- Thread starter liam1
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are the DR economists the only ones in the world that don't understand that...
Immediacy or being shortsight is a trait.
Immediacy or being shortsighted is a trait of most Dominicans and the present authorities are no exception. They are fanatically trying to overvalue the peso to demonstrate an abyss between the previous lousy government and them and to also be able to buy more dollars to meet their commitments. In their immediacy and shortsightedness they are overlooking
damage to tourism, free zones and dollar income from abroad. Hope it will not be too late when they realize what they are doing.
Immediacy or being shortsighted is a trait of most Dominicans and the present authorities are no exception. They are fanatically trying to overvalue the peso to demonstrate an abyss between the previous lousy government and them and to also be able to buy more dollars to meet their commitments. In their immediacy and shortsightedness they are overlooking
damage to tourism, free zones and dollar income from abroad. Hope it will not be too late when they realize what they are doing.
At least have the link to it
The link to the article, at a very minimum, should have been in the post.
liam1 said:
The link to the article, at a very minimum, should have been in the post.
We understand that concept very well. The thing is that the DR currency is not overvalued, its a the right level it should had been all along.liam1 said:
During the Hippo years it was undervalued, mostly due to his irractic way of handling things, the extra premiums caused havoc on the currency's value.
I know 4 years is alot and many foreigners seem to have forgotten that the DR currency was at 16 to 1 before Hippo came and scared the heck of everybody causing the currency to artificially lose its value, not because its value was actually lost, but simply because it was a result of a panic. Hippo did quite a job, now things are back where they should have been in the first place!
Nal0whs said:
Are we going to revisit this propaganda again? There is not a single credible source that states the currently is at its proper value. Please do not quote the Dominican Central Bank or the government owned Listen Diario.
Nal0whs said:
Hardly, it was due to massive capital flight and the opinion that the RD economic and political models were nonviable. This capital has yet to return to the country by your own government's admission. The economic models have not improved in fact they are getting quite a bit worse. Examples more useless employees, nonpayment of electrical services by the population and an inflationary 20-30% pay increase.
Nal0whs said:
The currency at that time was considered overvalued as well although not by the current 100%+ overvaluation. If memory serves the calculation placed the peso at a 20%+/- overvaluation at the end of the PLD admin. If I also recall correctly the currency went from 14 to 16.5 during the last Fernandez term which would be about an 18% devaluation during the RD "good times"
There is nothing wrong with being quite the nationalist, however at least be somewhat reasonable.
Since you (and everybody else for that matter) don't want me to quote Dominican sources, then I will cease to do that. At the very least, I'll quote a Dominican source along with a more respectable foreign source.Lurch said:
Here, however, I have simply included some sources (non are tied to the DR directly, but they are about the DR economy). Put a lot of emphasis on what the sources say about the exchange rate's behavior and its implications.
NOTICE: SOME OF THE SOURCES ARE ON ADOBE ACROBAT PDF. ALSO, SOURCES THAT ARE IN SPANISH ONLY I HAVE DESIGNATED THEM WITH THE LETTERS SPH FOLLOWED TO THE SOURCE AND THEN UNDERNEATH, YOU'LL SEE THE LINK.
SPH - AMERICAN CHAMBER OF COMMERCE OF THE DR
http://www.amcham.org.do/discursos/2004_11_30_Andres_Dauhajre.pdf
SPH - ALSO FROM AMERICAN CHAMBER OF COMMERCE OF THE DR
THIS IS A VERY INTERESTING REPORT WITH LOTS OF GRAPHS WHICH MAKES READING THIS MUCH EASIER FOR NON-ECONOMISTS AND ECONOMIST ALIKE.
http://www.amcham.org.do/discursos/2004_11_30_joseluis_deramon.pdf
http://news.tradingcharts.com/futures/6/9/61511996.html
http://latinbusinesschronicle.com/reports/reports/dominican.htm
Nal0whs, by Hippo's "erratic way of handling things", are you saying that the peso fell mostly due to Hippo's big mouth and erratic behavior, or did you mean to say his incoherent policies and governing practices (when there were any to speak of, that is!)?Nal0whs said:
Because while I agree that Hippo's craziness probably damaged confidence in the Dominican economy and made the peso's fall worse than it had to be, I think that many other things actually pushed it away from 16:1US$ to around 50:1, and these things have yet to be fully corrected and therefore the peso is stronger than it should be realistically. It was the Hippo Administration's policies and practices (and sometimes lack thereof) that drove the peso down. The huge increase in government bureaucracy, the huge increase in public debt, the crisis in the banking sector, the dramatic rise in bogus and phantom public works projects, the meteoric rise in graft and corruption, the inconsistent economic and trade policies, the sharp rise in fees and taxes, the politicization of the Central Bank, the decimating of some of the first Fernandez Administration's good works (such as OMSA & AMET) etc etc that had alot to more do with what happened to the peso...
