Panama Investor Blog

The downside of not having the U.S. dollar

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

Posted: Friday, November 05, 2010 - By Adam Williams

The dramatic depreciation of the U.S. dollar has resulted in financial crisis for many members of the national tourism sector in 2010.

Harmony Reforma

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.” 

Potential Fallout

 

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.

12,700 new hotel rooms and few skilled workers

  I have posted about this challenge before, but an article in the paper today brings the issue to light with a few more details. First consider that Panama will be nearly doubling its number of hotels over the next few years. These businesses are already struggling with finding the human capital required for these many new hotels and restaurants. They are in need of over 15,000 workers in hospitality and as this article points out, Panamanians ar  e deficient in their language skills.

MINERVA bethancourth
mbethancourth@prensa.com

The hotel industry is concerned about the lack of manpower that will require projects to be built in the country.

The president of the Panamanian Association of Hotels (APATEL), Sara Pardo, expresses its concern at the forum on "Investing in Infrastructure and Human Capital as Engine of Economic Growth."

In the next three years will enable 12 000 700 new rooms and it is estimated that hotels need about 15 000 employees, including waiters and waitresses.

Pardo noted that the main weakness observed is the English domain, which is a disadvantage to Panama to other countries like Costa Rica, which is already demanding the use of three languages.

Although some government agencies advance training initiatives, Brown believes it is necessary to start more programs across the country.

 

Overview of new flights to Panama

Salo Shama, Panama's tourism manager, has been very active in getting airline companies to begin direct flights to Panama. He knows that this is the best way to attract visitors because just to advertise the country and have no easy way to get there accomplishes little. Here is an article from La Prensa that gives a good overview of the new flights that are being scheduled into the country.

MAchine translated from La Prensa

ALEX E. HERNANDEZ
aehernandez@prensa.com

New airlines gear up for landing at the Tocumen International Airport.

Between November and December two companies will begin operations of Flight: Tame of Ecuador and Germany's Condor. The first will make its first commercial flight to Panama on December 1, whereas Germany has referred to fly in mid-November.

Tame will have a frequency of six flights per week, excluding Saturdays and cover two routes a week: Monday, Wednesday and Friday made the trip from Quito to Panama, while on Sundays, Tuesdays and Thursdays will fly from Guayaquil to Panama.

But the Panamanian market is no stranger to Tame, the airline already performed two charter flights to Panama every seven days.

"We realized we had an opportunity to establish flights a week and hope in the first months of occupation of 75%," Benaim said Maurice, manager of Tame in Panama.

For its part, the German airline Condor is only waiting for the Civil Aviation Authority (CAA) gives approval to begin flights to Panama.

The company made a direct flight to Panama from the German city of Frankfurt to a 45-minute stopover in the Dominican Republic.

For the president of the Panamanian Chamber of Tourism, Annette Cardenas, it is important to increase flight frequencies to the country, it is the only opportunity to attract more visitors. Besides these two airlines in 2011 awaiting the arrival of new companies, including Qantas of Australia, who will perform a scale of four days in Havana, Cuba, and then fly to Panama, where passengers will take another four days, then return to their country. In November he will take the first step for airlines of the UAE is interested in for flights to Panama.

Rafael Barcenas, director of AAC, said during the forum to carry out the Latin American Air Transport Association will sign a bilateral agreement with the UAE, which would allow companies such as Emirates Airlines and Flydubai set frequencies that include Panama.

For the next year also has seen the arrival of the Japanese airline All Nippon Airways (ANA), which is awaiting the results of the technician performing their new model Boeing Dreamliner to negotiate with Panama is a direct flight between the two countries.

Caribbean Connection

On Saturday October 23 was the first trip of the Dutch Antilles Express Company (DAE) to Panama.

The airline was founded in 2005 will have two flights a week between Curacao and Panama. Floris Van Pollan, CEO of the company, said the airline operates flights to Venezuela, Colombia and the Dominican Republic but said that Panama will be the first Central American destination that will cover the company.

Copa to allow stop overs in Panama with no extra costs

This is another example of the Panama Tourism Authority going after the low hanging fruit. With millions of passengers passing through Panama on their way to somewhere else, it makes sense to make a deal with the airlines to allow passengers a stay over without penalty. As the article points out, if only 5% of those Passengers decide to stay over for a visit it represents more than 150,000 visitors. Salo Shamah has been diligently working to get more airlines to make direct flights to Panama and then internally to get them to coordinate and take passengers from Tocumen to cities in the interior. This will hopefully begin in the next quarter of 2011. There are many ways to promote Panama, but these fundamental actions of making Panama accessible are the most important IMO.

Translated from La Prensa

Tourists would stop in Panama at no extra cost

Roberto González Jiménez
rgjimenez@prensa.com

One of the great opportunities that Panama has to grow as a tourist destination is to attract some of the tourists who pass daily through the Tocumen International Airport but did not visit the country.

The passenger who buys a trip to Copa Airlines with a stopover in Panama may remain in the country several days and then resume the journey to their final destination without extra cost.

Soon will launch a campaign in international media. "If we can nip 5% of that market, would be 150 000 people" in a year, Solomon said Shamah, administrator of the Panama Tourism Authority.

