The Peso and the Election?

[PICHARDO]

P. What was the last break? Is that what we now know as these reforms?

R. What we lived in 2003 and 2004, when the currency went to 50 and up, we had instability. We do not want exchange privileges or higher rates, we want the real rate. An artificially high currency rate creates volatility, and no one invests or comes to the country. That's when the fiscal reform began in 2003 and 2004 and stopped everything.

When Fernandez,-during the transition- started given security for investors, restarted the investments. I still have not stopped, but only because we hope to weigh things and be given the treatment as a national development plan should be given to each area.

http://www.dr1.com/forums/real-estate/122314-punta-cana-what-you-didnt-know.html#post1065050

 

[playacaribe2]

The PLD will continue to under value the peso against the dollar since there's little competitive change in the local industry to let it float anytime soon.

Pichardo:

The Dominican Peso is not undervalued...in fact it is overvalued....and should be at 41.6...meaning the peso should be worth less than it is....meaning it is an over valued manipulated currency controlled by the Central Bank.

A lot of people I know living in Japan trade the DR Peso and the Japanese Yen for a profit from that scheme.

Ok I'll bite on this one. How does a currency that is not freely tradeable, whose rate is set by the Central Bank, freely trade on any forex exchange or otherwise. Please tell us what exchange, website, anything, as the currency is a good short candidate now..and perhaps a huge short if Mejia wins...actually even if Medina wins too.

And if you share that with us, I promise to show you how my DR Mall construction index for shorting the peso works lol.


Respectfully,
Playacaribe

 

[jackcrew]

Interesting discussion. So I will too toss in my opinion. The biggest threat to the Dominican economy is the deficit it has been running. To lower a deficit, you can raise taxes, decrease governmental spending, or devalue the currency. A new government (PRD) will get into power and increase governmental spending because they have many promises to keep and palms to grease. In addition, a new government will avoid taxing from the start. That leaves them with only one alternative... devalue the currency (something the Greeks wish they could do at this moment). The PLD has less promises to keep and less palms to grease because they have been doing this for years. Taxes will remain the same because everyone will attempt to maintain the status-quo. They will still need to devalue the currency, but just not as much.

 

[PICHARDO]

Interesting discussion. So I will too toss in my opinion. The biggest threat to the Dominican economy is the deficit it has been running. To lower a deficit, you can raise taxes, decrease governmental spending, or devalue the currency. A new government (PRD) will get into power and increase governmental spending because they have many promises to keep and palms to grease. In addition, a new government will avoid taxing from the start. That leaves them with only one alternative... devalue the currency (something the Greeks wish they could do at this moment). The PLD has less promises to keep and less palms to grease because they have been doing this for years. Taxes will remain the same because everyone will attempt to maintain the status-quo. They will still need to devalue the currency, but just not as much.

Under a free floating exchange rate the local export market would deflate and the imports would need to be taxed in order to keep what remains of local industry from going under.

The main problem for the DR is lack of a competitive industry, the only sector that would be able to stay and grow would be the tourism market, as noted.

The free trade agreements so far is showing how lacking for competitive the DR really is.

The old tax imports and keep to the usual lack of competitive level with peso devaluation is not going to work this time around:

Dominican Republic pledges to lift tariff on Central American products

GENEVA. - Dominican Republic today pledged compliance with the World Trade Organization’s (WTO) ruling against tariffs levied of imports of tubular weave and plastic sacks from Central American nations, Efe reports.
The ODS, WTO’s arbitration arm said it will follow up on the application of its recommendations to the Dominican commitment, to "immediately apply and in any event, before April 30," regarding its obligations as a WTO Member State.
On February 22 the OSD had adopted a report’s conclusion on Dominican Republic’s failure to adhere to its trade obligations, with a levy as high as 38% to those Central American imports, used as packing material for agro-industrial, foods and industrial products.
The decision stems from a complaint by Costa Rica, Guatemala, Honduras and El Salvador against the tariff, which Dominican Republic sought to justify by citing the WTO’s Safeguards agreement allowing temporary levies to protect local products, but they countered by showing that the alleged damage couldn’t be proved.

​http://dominicantoday.com/dr/local/...s-to-lift-tariff-on-Central-American-products
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[PICHARDO]

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[jackcrew]

So, the only alternative for the Dominican economy is trade tariffs to protect the local industries? This will increase local inflation dramatically and the peso will still need to be devalued. Things are not sounding to good for the peso...

 

[playacaribe2]

Interesting discussion. So I will too toss in my opinion. The biggest threat to the Dominican economy is the deficit it has been running.