Well, this is one "foreigner" who has not forgotten at all. In fact, I recall that the peso was at 5-6:1 when I first visited the DR in May 1986 (just as Balaguer stole the elections). By the time I moved to SD in November 1995, it was 12.5:1. By Leonel's inauguration the following August, it had fallen to 14. At that time, no dollar-denominated bank accounts were yet allowed in the DR, so those of us living off pesos in the DR suffered a 12% devaluation in just 9 months. The exchange rate was stable for awhile at 14, then drifted down to 16 by the end of Leonel's term. By then, thank god, we could keep US$ in the DR without having to stuff them in mattresses or a safe deposit box. When I left the DR in October 1999 the peso was at 16 and stayed that way for the last months of Leonel's rule and much of the first Hippo year or so, despite Hippo's mouth. But as it became clear that Hippo never had a coherent economic policy, never met a policy he couldn't reverse on a whim (and then switch again the next day), did most governing by the seat of his pants, tolerated record graft and corruption....everyone realized that the peso would fall big time.Nal0whs said:
the fact that the maleria rumors didn't affect peso one bit just shows you that the exchange rate in not real and is being manipulated by leonel. what happens when there is a rumor of mad cows disease in canada? the canadian dollar depriciates against every other major corrency. or when a gas pipe explodes in iraq? oil up, USD down. seems like the peso is immune to bad news. it's like the peso doesn't care what's going on with the economy.
You answered your own question!Keith R said:
And when what I said about "Hippo's erratic way of handling things", I meant everything you mention. His way of talking (which never brings confidence to anyone, especially if its the president!) and his way of governing, etc.
It all contributed to a worst depresiation than otherwise.
Still a little confused by all this
Ok, maybe the maleria thing wasnt such a good example, but I would like you all to imagine what would happen to the Pound Sterling should the British Government default on numerous international loans, or if they couldnt make the most basic of domestic payments (Electricity= or even if they had to go cup in hand and sell their soverignty to the bloody IMF!!!
All o any of these things would lead to a devalued currency, but here in the sunny DR land of plenty (Well plenty of UBH?s, Brugal and Bachatta) the currency does the other and appreciates 100% in the face of everything!
P.S. I keep heaing about all these dollars coming into the economy right now from all those smart, well-to-do and rich Dominicans who are in-the-know and had them stashed out of the country before. Well my question is WHO IN THEIR RIGHT MIND would change large amounts of dollars NOW???? Just the thought of how many peso?s you would have gained by doing such a thing six months ago would surely turn even the strongest of stomachs???
Ok, maybe the maleria thing wasnt such a good example, but I would like you all to imagine what would happen to the Pound Sterling should the British Government default on numerous international loans, or if they couldnt make the most basic of domestic payments (Electricity= or even if they had to go cup in hand and sell their soverignty to the bloody IMF!!!
All o any of these things would lead to a devalued currency, but here in the sunny DR land of plenty (Well plenty of UBH?s, Brugal and Bachatta) the currency does the other and appreciates 100% in the face of everything!
P.S. I keep heaing about all these dollars coming into the economy right now from all those smart, well-to-do and rich Dominicans who are in-the-know and had them stashed out of the country before. Well my question is WHO IN THEIR RIGHT MIND would change large amounts of dollars NOW???? Just the thought of how many peso?s you would have gained by doing such a thing six months ago would surely turn even the strongest of stomachs???
