In a previous post I talk about the inflation Panama is seeing because of being tied to the U.S. dollar and the negative impact on peoples lives as consumer prices increase. Now we can see the other side of the coin. Costa Rica uses their own currency called the Colone and it has been strenthening against a falling dollar and that is causing havoc in the tourism industry. This article from The Tica Times explains what is happening.
Tourism Industry Battered By Exchange Rate High Colón Hits Hotels
Double Whammy: The falling value of the dollar coupled with the rising cost of doing business is putting the squeeze on Costa Rica’s tourism industry. Above, an empty beach near Montezuma, on the Nicoya Peninsula.
For Costa Rica’s tourism industry, the economic crisis of 2010 is the sinking and unpredictable exchange rate.
As the U.S. dollar loses value, the colón has appreciated, hovering near the ₡500 mark during the past three months. While the stronger colón has resulted in one of the smallest increases in consumer prices in the last decade (around 4 percent so far in 2010), economic sectors that are fueled by sales in U.S. dollars, but pay most expenses in colones, are taking a beating.
One of the most important of these sectors is tourism, an industry that accounts for around 7 percent of the nation’s gross domestic product (GDP) and generates annual revenues of around $2 billion.
Last Thursday, the Costa Rican National Tourism Chamber (Canatur) hosted a presentation to highlight just how severe the damage to the industry caused by the exchange rate has been. Amid the torrent of data and statistics put forth to demonstrate the financial strain placed on the sector in 2010, one fact stood out: in a Canatur survey, 66 percent of hotels and other tourism-related businesses reported being negatively affected by this year’s fluctuations in the exchange rate.
And that might be an underestimation.
“It’s changed the entire chain of the tourism industry from one end to the other,” said Boris Marchegiani, president of the Gaia Hotel and Reserve in Manuel Antonio, on the central Pacific coast. “It’s not just the hotel part of it. It’s affected the food that we provide, which we have to pay for in colones converted from dollars, it has affected the tour operators, because they charge in dollars and have to pay employees in colones, as well as the costs of amenities and all other operating costs. Just think of any element of the tourism industry, and the exchange rate is destroying it.”
A similar sentiment was shared by representatives of the sector in all corners of the country contacted by The Tico Times this week. Given that most revenues generated by the tourism industry are in U.S. dollars, the roughly ₡70 colón decrease in the value of each dollar over the past year has resulted in often traumatic losses. For example, if a family spends a few nights at a hotel and racks up a $1,500 tab, in 2009 that translated to around ₡862,500, whereas one year later, that same amount translates to ₡757,500, or about $200 less.
Increased operating costs, which are paid in colones, have brought further financial anguish to the industry. According to Canatur, in the past four years, average operating costs have increased 11 percent, cost has risen 31 percent and minimum salary is up 46 percent. Employee salaries, for example, are paid in colones. If an employee makes ₡500,000 per month, in 2009 that salary was worth $870. In 2010, the same wage has a value of $990.
“The Costa Rican Electric Institute (ICE) raised the price of commercial electricity 30 percent across the board,” said Dan Wise, the owner of the Río Colorado Lodge in Barra del Colorado. “Now, with the colón increasing about 15 percent, our electric bill went up 45 percent. There was the 30 percent increase plus an additional 15 percent increase because of the colón adjustment. My power bill is now up 45 percent compared to where it was a year ago.”
Wise said that the minimum wage for his employees had also increased significantly despite his not granting any raises.
“Let’s say a salary has gone up $50 per month for a minimum wage employee,” Wise said. “If you have 50 employees making $50 more a month, that’s an additional $2,500 in expenses per month that you weren’t paying last year. And that’s without even giving a raise. It’s brutal.”
At the conclusion of Canatur’s presentation last week, Juan Carlos Ramos, the organization’s president, was asked what he thought the future would hold for the tourism sector should the value of the U.S. dollar continue to depreciate.
After a slight pause, Ramos responded:
“There could be hotel closures. There are a lot of hotels having tremendous difficulties with the exchange rate fluctuations this year. If the value of the dollar doesn’t improve soon or there is no government or bank intervention, more hotels could close by the end of the year.”
According to Carlos Lachner, president of the Costa Rican Hotel Chamber (CCH), there have already been several hotel closures in 2010, including “three or four” in the La Fortuna area near Arenal Volcano in north-central Costa Rica. Lachner indicated that many other hotels are struggling to pay debts and could also go under if the dollar fails to recuperate.
Time for An Intervention?
Ramos said that various tourism industry associations – including the Costa Rican Tourism Board (ICT), the Costa Rican Tourism Professionals Association (Acoprot), the Costa Rican Restaurant and Hospitality Chamber (CACORE), CCH and Canatur – have held meetings with the Central Bank of Costa Rica (BCCR) and President Laura Chinchilla to discuss strategies to reduce the impact of the exchange rate’s volatility on the industry.
According to Ramos, the discussions hinged on the idea of reevaluating the system of exchange rate bands, whereby the value of the colón is allowed to fluctuate freely between established maximum and minimum values. Fluctuations generally occur in response to the supplies of colones and dollars in the Costa Rican market, as well as other factors, such as the value of the dollar against other currencies.
The bands system, which was installed in 2006, replaced the system of mini-devaluations, which assured a daily depreciation of the colón versus the dollar in small, predictable increments. When the mini-devaluations system was installed in 1984, a U.S. dollar was worth around ₡50.
In 2010, the bands system has fallen under intense scrutiny, as dollar-based economic sectors, such as tourism and exports, have been punished by the devalued dollar and the unpredictability of the exchange rate.
“The mini-devaluations made it much easier to plan your finances,” said Jean Waller, the owner of Casa Viva cabinas in Punta Uva, on the southern Caribbean coast. “You could budget ahead of time because you knew what the value of the dollar would be. With the current system, that just isn’t possible.”
A Casa Presidencial spokesman told The Tico Times that no official decision had been made on whether the government would take action to influence the exchange rate, which is a responsibility of the BCCR (the president and board of directors of the bank are appointed by the Executive Branch).
In an interview with The Tico Times in August, BCCR President Rodrigo Bolanos said that “the Central Bank is going to keep [upper and lower] limits that have been established where they are with the hope that the exchange rate continues to remain within those bands.
“Whenever the Central Bank has to intervene to control the fluctuation of the exchange rate, it weakens the natural activity of the monetary system,” he said. “I would say that my objective is to look for a way to monitor the exchange rate in case of external economic shocks and to attempt to limit the Central Bank’s intervention in adjusting the value of colones to dollars (TT, Aug. 13).”
A Weakening Muscle
While economic conditions are often cyclical, the pains of the tourism sector caused by the exchange rate arrive at a time when the industry is already limping. In 2009, the ICT reported that the number of tourists who visited Costa Rica fell 8 percent from 2008. While the ICT reports a 9 percent increase in the number of tourists in 2010, the drop in the exchange rate has worked to counteract any positive impact of the increase in visitors.
“The devaluing of the dollar came at the worst possible time for this industry,” Marchegiani said. “We have been warning the government that the exchange rate could break tourism for years now, and they haven’t reacted. But it’s not only the present, it’s the future as well. If someone is considering investing in Costa Rica or building a new hotel here, who would want to invest in a country with an unstable currency? I wouldn’t recommend it to anyone.”
As the dollar continues to lose strength, vital pieces of the Costa Rican economy are weakening, even as other sectors – such as consumer prices – benefit. But if the dollar doesn’t recover soon, the tourism industry, one of Costa Rica’s biggest economic muscles, might lose quite a bit of its punch.