I concur...but add, deficit spending is not all bad if sequential growth and productivity outrun the deficits and provide the means to pay back/deal with those deficits that were created. Unfortunately, such is not the case here.....at least not yet.

To lower a deficit, you can raise taxes, decrease governmental spending, or devalue the currency.

As stated above, growth of the economy can do wonders for deficits. However, growth has been slowing markedly from the double digit figure of just two years ago and has been cut in half and trending lower.

Taxes will remain the same because everyone will attempt to maintain the status-quo.

The DR has put off an 18% IMF mandated electricity hike until after the elections. I do not see how they can impose that large a price hike, so they may need to increase other taxes to make up the difference.


Respectfully,
Playacaribe2

 

[jackcrew]

You are right playacaribe2, deficit spending is fine as long as economic growth and productivity outpaces it. While the DR has slowed considerably in its growth projections, it still continues to expand. I have no idea where the people get their money, but they certainly spend enough to keep things floating. Perhaps economists need to factor in remittances as an engine to economic growth.

 

[playacaribe2]

I have no idea where the people get their money, but they certainly spend enough to keep things floating.

The alphabet soup agencies, i.e., IMF, IDB, USAID, Brazil, Venezuela, E.U., US. The loan amounts from the IMF are staggering....and with growth slowing....the winners of the next election may wish they didn't.

Perhaps economists need to factor in remittances as an engine to economic growth.

Remittances are a funny thing. While I am sure some of the over 2 billion USD remittances annually are used for starting businesses etc., I really think the majority of those funds do not provide any real growth, but rather are used for consumable staples.

The promising growth areas are in exports and mining. The DR's rapid changeover to nat gas for vehicles also promises to help lower their dependence on oil, and because nat gas is far less expensive, help to lower their balance of payments deficits. But make no mistake, there is lots of work to done to fix the economy.


Respectfully,
Playacaribe2

 

[Randall Bell]

http://www.dr1.com/forums/real-estate/122314-punta-cana-what-you-didnt-know.html

Read the part where he talks about the exchange rate and control of the gov over it, as well where it should be left to go...
That's the head of the tourism sector that creates the largest piece of foreign currency for the gov after none!

Hi Pichardo,

Okay I read that. Can we back up on something though?
Most purchases for the tourist industry are made outside the country are they not?
Canadian tourist pays $1000 for a 7 day AI break in punta cana, then puts his credit card away and never pays again.

That $1000 probably hits a Bracelo or other hotel bank account outside the country. And they transfer just enough into the country to pay their staff. Let's say the staff salaries are $RD10,000 per month. With that $1000, currently they can pay for 4 staff. now let's assume the exchange rate went to 80:1, with 1000$, they could pay for 8 staff. Clearly they'd want the tassa to be such that the peso is worth less no?

 

[PICHARDO]

Hi Pichardo,

Okay I read that. Can we back up on something though?
Most purchases for the tourist industry are made outside the country are they not?
Canadian tourist pays $1000 for a 7 day AI break in punta cana, then puts his credit card away and never pays again.

That $1000 probably hits a Bracelo or other hotel bank account outside the country. And they transfer just enough into the country to pay their staff. Let's say the staff salaries are $RD10,000 per month. With that $1000, currently they can pay for 4 staff. now let's assume the exchange rate went to 80:1, with 1000$, they could pay for 8 staff. Clearly they'd want the tassa to be such that the peso is worth less no?

Is the other way around! The industry at large consumes most of their expendables locally, whilst their purchase parity suffers with a undervalued peso. You must understand that under the conditions industry works with the gov, they MUST revert the USD$ and other foreign currency not spent on variables outside into pesos soon after. The gov is the catcher of that currency and gives back to the industry an undervalued trade for their hard worked money.

If you were to use the Mac index to see the real value of the DR pesos to that of the Dollar, not to even mention the Japanese Yen, you'll find how credible the devaluation of the RD Peso really is!

For the industry an undervalued RD peso than what the free floating market demands, means that they can't expand as much as they want or carry out long term investments down the line with a RD Peso that's bound to seek it's own value when the sh*t hits the fan. If they were seating in Puerto Rico or Miami, yes the undervalued Peso would be a God sent, but given how they must operate and fund all their enterprise in the DR such undervalue hurts them the most than all other industries.

When the rate goes 80:1 in your calculations, the wages will also go up and the killer will be the inflation that will eat into their local profits from rising expenses.

The key is to let the peso float and let the market set the real value adjusted for inflation.
You can't continue to prep the exports at the cost of competition, whilst at the same time devaluing the peso with inflation creeping up unchecked.