The actual default will not correspond in a devaluation. What correspond in a devaluation after a default is the panic that errupts from scared investors who lose interest in investing in that country, thus the demand for that country's currency falls and there goes the exchange rate.nickkieswetter said:
In the DR there is alot of positive hopes. Both Dominican investors and foreign ones are very confident in this government. As such, a default would cause a little shake up, but given the perfect understanding between the collapse brought over by the Hippo's and the attempt to normalize everything by the Leonel's, many investors would not panic as much as other wise. As such, the exchange rate might change by a few points, if at all in such circumstance.
What exactly is it that you don't understand? Is it the exact mechanism of how the exchange rate is derived or what?
Just an Idea...
I am new to this and I admit that I do not have nearly enough information to make a truly educated comment.
However doesn't the overvalued Peso allow the Dominican Republic to purchase expensive oil cheaper since oil is purchased in US$ (I believe)?
Comments?
Hurts epxorts nonetheless but who isn't affected by high oil prices.
I am new to this and I admit that I do not have nearly enough information to make a truly educated comment.
However doesn't the overvalued Peso allow the Dominican Republic to purchase expensive oil cheaper since oil is purchased in US$ (I believe)?
Comments?
Hurts epxorts nonetheless but who isn't affected by high oil prices.
liam1 said:
Nals Said,
What exactly is it that you don't understand? Is it the exact mechanism of how the exchange rate is derived or what?
Thats it, you have really hit the proverbial nail on the head Nals!
No I dont understand at all how it is derived, I would indeed be very happy if you or someone could explain this, and further more prove that it is a fair system!
Also has the way the exchange rate is calculated changed since Hippolito was in Government, because if not why did we not see this appreciation during the first half of this year when all serious investors would have surely known that Hippo didnt have a chance in hell of re-election, and further more why didnt alll these so called investors buy up all the pesos cheap if the current situation was such a forgone conclusion given Leonels past record and the fact that he really is a nice guy!!!!!?????
Nick
What exactly is it that you don't understand? Is it the exact mechanism of how the exchange rate is derived or what?
Thats it, you have really hit the proverbial nail on the head Nals!
No I dont understand at all how it is derived, I would indeed be very happy if you or someone could explain this, and further more prove that it is a fair system!
Also has the way the exchange rate is calculated changed since Hippolito was in Government, because if not why did we not see this appreciation during the first half of this year when all serious investors would have surely known that Hippo didnt have a chance in hell of re-election, and further more why didnt alll these so called investors buy up all the pesos cheap if the current situation was such a forgone conclusion given Leonels past record and the fact that he really is a nice guy!!!!!?????
Nick
Ok, now that we got step 1 in check, lets see how to solve this problem!
Currency exchange is derived based on supply and demand. The supply is provided to the market by the Central Bank, while the demand is created by businesses who need a foreign currency to purchase goods and services from other countries. If the need for a foreign currency exceeds the current supply of such currency, such currency appreciates in value. If the need for such currency is below the supply in the market, the currency depreciate in value.
In order to maintain a stabilized currency exchange, Central Bank's role comes in. Central Banks have the ability to influence the exchange rate by adjusting the interest rate. The way the Central Bank adjust the interest rate is by enlarging or decreasing the money supply in the market (in economics this is known as M1). The way the Central Bank do that is by buying or selling bonds, etc. depending on the objective. Every bond the Central Bank sell, takes decreases the money supply because such money would be in the hands of the Central Bank, not in the market. Every time the Central Bank buy, that increases the money supply because such money would leave the hands of the Central Bank and enter the market.
Other mechanism that can cause havoc on the value of a currency is segniorage. Segniorage is simply the government printing unback currency. This unbacked currency saturates the market, further diminishing the value of such currency. The reason why the value diminishes is because if 1 peso was backed up by 1 dollar and the government printed 1 extra peso without backing it with 1 extra dollar, then every 1 peso would be backed up only by 50 cents and every 1 dollar would buy 2 pesos.
Hipolito printed millions upon millions of pesos without backing, artificially saturating the market and causing the severe depreciation that the peso has experienced lately. As such, Dominican companies that need to buy dollars so they can import American products and services need many more pesos to buy the same amount of dollars. This sudden shift in the value of the currency sent a shock through the economy as investors panicked. Investors panicked because the government intentionally grossly devalued the currency and showed no worry or remorse, in fact, Hipolito made it clear that he did not care if the country fell into a crisis! As such, investors panic and those who had pesos accounts in banks wanted to convert them into dollars before the government further depreciated the currency by printing without backing.
