Your Dollar Still Goes Far in Ecuador

When my wife Merri and I first arrived in Ecuador in 1997, one U.S. dollar bought about 3,000 Ecuadorian sucres. Then Ecuador’s currency took a disastrous nosedive. Within a year, 7,000 sucres equaled one greenback.

By late 1998, the decline exploded, leaving the sucre in a freefall. In February 2000, a U.S. dollar was worth 25,100 sucres. The currency had fallen 67% through a disastrous 1999.

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 over a dozen other banks and triggered a political and economic crisis that brought the entire country to its knees.

Here is an important lesson we learned. For expats with U.S. dollars, living became less and less expensive. A hotel room that had cost $50 in 1997 cost $5 in 2000, for example.

Many businesses, especially hotels, began putting their rates in U.S. dollars. They raised the sucre room rate every night. 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 to the dollar each night) in many sectors, so Ecuador’s government took a step that no country its size had ever attempted—it 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?

Shortly after this Andean nation accepted the dollar as its national currency…the greenback, whacked by continual U.S. federal debt, budget, and trade deficits, began a freefall of its own…even against Latin and other emerging currencies.

Over the past five years, the dollar has fallen versus currencies in Brazil, Mexico, Colombia, and even tiny Peru.

The fall of the U.S. dollar against the Brazilian real in the last five years

So what’s the impact to those living in a nation whose 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. A good example would be to live in Ecuador but invest in currencies that rise against the dollar.

What happens, though, when your savings and income are in dollars, if you live in Ecuador or another country that uses U.S. dollars?

First, you gain a great convenience factor! Merri and I find it useful not having to convert currencies. This saves Forex charges, too. Plus, ATM machines work well. We collect cash we need to live in Ecuador via an Ecuadorian ATM that charges our Florida checking account.

There are some inconveniences at times. When dollarization first took place in Ecuador, no one quite knew what the correct conversion should be or the consequences of dollarization.

Initially, everyone selected the highest possible dollar price. Shoe shines, which had previously converted to 35 cents, suddenly cost a dollar. Tips that had been a quarter were a dollar. A bag of bread rose from 60 cents to a buck.

This artificial inflation covered every sector of the economy. It took a while for the marketplace to sort this out. No one really knew the correct price for anything, except, eventually, the consumer.

Over time, prices worked through the system and impacted the budget of the man in the street. When something had become too expensive, consumers had to say “no,” and prices stabilized and came down. Now, years later, expats living in Ecuador enjoy a good meal at a top-quality restaurant for $5. Medical costs are low, as is the cost of transportation, labor, and real estate.

The falling dollar also helps create business opportunity. I discussed this with an American who has owned a flower plantation for years. His Ecuador business exports flowers globally at low prices. He outlined the perspective from an exporter’s point of view.

“The flower business in Ecuador has been good due to the dollar fall versus other Latin 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 American 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 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 clothing will cost more in the U.S. and Ecuador. Global commodities like cement and steel, for example, 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 the U.S. Price increases probably will 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.

Latin American countries have been talking for some time about creating a uniform Latin currency and central bank. Brazil’s president, Luis Silva, was the most recent focal point for the creation of a South American union called UNASUR (Union of South American Nations, or Union de Naciones Suramericanas).

This idea began to gain momentum in the early 2000s, and was more formerly defined in Brazil in September 2005, when the South American Community of Nations was formed.

There was further advancement in May 2007 during a Latin heads of state meeting in Venezuela. The name was changed to UNASUR and the idea advanced that two existing trade pacts, Mercosur and the Andean Community, unite to form a Latin intergovernmental union, modeled on the European Union, standardizing laws, customs, currencies, and trade.

The current treaty, which was agreed on in May 2007, places UNASUR’s headquarters in Quito, Ecuador, the UNASUR parliament in Bolivia, and the Latin central bank, called Banco del Sur, in Colombia.

An initial step has been the creation of Banco del Sur. Documents signed in December 2007 by Argentina, Bolivia, Brazil, Venezuela, Paraguay, Ecuador, and Uruguay were the formal beginning of the bank. Banco del Sur’s headquarters are going to be in Caracas, with offices in Buenos Aires and La Paz.

At this time, the bank will not be a Latin central bank, but a development bank designed to supersede or compete with the World Bank and IMF.

Original funding was a few hundred million dollars with speculation of a rise to as much as $10 billion. The first loans were hoped for in 2008. Projections have been grand, but already the arguments over how the bank will operate have begun. Since the bank’s inception, little has been covered in the news.

Argentine economist Alan Cibils was quoted as saying that from a theoretical point of view, such a bank had been necessary for a long time. But he added: “From a practical point of view, I would say I’m skeptical. It’ll be very difficult to have an institution that operates with transparency and efficiency given the levels of corruption in the governments that are sponsoring this institution.”

The length of time it has taken the European Union and euro to evolve suggests that we should not expect to invest in or spend a lato any time soon.

The EU, which had the horrendous effects of World War II as a driving force, has required decades (the foundations of the EU started in 1951) to emerge in a region where there was considerable political stability and huge financial reserves. It is not reasonable to expect a South American Union (SAU) to emerge any time soon.

The union is one thing, a common currency is another. It required 51 years from the start of the EU until the euro emerged, and even now, eight of the EU members have not accepted the euro as their currency. Considering the political atmosphere in South America, the distrust and the varied economies and cultures, we should not expect a fast evolution. Any drops in the price of oil will also slow down momentum of this idea. Latin countries are still quite poor if their oil revenues are reduced. Their tax base is low compared with the Western world, so reduced oil revenues would lower the funding available for grand schemes.

The EU has paved the way, however, leaving a model to adapt. Perhaps in the lifetime of baby boomers, expats will see a SAU and lato currency become as much a reality as the EU and euro.

The global nature of government bailouts during this current economic downturn means that no currency is guaranteed and few countries are safe from inflation.

Currency diversification helps fight inflation, so regardless of dollarization and where you live, be prepared to invest in more than one currency.

If Latin governments can create a strong currency that we can invest in, we’ll be better off. If so, we’ll get one more currency to use for our diversification. We’ll need it.