A currency without sharp fluctuations

DOMINICAN CURRENCY

A currency without sharp fluctuations

According to the Central Bank the Dominican currency is behaving with a continuous annual trend of devaluation close to 3%, without sharp fluctuations.
Far from the turbulent days experimented by the currencies of the largest economies in Latin America, the Dominican peso marches along a path of soft devaluation, which allows corporate programming of currency flows for international trade operations.
 
Companies that export find it feasible to estimate payments in Dominican pesos, according to the revenue stream in dollars from their sales abroad. This is possible because in their calculations they can include a depreciation percentage of the national currency into their future income, which is close to 3% annually according to the experience of the past five years.
 
On the importer´s side, devaluation is a variable of high priority when scheduling operations. Whether it is raw materials or finished products, it is essential to have a realistic estimate of the depreciation to establish the final cost in local currency of an acquisition made overseas. These calculations are more valid with the high predictability in the exchange market, which is a favorable condition for the Dominican Republic.
 
In theory, in countries where there is a set exchange rate by the monetary authorities, it should be easier for companies to plan currency flows to carry out international trade operations, because the exchange rate is always the same. In practice, this certainty is unreal since these inflexible exchange rate regimes lead central banks to control the sale of dollars at the rate they are entering the country, and foreign exchange transactions tend to be too slow, affecting business activity . Latin America is deeply sensitive to the dominant conditions in international financial and commodity markets. The trend in behavior of external capital flows into their territories, and the increase or decrease of export earnings are two variables that can determine the exchange rate.
 
As the region has already experimented, it can go through not only a strong process of devaluation, but also periods of revaluation. If the movements of acceleration of devaluation are abrupt, the damage to the importing activity is enormous, because it increases the cost of goods purchased directly hitting the profitability of an operation, as in the case of a final product, or the cost of a production process, if the imports are components.
 
The revaluation or appreciation of the value of the national currency against foreign exchange is also traumatic for the economic activity. It might seem advantageous for those who depend on overseas purchases, but it affects export revenues, which can decrease the trade activity.
 
A stable free market is the ideal context for an exchange policy to be favorable for foreign investment. The Dominican peso does not suffer from sharp falls as other currencies, but gently slides down a steep of predictable devaluation. In 2015, it closed with a devaluation of 2.9%. In the last two years, the depreciation of the peso was 6.6%, in the last three of 12%, and the last five-year period, 21.5%.
 
The sudden jumps of the exchange rate are not perceived in the Dominican horizon. In 2003 the dollar rose 99% against the national currency, and in 2004, a revaluation of 13% was recorded. This year the soft devaluation maintains an inclination of 3%, and the dollar could close at 47 pesos. On its balance sheet for the first quarter of 2016, The Central Bank highlights that the exchange rate stability is reflected in accumulated depreciation of 0.6% in that period.
 
The Mexican, Brazilian, Colombian, Peruvian and Chilean currencies have gone through stronger devaluations in the past two years. Argentina is in the adjustment phase, after a long freezing period, not to mention the Venezuelan, a global collapse without parallel. All these currencies have in common that they are highly susceptible to the tendencies of commodity prices.
 
On this stage, Dominican Republic has two considerations in its favor: it is not an oil producer, but benefits from its low prices, and its key sector is tourism, a permanent generator of foreign exchange. The exchange rate of the peso reflects these conditions. For the foreign investor that is a decisive consideration: to arrive to a country with a smoothly devaluating exchange rate, non-traumatic for his imports, and certainly protective of its exports..