As soon that many of these investors dumped their pesos for dollars, the peso further fell due to this negative effect on the market. In addition to this, many investors distrusted the Dominican government so much that as soon that they dumped their pesos to dollars, they moved their dollars out of the country, further causing the currency to depreciate! What resulted was a severe scarcity of Dollars in the Dominican market and a once flourishing economy being strangled by a villain who knew nobody was around to give him punishment. This kept going on and on until Leonel was sworn into power.
Once Leonel was in power, investors were much more relieved based on Leonel's previous proven record of maintaining good economic policies. One of the first things Leonel did was to remove much of the unbacked pesos that Hipolito created, this caused the peso to appreciate since every peso was now backed up by more dollars. This appreciation and the confidence in Leonel by investors caused many investors to bring back much needed dollars into the market and this further increased the value of the peso. This is the basic process that has been going on since September up until today. Dollars are coming in, unbacked pesos are being removed, and this is resulting in an appreciation of the peso.
As you can see, this is why I say that the current exchange rate is the normal rate for the peso, not the rates that we saw during Hippo's reign. As you have noticed, the Peso has further stabilized lately, which means the value of the peso is more where it should have been. This stabilization will simply splur more confidence and thus, more dollars that fled are entering the market as we speak. As the peso stabilizes, prices should drop and have dropped in many items. Other items have remained high still, but those prices should start to drop soon as well. In addition, the real income of the average Dominican has increased in the last few months.
Real income is the amount of stuff you can buy with your current nominal income. Nominal income is the face value of the income you get. In other words, when you get 1 peso, your nominal income is 1 peso. However, if that 1 peso can only get you half an orange today, when in the recent past that same peso was able to get you one full orange, your real income has decreased even though your nominal income has remained the same.
The opposite has occured. Up until recently, 1 peso would have bought you half an orange, but today it buys you (using the current drop of 20% in prices of the family basket price), that same peso will be able to get you up to 60% of an orange or 20% more than before. As prices further decrease, the more you'll be able to buy with the same peso. In short, your real income increases while your nominal income remains the same.
This is a bit of a tricky concept for many Dominicans because many won't understand that they are richer when the real income increases, simply because they only see the nominal amount in their wallets. That is, they only see 1 peso in their wallet! As such, an increase in nominal income would be nice to keep workers happy, because the worker would see 2 pesos in his pocket instead of 1 peso. However, increases in minimum wage and/or wages and salaries in general usually are done to keep up with inflation. As such, even though the average joe has more cash in his/her pocket and because of it he/she is happy, the reality is that that amount of cash (though more) still buys the same amount of stuff that the 1 peso bought before. As such, their wealth has not really increased, but they think it has and that keeps them happy and the happier people are, the more they spend and the more they spend the better it is for the economy, etc etc etc.
Of course, you'll hear many expats complaining still, but that is because most expats live along the north coast or in SDQ. These are places where there is an above average number of people (for the DR) who have money in their pockets and as such, the cost of living is higher there, naturally. As such, these places will be among the last places to see the drop in prices that have been noted in other areas of the country, such as the Cibao valley where many things cost less than in Puerto Plata to start with.
No, the way the exchange rate is calculated is the same since exchange rates have been calculated!
This appreciation did not took place in the first half of this year because investors were worried, as usual during the Hippo's reign. Everybody knew Hippo did not had a chance in winning the election, BUT nobody knew if the elections were going to be rigged.
Everybody (including Leonel himself) knew that Hipolito had a high chance of messing with the elections and Hipolito probably would have done so, if the events on Election day had not unfolded in the way that it did. As such, investors waited to the last minute to assure themselves that Hipolito was out of the picture for good. After the elections, investors waited until Leonel came in and took power because they did not trust Hipolito, even in the final stretch of his reign.
Because if the investors would have bought all of the pesos cheap, that would have caused an appreciation of the currency that was neither Central Bank initiated or market controlled. This is what the Hippo's were doing all along, thus the currency appreciated one day and collapsed the next, causing severe instability and further scare other investors and aggravate the economic situation. That is not in favor of any sane government or investor - unless they are corrupt to the nth degree and don't give a *** about the country. Luckily, Leonel's government and the group of investors who trust Leonel recognize their responsibility to the nation.
