Anny Mosity vs. Reality--Depreciation vs. Interest

OK Lets compare based on simple mathmatics.

The average yield on short term notes over the past 5 years in the USA (Canada) has been between 6% > 4%. Go to any bank. I Will use the mean average of 5%. My pension plan paid me 4.25% so I know first hand what fixed income yields are paying.

DR dominated bank accounts are paying 15% - 20%, I will use 17.5 percent as the mean average.

The Year 1996.
Dominician Peso RD $120 000.00
equal to
American Dollars $10 000.00

by 2001 using the yields above, the amounts in your account would be;

2001
Your Peso account RD $268 764.00
Your American account $12 763.00

using todays exchange rate 1 USD = 16.4 Pesos

Lets see what investment turned out better.

Your Peso investment now worth $268 764.00 buys US$16 388.00 TODAY!!

Your American Investment now worth just $12 763.00 buys only RD $209313 TODAY!!

Which investment vehicle gave you a better return???

As long as the Interest rate yield curve is greater than depreciation of the underlying currency you will make as much or more money.

Now I do agree. If you know the currency is about to be depreciated buy American Dollars for the short term and as soon as the depreciation happens, buy back into RD currency and the high rate of return that you will get with them.

Also keep your money in a solvent financial institution. Sometimes it has nothing to do with the local curreny or economy but the poor lending practises of individual banks, this is where people lose money.

It would not be entirely unrealistic for the peso to half its value compared to the dollar in a very sort amount of time...

Example: the current goverment decides to print more peso bills to cover loan payments. This has happened several times during the history of the DR.

Compare your investment base on risk vs reward, not based on return alone. During your investment at 5% in a US bank, you had very little worry about bank default, govenment siezure, currency devaluation, corrupt bank officials etc... these risks exist in DR institutions...

If you still dont get it, I have some internet IPOs to sell you... some of them returned 1000%...

I guess you forgot about the Savings and Loan crisis in the late 80's early 90's in the States.

The two Bank failures in Alberta Canada in 1985 and the Code Inquiry that followed. People I know got 18 cents for every dollar they deposited.

Click the link for information on failures within the American Banking system, deposit insurance isn't as fail safe as you think.

MaxxJaxx, your example covers a favourable period. Let's look at the long term. If you invested US$ 100,000 in financial paper here 25 years ago you would have gotten about 7 to 8% interest. Of course you first had to convert the US $100,000 to RD 1000,000.
You spent the interest of course because that was to support you here in the DR. At that time one US dollar was equivalent to one Dominican peso. Today, your principal of RD 100,000 would be worth less than US$ 6,000. At 17% your annual income is now only US$ 1,020 or $ 85 per month. Time to go back to work and start all over again.

As a short term speculation you can buy financial paper. Why not? As a long term investment strategy to provide you with a secure income it hasn't proven itself.

I have to agree with Stephen: Never say never. I have now gone through two near-overnight devaluations - one in W. Africa in '93 of 50% (literally overnight) and one in Indonesia in 97/8. People with their savings in Indonesian rupiah saw the rate go from 2200 per US$ to 14,000 per USD in 4 months. Similar math for the DR would mean DR108 per USD. Not trying to compare the countries, just want to remind people these things do happen globally. There is no better economics leson than watcing this happen in front of you.

For those with dollars there was a short term windfall in terms of local spending power, but most imported goods were repriced overnight and those with only local earnings and savings are the ones really screwed.

As others have mentioned, it all depends on your individual appetite for risk. The low risk option is to keep hard currency. With the threat of a devaluation this actually also allows for some upside potential due to the local spending power increase you'd have...

With short term certificates presently paying about 20% a year, the peso would have to increase to approximately 20 pesos = 1US$ within a year at which time you would break even ( disregarding the conversion rate ).
The short term investment is for a period of 60-90 days and it is highly unlikely that the peso is going to devaluate 20% within that time frame.
Quite frankly, you'd have to be crazy not to make this investment---I,ve being doing it for over 5 years now and there's never been a problem--I'm way ahead of the game.

Nope, unlikely to devaluate 20% in 90 days. But the calculation should be 5% in 90 days since 20% is annualized.

Glad it has worked for you so far though. Especially if the bulk of your expenses are peso-based.

when (not if) it happens, you wont even know what hit you.....

hopefully you will have made enough over the last five years to keep yourself afloat, but it could easily set you back 2 of those years...

If you have been living off the interest instead of compounding, you will be in real trouble...

The best idea is to short the peso. Or better yet to try out a horizontal calender spread on the dollar/peso differential. This way you have win/win situation. Talk to some sophisticated options dealers about and they can give you addtl info. shorting the Indonesian rupiah proved to be a fortune for the select few.

yeah I was looking into that a while ago, but I am no longer able to play such games