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COLONES vs. DOLLARS: Is it smarter to keep your savings in colones or dollars?
For many years I’ve heard that the smart person living in Costa Rica should always pay using colones, but keep their money in a dollars account. There was good reason for this. The colon was, for many years, on a system of scheduled devaluation that made holding colones a losing proposition.
The colon had devalued 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. The Central Bank now permits both the state and private banks to set their own exchange rate.
The colon has maintained total stability against the dollar. If you look at the exchange rate history you will see the exchange rate today is within 1-2 colones set by the banks in October 2006.
Should a smart person now hold colones and not dollars?Here is some information to help with your decision. 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.
I hope this helps with formulating a decision.
Hola, All that seems very complicated, and if I see it from the people point of view, I would say it is now better to have a colones saving account than US. The only reason is because the interest rate for colones is better and since it is not devaluating compare to USD.
I’m not a professional investor, but that is what happened since last october….now the question is when they will reevaluate the colones, it could drop big time !! JoAs others have said, the dollar-to-colon exchange rate has been virtually unchanged since last October when the central bank began to allow the colon to float. That being the case, since October it hasn’t made any significant difference which currency you’ve been holding.
If there is a difference in the interest rate the banks pay on dollars versus colones, it can’t be much, and unless you’re talking about many, many dollars, the interest difference could hardly be lifechanging.
I would suggest that we are asking the wrong question here. The question should not be which do I choose between the two currencies, the question should be: “Should I invest here at all?”
I love Costa Rica and it’s people but it’s still a small Central American country that some people call a Less Developed Country (LDC).
Most of us have a serious amount of money invested in Costa Rica real estate which must factored into the equation when you look at your overall global asset allocation plan.
If you look at an internationally diversified portfolio, how much would be prudent to invest in a tiny Central American country called Costa Rica? A tiny amount…
So even if you had a net worth of $1 million and you own your own home in Costa Rica which is worth $200K – I would suggest that having 20% of your net worth invested in Costa Rica would be more than enough.
My advice to my non-US investment clients is to keep six months worth of cash living expenses inside Costa Rica, the rest is safely invested ‘offshore’ in multi-currency investment accounts in London, Dublin, Hong Kong or Zurich.
If you are a British retiree then stick with British pound, Euro or other European currency investments.
If you are American earning US dollars from SS or investments that you stick with US dollar investments. It is unfortunately extremely difficult for US citizens to invest outside of the US now because the government wants to know where you have stashed every single penny!
Please also note that although Costa Rica banks will pay interest on colones and interest on US$ accounts, when evaluating investments, you must compare apples to apples.
Profiting from the increase/decrease in foreign currency exchange rates is not for the faint of heart. Even experts with a lifetime of experience are only right half the time ….
Whatever investments you look at here, just please make sure you are comparing apples with apples. A ‘AAA’ rated investment rated by a Costa Rican ratings firm, is NOT the same (NOT as safe) as a Standard & Poors ‘AAA’ rating and remember that…
The overall sense of responsibility and urgency amongst “investment advisors” and “private bankers” in this country is also VERY different (“novice” like or “amateur” would be a polite way of saying it…) than what you will be accustomed to…
Scott Oliver – Founder
WeLoveCostaRica.comAuthor of ‘Costa Rica’s Guide To Making Money Offshore in Bull & Bear Markets.’
Like Scott said the dollar has fell against most currencies. I had to put up a cd for $18K for my Setena I bought a CD in Euros from the Banco National de Costa Rica They paid 3 plus % for a year. I want to see if I can get a checking account in Euros or Swiss Francs. I put a chart up the Euro has appreciated quite nicely.
Stan
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