In addition to the fact that not every investor is in the business of arbitrage.
I hope I have answered your questions Nick, as you can see, I really stretched myself here in trying to explain this as clear as I possibly can.
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.....And they all lived happily everafter
Nal0whs:
While I always enjoy reading your viewpoints on the economy of the DR and while your easily understood explanation of the laws of supply and demand help to clarify economics for the lay person, I must take issue with your current assessment of the DR economy.
First, the current rate for the peso is not the normal rate, nor will it stay there much beyond the first quarter of 2005. The Central Bank has manipulated the peso down in its attempt to buy dollars to satisfy the requirements of the IMF with regard to currency reserves, to pay off some of the massive debt owed to the electric companies and, as you suggest, to stop the capital flight that was evident during the Mejia administration.
But for arguments sake, let's assume you are correct and "that the current exchange rate is the normal rate for the peso."
The economic engine of the Dominican Republic is driven more or less by free trade zone exports, tourism and remittances.
Free trade zone export companies are being squeezed hard economically. They pay their workers with the converted dollars their exports bring in the marketplace. Their payroll has escalated because of the rapid artificial appreciation of the peso, leaving little if any profit. A continued strong artificial exchange rate will cause many of them to close and set up shop elsewhere in the Caribbean basin or on the Pacific rim.
If this is the normal rate for the peso, Tourism will eventually decline causing pockets of unemployment and further undermine any economic recovery. To be sure, this seasons bookings are probably safe. But the AI tourist is for the most part very budget conscious and quite possibly any increase by tour operators will send them scurrying for AI's in Mexico or elsewhere for next season. Yes, the tour operators will have to raise rates. The wages paid to workers is in pesos and it is now taking a whole lot more pesos to pay them as well as pay for maintenance and upkeep on those resorts. Remember, ten years ago the DR was not even in the top ten destinations for American tourists and today it is in the top 5.
Remittances to the DR have been pegged at over 2 billion dollars annually. As the peso appreciates against the dollar, the purchasing power of Dominicans receiving dollars has eroded. Thus they have less pesos to spend slowing down an already struggling economy.
For the sake of the Dominican economy and its people I hope you are wrong!
Respectfully,
Playacaribe2
Nal0whs said:
Nal0whs:
While I always enjoy reading your viewpoints on the economy of the DR and while your easily understood explanation of the laws of supply and demand help to clarify economics for the lay person, I must take issue with your current assessment of the DR economy.
First, the current rate for the peso is not the normal rate, nor will it stay there much beyond the first quarter of 2005. The Central Bank has manipulated the peso down in its attempt to buy dollars to satisfy the requirements of the IMF with regard to currency reserves, to pay off some of the massive debt owed to the electric companies and, as you suggest, to stop the capital flight that was evident during the Mejia administration.
But for arguments sake, let's assume you are correct and "that the current exchange rate is the normal rate for the peso."
The economic engine of the Dominican Republic is driven more or less by free trade zone exports, tourism and remittances.
Free trade zone export companies are being squeezed hard economically. They pay their workers with the converted dollars their exports bring in the marketplace. Their payroll has escalated because of the rapid artificial appreciation of the peso, leaving little if any profit. A continued strong artificial exchange rate will cause many of them to close and set up shop elsewhere in the Caribbean basin or on the Pacific rim.
If this is the normal rate for the peso, Tourism will eventually decline causing pockets of unemployment and further undermine any economic recovery. To be sure, this seasons bookings are probably safe. But the AI tourist is for the most part very budget conscious and quite possibly any increase by tour operators will send them scurrying for AI's in Mexico or elsewhere for next season. Yes, the tour operators will have to raise rates. The wages paid to workers is in pesos and it is now taking a whole lot more pesos to pay them as well as pay for maintenance and upkeep on those resorts. Remember, ten years ago the DR was not even in the top ten destinations for American tourists and today it is in the top 5.
Remittances to the DR have been pegged at over 2 billion dollars annually. As the peso appreciates against the dollar, the purchasing power of Dominicans receiving dollars has eroded. Thus they have less pesos to spend slowing down an already struggling economy.
For the sake of the Dominican economy and its people I hope you are wrong!
Respectfully,
Playacaribe2