This will continue to promote being broadcast on international media, which offers free Atlapa Convention Center the organizers of events that bring a minimum of Congress.

According to latest official figures, which correspond to the month of July in the year to date have entered Panama 991,000 tourists.

For its part, including transit passengers and crew added 1.2 million. In this group of potential tourists will be targeted the next campaign to promote Panama abroad.

Panama Tourism Revenue To Reach $2,4 Billion

By the end of July, tourism revenue grew 15% when compared to the same period of 2009. If sustained, Panama could reach $2,4 billion by the end of this year. Panama received $967,4 million in tourism revenue in the first seven months of this year, 15% more than 2009, when the country netted $837,7 million.

During these first seven months the quantity of tourists also increased to 991.000 visitors, a 10% increase when compared to last year.

Gringo Bashing in Costa Rica?

This article is written by an American businessman who lives and works in Costa Rica and appears on Insidecostarica.com. Over the years the Costa Rican government and the tico's have begun to take Americans and the economic benefits they bring for granted. Where tico's once were welcoming and desirous of Americans to come visit and live there, it seems there is a growing anti-American sentiment at worst and gringo gouging at the cash register at best. As this gentleman points out, if Americans quit coming to Costa Rica, their economy would be devastated. I think this same sentiments could apply to Panama although I don't believe North Americans make up as much of the overall economy in Panama as they do in Costa Rica.

By John Holtz*

Just how dependent are we, in Costa Rica, on the economic well being of the United States and its population? I'm not convinced that Costa Rica really knows the answer to that question and perhaps does not care too much.

Maybe economic ignorance is a good thing since the US economy and most Americans are on the emotional cusp of deep depression brought on by way too many conflicting, contradicting expert opinions and figures drowning out the much needed feelings of optimism for the future.

We are told that at least 60% of all tourists who come to Costa Rica are from the US and that is a lot.

In a land where facts tend to conflict, I have heard 30,000 and up people have come from the US and live here but the records show as of March 31, 2010 only about 13,795 or so are in CR legally. But, they do spend a lot of money and they do invest heavily in Costa Rica. **

In total, the estimated amount of legal expats in Costa Rica is 346,956 from all over the world. That´s about 8% of the population. **

Thanks to the Spanish language newspaper, La Nación, we learned that CR´s growth for 2009 was not 2.2% as advertised but rather -1.8% and that is a shocker. Costa Rica´s deficit of trade jumped an astounding 86% for the 1st seven months of this year and make no mistake about it, the United States is CR´s number one customer.

The unrealistic and perplexing dollar – colon exchange rate is making CR products, the cost of living and services priced out of most international markets and there is no relief in sight. None at all! (Just try and get a straight answer as to why!)
Of investments, Americans are at the top of that list and they heard very few complaints from the nationals who held up the “Costa Rica For Sale” sign high above their heads during the boom years.

Costa Rica has survived for many, many years from the milk of the United States and it has been fairly easy with nifty slogans like “Pura Vida”, “Switzerland of Central America,” “Military Free”, “First Democracy”, “No Artificial Ingredients” etc. to attract Americans.

But, during the last several years the tits of mother America have gone dry and it looks like they will stay at just a dribble for more years to come. Perhaps many if you believe some economists.

Even Costa Ricans who work in the US and remit money home have had a dramatic drop from 2.3% of the CR GDP in 2007 to only 0.3% in 2009.

It is impressive the estimation of CANATUR and ICT who are paid well to pump only sunshine of these millions of tourists who are crowding the airports every day. However, According to a report on Canal 7, the average stay per tourist has dropped from 14 days in 2007 to just 10 or 11 days in 2010. None of those experts interviewed took a shot at how much money was typically being spent each day and even during the Costa Rica two week school break, hotels were only 46% full and restaurants mostly empty.

Having been touted as inexpensive, Costa Rica is being marketed as a good place to retire and live on the cheaper side of life. At least that´s what the real estate and tour agencies now promote. Sorry to bring in a little reality, however, it is expensive living in Costa Rica unless you are willing to make serious changes in life style plus you might wish to buy a gun.

In 2006 until 2008, while pieces of Costa Rica were being sold off, prices skyrocketed for everything from property to food stuffs because there were buyers on every airplane that landed and they have not come back to earth since then.

But now with American inbound cash flow slow to none, I am finding that Costa Ricans are not as warm in their welcome as when we had lots of money to spend.

Recently and too often, I have heard and read the time honored clichés more than I want: “Yanqui Imperialists”, to “Gringos Go Home” and even “Kill the Gringos” in Spanish language blogs and newspapers. Especially in response to the US sending ships and patrols to root out the drug traffickers at the invitation of the Costa Rica government. (Don´t blame Gringos, blame yourself for voting not once but twice and making the invitation in the first place.)

So Ticos, my advice as a businessman, is to drop this Gringo Bashing stuff! It´s not getting you anywhere.

Stop invading our hotel rooms, our homes, and our cars. Stop over charging us for everything and anything plus don´t even think about adding more taxes than we already pay in Costa Rica. And while you are at it, give us some efficient security, okay?

