HOW TO FACE THE DOLLAR DEVALUATION (FROM A PANAMANIAN VIEWPOINT)
Commercial factor – as the dollar looses value, the price of products imported from Europe, Asia, and Latin America become more expensive. This has made the cost of living higher in Panama.
The marriage between Panama and the dollar is in crisis. The American currency has devaluated 78% in the past seven years and this has debilitated our purchasing power and has made the cost of living higher. However, there are very few Panamanian economists who believe that it is time to put an end to the dollarization in our economy. The majority of those asked believe that in this occasion there is another option: a competition of currencies.
“To maintain the characteristic status of a international financial and commercial center, instead of allowing the circulation of only one currency, we should allow the circulation of all those currencies whose value is reflected by governments who maintain healthy fiscal and monetary policies, such as the Euro, the British Pound, the Yen, and the Swiss Franc,” commented Jose Abbo (a Panamanian financial expert).
The country could take advantage of the existing banking structure to manage this cosmopolitan influx, business men and businesses would have the flexibility to negotiate in the currency of their convenience, and investors could place their funds in a greater variety of instruments.
“This would stimulate local saving and our attractiveness as a foreign investment destination, by eliminating our dependency. Furthermore, it would eliminate the fear caused by the devaluation of the dollar on investment returns, since investors would be free to place their funds in Panamanian institutions in the currency of their preference” he said.
*In Panama the dollar circulates since mid XIX century. Along with the dollar, the British Pound, The Colombian Peso, The French Franc, and a series of quasi currencies were emitted by the banks of these times. After the independence of Panama from Colombia, the Government signed the Taft Agreement with the United States and proclaimed the dollar as the official currency. This was in 1904.
Juan Carlos Cachanosky, chief economist for Goethals Consulting for Latin America and Aristides Hernandez, local president of Latin Consulting, agree with Abbo.
Everything seems to indicate that the dollar will continue to depreciate, at least for however long the United States’ economy continues having commercial and fiscal deficits so elevated, continue collecting debt at the rate they are going, and facing a regressive cycle.
More than 80% of international reserves in central banks were in dollars during the 70s. But in 2007 this changed to 68%, and the Euro, since being in currency in 2002, has become the currency with the most liking from international communities, states Miguel Ramos, investigator from the Institute of National Studies from the Universidad de Panama.
“Every time the Central Bank of the EU reduces the type of interest, the dollar is weakened. If you add this to the fiscal disequilibrium which that country faces, their recent initiative of fiscal sacrifice to incentivize consumption, and the cost of the war, we will have to wait a while to see the dollar return to being a strong currency” Hernandez stated – who is advocating for authorities to promote the circulation of the Euro and savings in this currency.
When consulted, the Minister of Economy and Finance (MEF) stated that there are no legal restrictions for the legal circulation of other currencies in Panama. But that saving and commerce based in other currencies will have to depend on the private sector players. “Banks and private sector could accommodate themselves to this.”
The Canal Authority, for their part, could accumulate different strong currencies changing in Euro, Pounds, Francs, and Yens.
John Wasik, financial planner and analyst from Bloomberg, recommends investors to diversify their portfolios to reduce dependency on the green bills.
“You can choose from various investment funds in foreign currency which are offered in stock markets and retain them. In the last two years there have been many funds with very good results,” he said. In the last 12 months, for example, the CurrencyShares euro Trust gained 22% and the Japanese Yen Trust gained 17%.