 

[Randall Bell]

Is the other way around! The industry at large consumes most of their expendables locally, whilst their purchase parity suffers with a undervalued peso. You must understand that under the conditions industry works with the gov, they MUST revert the USD$ and other foreign currency not spent on variables outside into pesos soon after. The gov is the catcher of that currency and gives back to the industry an undervalued trade for their hard worked money.

If you were to use the Mac index to see the real value of the DR pesos to that of the Dollar, not to even mention the Japanese Yen, you'll find how credible the devaluation of the RD Peso really is!

For the industry an undervalued RD peso than what the free floating market demands, means that they can't expand as much as they want or carry out long term investments down the line with a RD Peso that's bound to seek it's own value when the sh*t hits the fan. If they were seating in Puerto Rico or Miami, yes the undervalued Peso would be a God sent, but given how they must operate and fund all their enterprise in the DR such undervalue hurts them the most than all other industries.

When the rate goes 80:1 in your calculations, the wages will also go up and the killer will be the inflation that will eat into their local profits from rising expenses.

The key is to let the peso float and let the market set the real value adjusted for inflation.
You can't continue to prep the exports at the cost of competition, whilst at the same time devaluing the peso with inflation creeping up unchecked.

I need you to try again with me, because I don't follow you my friend.

You are mentioning a lot of 'buzz words', but not addressing the specific example, so let's go through it again:


I'm Barcelo.
Canadian tourist pre-pays me $USD 1000 to my cayman islands account for their upcoming 7 day vacation.
I need to decide how much of that $USD 1000 I have to transfer to DR to pay for fulfilling the Canadian tourists' holiday.
Currently I transfer say $USD 800 of that $1000 to the DR, to pay for the staff and various local costs.
The tassa is currently 40:1. What's better? For it to be 80:1? or 20:1?


YOU SAY:

20:1 is better. because... (big mac index, stability for DR, etc, and well, not sure what else you say...)


I SAY:

80:1 is better.
If something costs $1 outside DR (like petrol), and it's imported into DR, it will cost the same inside and outside DR +/- local tax. So those types of expenses are a 'push' and 'on both sides of the equation' so they can be cancelled out.
If something is produced inside DR (like labor), 80:1 for me is better, because I can buy more of it.
now you may argue, 'but bad tassa leads to inflation and results in increased wages'.
True, but:

1. things that increase in cost 'domestically' that are imported, are actually costing me the same. ie. hotel needs a $10 towel. before the towel was imported at 10$ on 40:1 tassa, and 'cost' me 400 pesos + tax, at 80:1 tassa, it costs me 800 pesos. you may say that's an 'increase in cost', but it's still just $10 for me, and i'm making my money in dollars anyways.

2. labor costs are never 'instantly' indexed to inflation. if salaries are 10k dop, and the tassa goes 2x, employees don't overnight expect their salaries to be 2x increased to 20K dop.

3. **MOST IMPORTANT** the opposite is certainly NOT true! If the tassa went to 20:1, would employees who were making 10K DOP per month now expect to be paid 5K DOP and be 'okay' with it???? clearly not. So this argument is immaterial to the grand scheme...


Discuss

 

[bob saunders]

The only thing Randall , besides the fact that many people that go to A1 leave the resort. There are also many tourists that do not go to A1's, like me. Anyway you look at it if the peso goes 50 - 1....etc it negatively affects the majority of people on the island.

 

[PICHARDO]

I need you to try again with me, because I don't follow you my friend.

You are mentioning a lot of 'buzz words', but not addressing the specific example, so let's go through it again:


I'm Barcelo.
Canadian tourist pre-pays me $USD 1000 to my cayman islands account for their upcoming 7 day vacation.
I need to decide how much of that $USD 1000 I have to transfer to DR to pay for fulfilling the Canadian tourists' holiday.
Currently I transfer say $USD 800 of that $1000 to the DR, to pay for the staff and various local costs.
The tassa is currently 40:1. What's better? For it to be 80:1? or 20:1?


YOU SAY:

20:1 is better. because... (big mac index, stability for DR, etc, and well, not sure what else you say...)


I SAY:

80:1 is better.
If something costs $1 outside DR (like petrol), and it's imported into DR, it will cost the same inside and outside DR +/- local tax. So those types of expenses are a 'push' and 'on both sides of the equation' so they can be cancelled out.
If something is produced inside DR (like labor), 80:1 for me is better, because I can buy more of it.
now you may argue, 'but bad tassa leads to inflation and results in increased wages'.
True, but:

1. things that increase in cost 'domestically' that are imported, are actually costing me the same. ie. hotel needs a $10 towel. before the towel was imported at 10$ on 40:1 tassa, and 'cost' me 400 pesos + tax, at 80:1 tassa, it costs me 800 pesos. you may say that's an 'increase in cost', but it's still just $10 for me, and i'm making my money in dollars anyways.

