in Ecuador. Lots in Crucita, the tiny fishing village north of Manta, were bought for only $2,500.

Our group of 100 people stayed at the Oro Verde Hotel in Manta. My wife, Merri, struggled to figure the group’s room bill, which was just over 194 million sucres...for one night’s stay. 194,880,000, to be exact! For one night’s stay!

This was not so bad for an American tourist, as the conversion worked out to be $6,720. This was actually a bargain price for 100 people in the best all-inclusive hotel on the coast. Yet when the bill arrived, all the zeros gave us a jolt and drove home the point that bad governments can create inflation and destroy an entire nation's wealth.

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 freefall. 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.

With little preparation, and even less public discussion, the government dollarized the nation.

In one way, this economic maneuver worked. 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.

Was dollarization a temporary fix? Did Ecuador jump out of the economic frying pan into a failing currency fire?

Actually, dollarization reversed the currency role and took Ecuador out of a currency fire into an economic frying pan.

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

First, the most important lesson of purchasing power: “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 were overpriced: it went from 60 cent 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 with products from countries (such as 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 U.S.

Products coming from the U.S. will also remain stable in U.S. dollar terms. If the dollar falls to the yen and euro, Japanese and German cars, Chinese computers, and Italian designer wear 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 in America. Price increases will probably 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.

One, however, must wonder if Ecuador will remain on the dollar...I will discuss this in the December issue of International Living magazine. [Editor’s Note: If you are not a subscriber to IL magazine, sign up in time to receive Gary’s article.]

Gary Scott
For International Living

Editor’s Note: Gary Scott has been diversifying in multi-currency portfolios since he was stuck in a Singapore hotel in May 1971 (when the U.S. dollar first fell). The dollar was worth 400 Japanese yen then. Now it is barely at 100 yen. In fact, the greenback has fallen so far that Gary created a multi-currency portfolios course to help International Living readers learn how to protect themselves against inflation and falling currencies through multi-currency diversification. Learn more here.

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