New Debate:Dollar Power VS Peso Power

To our pop economists, here's a good one. Stephen Hadley and I have been arguing for some time as to the best management of your money in DR, posing the hypothesis that you have $1,000,000 pesos or more(no lesser amounts) disposable for investment in commercial paper or certificates of deposit and assuming that you depend on the interest rates to cover some of your monthly expenses or to subsidize your income.

1)Would you keep your pesos and invest at interest rates of 15% a year, knowing factors such as devaluation, buying power,government regulations, cost of living inflation, etc.

2)Or would you keep it in dollars where the interest rates are at best 5 1/4% to 6% knowing the same factors and other risks.

So that you know, Stephen is of the dollar school. I stick to my pesos, as I believe the dollar is overrated in the present Dominican circumstances.

Give us your analytical opinion. Please, if possible, do not suggest that the money be used for investment in a business, specially with employees, or investment outside the DR(like Wall St.). This is not the argument. It is simply an investment question in DR.

TW

Depends on

How much income you need from the interest

How far might the pesos devaluate? If the delta there would only bring your effective interest rates down to the 5-6 percent you would be making on the dollars then it would be a no-brainer.

How liquid is Dominican paper?

What do we expect Dominican inflation to be over the next year?

I am of the opinion that the money should be in Dollar accounts currently while I believe the peso is in danger of losing value against the dollar.

If I felt the peso was in a stable state I would go for the peso account.

Also take into account if your expenses are likely to be local properties, goods and services vs imported...

Looking forward to hear the opinions of others...

Also depends on the spread on the exchange rate.. That could be a real problem... Anybody have some estimates on that?

just do the math:

RD$1,000.000 = US$ 58,823 AT 17:1 (aproximate rate)

RD$1,000.000 X 15% = RD$150,000

US$58,823 X 6% = US$3,529 (RD$60,000)

as you can see you make about 2.5 x more money when you invest in pesos. when you add the macroeconomic variables into this equation, you might argue that the Dollar is a safer investment, but that would be overrated since the dollar and peso have reached a stable balance in the supply/demand curve. moreover, the first thing you should know when investing is that the higher the risk, the higher the return. this "higher risk" (which is not that much anyway) would pay for itself in a couple of years if you invest in pesos. it also depends on your age. i'm 24 years old, so i might use a more agressive investment strategy than what you would feel comfortable with if you are older or retired. if you want to achieve a balance of safety and growth, then you can always diversify your currency and split it between dollars and pesos. but i would definitely keep my currency in pesos and take advantage of the better rates. i would suggest you go to the link below and read a good DR related investment advice from a respected analyst.

sorry i forgot to put the link in the previous post. click below.

>>good DR related investment advice from a respected analyst<<

"respected"???? By whom? The "report" at the link you provide is less an analysis than a cross between rant, ramble, fantasy, wishful thinking & sales pitch.

"good" advice? How do you figure that?

Do you get a commission from Schroder, Papi? Or are you one and the same?

You are assuming the exchange rate remains the same... You have to convert currencies twice to do the calculation properly. Once at the beginning and once at the end at the final rate.

If the peso devalues against the dollar by and average of 7% per year your real gain it more like 15%-7% or 8%.

If the peso makes a quick move, you could actually lose "buying power"

even when you account for the devaluation of the peso against the dollar(15% - 7% = 8%) , the 8% is still better than the 6% you are making on the dollars. besides it might not be advisable to keep too many dollars because it would be more likely for uncle sam to find out and he will want his cut.( which is about 30% on interest income? ) furthermore, the US is in a deep recession right now, so i dont think the devaluation expense will be 7 % for awhile. the fed just cut interest rates by 1/4 points a few minutes ago, so i dont expect the dollar to be that strong in this circumstances due to the current weakness in demand.

My best advice since I could do either, keep mpnies that you might need within a year in DR currency, and monies that you will keep for safety in dollars since it does not go downthat easily. When we retire there we will keep an American account to have as a safety against unforeseen events, such as political instability. Never put all your eggs in one basket, since it can be drop,FDIC is a bit more security. If there is a similar insurance against bank failure then the peso is the better investment.