2. labor costs are never 'instantly' indexed to inflation. if salaries are 10k dop, and the tassa goes 2x, employees don't overnight expect their salaries to be 2x increased to 20K dop.

3. **MOST IMPORTANT** the opposite is certainly NOT true! If the tassa went to 20:1, would employees who were making 10K DOP per month now expect to be paid 5K DOP and be 'okay' with it???? clearly not. So this argument is immaterial to the grand scheme...


Discuss

You seem to be lost in the light...

That USD$ 10 dollar towel will not be USD$10 for much longer once the tasa hits 40:1 or 80:1...

The exchange rate is one thing, adjusted for local inflation, that USD$10 will buy the same for you, but not the same for the towel dispenser side. Once the inflation breaks open (as it does) the cost related to imports will rise above the tasa rate for the exchange Pesoollar and add extra costs to the resort's towels.

Salaries when the exchange rate goes as you posted, will buy exactly half from the jump at 1:40 to 1:80. Inflation will do the rest and either you find more Haitians willing to work for the same it will cost them to pay for transportation and food, with nothing left to show for the work other than having not died of hunger or increase the employee's wages (as it happened as well).

If the reverse happens, you can bet that purchase power will go up as it should, not meaning that wages will decrease accordingly but not grow to keep up with inflation as before. As it also happened~!

 

[Randall Bell]

Why would the $10 towel not cost me the same +/- tax before or after the tassa changes?

The local towel vendor will simply pass on the 'increase' in domestic cost due to the tassa to the local consumer.
Why would the increase exceed the increase due to the tassa? That would be irrational. Besides if it increases irrationally, Barcelo will just buy their towels outside and import them themselves, towels are not made here.

This isn't a scenario unique to DR. It's the same all over the world. devaluing the local currency is good for exporters. It's bad for importers and those who earn domestically (ie. the population at large).

As most of the big tourist industry players are foreign owned, for them, it's probably better if the peso drops in value, as they're in effect 'exporting' tourism, not 'importing' tourists.

Let's move to another key point - the government's current cost base includes a significant interest payment to the IMF and foreign sources does it not?

In what currency or commodity do these interest payments need to be made?

 

[playacaribe2]

Why would the $10 towel not cost me the same +/- tax before or after the tassa changes?

The local towel vendor will simply pass on the 'increase' in domestic cost due to the tassa to the local consumer.
Why would the increase exceed the increase due to the tassa? That would be irrational. Besides if it increases irrationally, Barcelo will just buy their towels outside and import them themselves, towels are not made here.

Your scenario is correct if the Barcelo buys their towels with Dollars....but, if they buy in Pesos and they took those Pesos in at 40:1 and the exchange rate is now 50:1....and they need to buy that towel....they are net losers on that transaction.

Which brings me to the larger salient point of the inteview Pichardo has quoted and highlited. Ranieri was really lamenting the lack of a "stable" exchange rate...not necessarily a higher or lower one. While a more devalued peso encourages more tourism, it is the wild swings and twice daily exchange rate fixes that were occurring during that period that made it so difficult for businesses...to conduct business in a manner consistent with making a profit.

This isn't a scenario unique to DR. It's the same all over the world. devaluing the local currency is good for exporters. It's bad for importers and those who earn domestically (ie. the population at large).

As most of the big tourist industry players are foreign owned, for them, it's probably better if the peso drops in value, as they're in effect 'exporting' tourism, not 'importing' tourists.

Devaluing the peso is good for the tourist and thus makes that destination a bargain, so to that end it is good for the resorts as they increase their occupancy rates and hopefully their yield per person. However, the kind of devaluation taking place prior to the interview caused locally sourced products, good and services to escalate in price....creating a businesses worst nightmare....unstable prices that eventually affect the bottom line.

Now if the peso was freely tradeable then businesses could hedge their peso accounts much like airlines do with their jetfuel. But, in spite of Pichardo's claims to the contrary, there is no mechanism to trade the peso into the future against any currency.

In the alternative, and as you point out above, a 20:1 peso would effectively kill tourism and exports as both are commodities that can either go elsewhere or be sourced elsewhere at cheaper prices. Neither of which the DR can afford to have happen...and my number 1 reason why Pichardo's 25:1 prediction is not likely to come to pass......unless of course the peso hits 50:1 and does a 2:1 reverse split.....and that is another discussion for another time.