And if Costa Rica would rather ride the big horse to Beijing, may Zorro ride with you because the country will need a swift sword of justice on her side.

This is a new day and possibly the start of a new “norm” where Costa Rica will need to adjust and learn to compete on the open market for both tourist money and foreign investments in general.

Most of all, if Costa Rica wants foreign money she needs to embrace expats and should very much include them into the policy making process instead of keeping them outside the decision making loop. Only citizens should vote. That´s a given. But expats need to be heard because without them, there ain´t no economy, and “That´s a fact Jack” (Movie “Stripes” Bill Murray).

Costa Rica, think about the negative economic and social impact if expats did indeed pack their bags and took their money out of the country.


*John Holtz is the Executive Director of the Center for the Studies of Modern Management www.modernmanagement.org and can be reached at: jrh@modernmanagement.org.

**Source: Dirección General de Migración y Extranjería

Foreigners can now stay in Panama 180 days on tourist visa

Over the last few years there has been a lot of controversy on the length of stay allowed under the tourist visa. The last administration even shortened it to a maximum of only 30 days which created major problems with real estate sales of vacation properties. Although never fully explained, the government finally relented under pressure and allowed the 90 day stay which had been the normal time allowed under previous administrations. Now the Martinelli administration has changed the visa to allow for 180 days which in my opinion is a very wise move. Why would you want to restrict peoples ability to spend money in the country by forcing them to leave for 3 days and then return for another 90 day stay. Lets just hope the police and immigration officials are well informed of this new provision.

Where does the tourism authority get funds for marketing the country?

In an earlier post I pointed out that Panama will be spending over $40 million to market the country and this article from La Prensa sheds light on where the money comes from. The majority is from the 10% room tax applied to each nights lodging and the other bulk of income comes from the entry tax into the country.

ALEX E. HERNANDEZ

aehernandez@prensa.com

And increased flow of tourists during the first half in about 7%, similarly increased current revenues of the Panama Tourism Authority (PTA).

From January to June, the institution raised $ 27.5 million, $ 3.9 million more in comparison with the same period last year when it raised $ 23.6 million.

The tourism authority has projected revenues of $ 40 million at the end of 2010. The income of the institution are the result of charging the fee for airfare, lodging rate and the lease of Atlapa, among others.

By way of airport tax raised $ 4.7 million in lodging $ 12 million in ticket $ 5.7 million, while the Atlapa rental income exceeded one million dollars.

With the fiscal reforms that became effective in July, the Ministry of Economy and Finance will be the entity responsible for collecting the tax on lodging, but the entire collection will be transferred to ATP.

Panama Tourism Budget Nears $50 Million

Panama's tourism minister has been very busy putting together airline deals and promoting the country at a variety of fairs around the world. According to this article in La Prensa, the tourism budget is closing in on $50 million. They are going to need a lot of tourists to fill the 10,000 or so new hotel rooms coming online soon.

alex e. hernández
aehernandez@prensa.com

The Tourism Authority of Panama (ATP) will next year with a budget of $ 48.4 million, a slight increase compared to the one approved for this year is $ 47.7 million.

The total for 2011, $ 31.1 million for investments (64%) and the remaining $ 17.3 million (36%) for operation.

ATP sources indicated that about $ 10 million will go to pay the advertising campaign developed by BB & M and should be submitted in the coming weeks.

Within the capital budget included $ 4 million to promote Panama as a destination for entertainment with a capacity to mobilize people from other countries.

To encourage the organization of congresses and conventions, the Tourism Authority of Panama offered at no cost Atlapa convention center for holding events with over 500 participants

Google director to speak at Panama Tourism Forum

Each year the American Chamber of Commerce here in Panama sponsors a tourism conference which never fails to provide important information about Panama tourism and other related industries. I have had the honor of speaking at this conference several times over the years and I always find the speakers to be enlightening and the subject matter to be timely. I encourage my readers to attend this upcoming event.

Here are some details:

The Amcham forum will be Sept. 9th- 2pm-6pm at the Miramar Intercontinental.
Tickets are $25 for Amcham members, $35 for non-members and $15 for students.
Call Amcham at 301-3881 to reserve your ticket.

Amchams 10th annual tourism forum will feature two important international speakers- David Hyman, the Latin American director of internet sales will speak about promoting tourism businesses on the internet and Bich Lien Kaldahl, the director of incentive sales for Continental Airlines with 10 years of experience about Panama, who will speak frankly about what Panama needs to do if it seriously wants to become a convention destination- one of the main goals of the Martinelli administration.

Other speakers include Fidel Reyes with his always fascinating report on Panama’s tourism sector, English ecotourism expert Andrew Coates presenting the “Ruta Verde”- a amazing proposal for an ocean-to-ocean pedestrian and bicycle path, Juan Benaventes, former trainer for Royal Caribbean on creating a culture of service, Agnes Santomeno, owner of Reprosa on Panama’s amazing handicrafts, Jose Golder on how Azueros became a tourism destination and Steve Thompson of the surf lodge Morro Negrito on Panama as a surfing destination.