Let's move to another key point - the government's current cost base includes a significant interest payment to the IMF and foreign sources does it not?

Yes. It is heavily indebted.

In what currency or commodity do these interest payments need to be made?

Payments to those sources need to be made in Dollars/Euros, and in the case of Venezuela the DR makes partial payments on oil imports from them in various goods/services....primarily in beans.


Respectfully,
Playacaribe2

 

[Randall Bell]

Good Morning Plyacaribe2,


Thanks for your post.

Thanks for the clarification on the towels example. I guess I can understand your point, but this would only be the case if a peso reserve was intentionally being run by the company. Presumably, they just convert dollars to pesos every 30 or 15 days, against their budgetted needs every 30 or 15 days.

ie. local management says, we need towels, they cost 40 pesos. HQ outside the country says - well if they cost less outside the country, we just buy and import. If they cost the same +/- tax, we just convert to pesos and buy. I guess it's possible that between the time the decision is made, and the time the purchase is made, they convert to pesos, the peso devalues more, and the towels increase in price in pesos. Hence the desire against 'wild swings' in currency. Point well taken.

---------------------------------------------------------------------------------------------------------------------------

Let's talk about the original post and the original contention I was trying to make.

If the government's current and future cost base to foreign interests is in a foreign currency (ie. dollars, or gold), then the government and central bank should be manipulating the currency tassa as much as possible to ensure that it's closer to 20:1 and not 50:1, that way their 'cost' will be lower to their debtors.

The fact that the tassa has INCREASED before the election over the past 4 months, seems to indicate that they're trying to press the breaks in the opposite direction, but it's sneaking up closer to 50. Kind of like a fat guy at a beach sucking his stomach in when he walks by a hot girl. lol. From time to time, he has to breath and he has to push his jelly out. That jelly out = going from 37 to 39 lol.

This is why one conjecture is to suggest that after the election, the 'pressure' to try so hard to look so good will be gone. and we will get closer to 50 not closer to 20...

 

[Frank the Tank]

Quite frankly, I have to come down with those who think that the peso is currently over valued. I think the peso's natural rate is somewhere between 42 and 46 to the dollar.

 

[playacaribe2]

Let's talk about the original post and the original contention I was trying to make.

If the government's current and future cost base to foreign interests is in a foreign currency (ie. dollars, or gold), then the government and central bank should be manipulating the currency tassa as much as possible to ensure that it's closer to 20:1 and not 50:1, that way their 'cost' will be lower to their debtors.

In theory that sounds reasonable. However, if the government moves the exchange rate down to 20:1...in essence strengthening the peso against the Dollar....the consequences to them are immediate and immense.

First, exports dry up as other countries who price in dollars look elsewhere for their fresh fruits, vegetables, coffee etc. Tourists look at a doubling in their cost to stay at a resort in the DR.....and as is the case with mass market tourism....seek cheaper alternatives ala Mexico, Jamaica, etc.

Now you have less Dollars coming into the country....which creates a shortage of Dollars to the Central Bank....which must source them elsewhere to pay their foreign debt...which is, lets say, priced in Dollars for ease of discussion. The Central Bank must now find buyers for their pesos.....and back to my point above....since the peso is not freely tradeable....no country wants to part with Dollars for a currency which is not freely tradeable with other countries....certainly not tradeable when a Central Bank fixes the rate....and can go up or down on a whim.....which is back to Ranieri's main point about a "stable" currency.

A non-freely tradeable is anything but stable in the eyes of the world.....and since money goes where it is treated best....very few countries will part with Dollars for Pesos. This leaves the DR scrambling to pay their foreign debt, potentially setting up a default....or as more likely the case.....more cash from the IMF. This scenario can also work in reverse....as the DR found out in 2003-2004 when inflation kicked in and the currency statred to devalue quickly and confidence in the DR peso dropped....and no one wanted pesos....causing the DR to seek help from the IMF to infuse capital in the form of SDR's (Special Drawing Rights) to stabilize the currency and the country economically.

The economic key word in all of this is stability.....since either a run down to 20:1 or run up to 80:1 are both economic destabilizers for any country....not just the DR.

All this having been said, the real back of the envelope Peso rate, according to my calculations is 41.6:1 and headed higher....geopolitical events notwithstanding.


Respectfully,
Playacaribe2

 

[Hipocrito Mejia]

Just read Playacribe2's post, and you'll get all the answers/speculation that you need.

The peso would be 25:1 in a free floating market. That is just too funny!