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Which countries are at risk, which countries are safe from a dollar crisis

May 6, 2010
Undisclosed Location

Most people don’t realize how many countries out there are dollarized.

In some countries, like El Salvador, Panama, Palau, Ecuador, etc. the US dollar officially circulates in the economy. In others, like Cambodia and Zimbabwe, the US dollar is the de facto currency, which means that they officially have their own currency, but US dollars are commonly used and accepted for everyday purchases.

Moreover, in other countries like Uruguay and Argentina, high ticket items like real estate generally change hands in US dollars. And finally, in many countries like Venezuela, Ukraine, Saudi Arabia, Hong Kong, Cuba, etc., the local currency is pegged to the US dollar at a fixed rate.

To be clear, there are many advantages to being dollarized. For tourists, it is far more convenient to deal in a major currency. For investors, there is generally less stability risk if you don’t have to deal with a third world peso. For business owners and traders, it makes sense to use the world’s #1 reserve currency.

But just as there are a lot of benefits to using the US dollar in a foreign economy, there is one massive, critical risk: what happens to these economies when the greenback finally breaks? What if there’s a run on the dollar, similar to what’s happening with the euro right now? Are these countries insulated? Here’s my take:

The actual currency unit in circulation, whether official or unofficial, is not that important. What is far more important is determining a country’s level of exposure to the United States.

El Salvador, for example, is heavily dependent on trade with the United States; 48% of its exports and 35% of its imports depend on the US… so a substantial dollar crisis which erodes the purchasing power of the greenback and reduces real wealth in the United States will have a devastating impact on El Salvador.

Then again, consider Honduras, which is not dollarized. 62% of it exports and 50% of its imports are bound to/from the United States. Honduras has an even greater level of exposure to the US, so a dollar crisis would likely be even more severe in that country, even though it circulates its own currency.

In contrast, consider Saudi Arabia, whose riyal currency unit is pegged to the US dollar at 3.75/$. Naturally, the preponderance of the Saudi economy is based on its oil exports, which it has no problems unloading to any number of countries across the globe, including China.

If the US dollar started to plummet, the price of oil (in dollar terms) would increase accordingly, and the Saudis would still be generating the same level of inflation-adjusted oil revenue. Net impact to the Saudi economy would be marginal, especially compared to places like Honduras.

We can see a very clear illustration of what would happen to these countries in the future by taking a look at the countries that are affected by the euro’s decline right now.

Take Switzerland, for example, which has its own, independent, time-tested, fairly sound currency. The Swiss economy is heavily dependent on the European economy, however, so as the euro has declined, so has the Swiss franc. Same with the Polish zloty, same with the Hungarian forint.

Overall, regardless of the currency in circulation, the safest places to be (economically speaking) in the event of a dollar crisis will be countries that have an independent source of income and do not depend on the United States for the preponderance of their trade.

Panama is one such example; revenues from the Panama Canal, its perpetual cash cow, will generally be enough to offset the negative impacts of a US decline.

Ecuador, with its reasonably well-developed (albeit de facto nationalized) oil sector, should also limp along just fine, similar to Saudi Arabia.

Peru, Chile, and Brazil are also on excellent footing; each of the three is blessed with substantial natural resource reserves and hungry export markets that are already diversified across the world. Chile’s trading partners, for example, are almost evenly split between China, Japan, the US, the EU, and the rest of South America.

This is a complicated topic, but it’s an important one to understand for anyone looking to plant multiple flags. I’ll be devoting more time to this next week when I talk about the nature of a dollar crisis, what it will look like, and when it will come.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Dana

    Great topic & info today, Simon. Very informative.

    I look forward to reading more.

  • Austin

    RE: Las Vegas–November Panama Conference.

    Was frustrated in being unable to either speak with you personally or hear your discourse with the crowd after the panel discussion–simply too noisy.

    I noted at the time that this conference was not on-target for me–later, it got much better, but the Central America conference still would have been more suitable had I known of it sooner.

    Have taken your advice on the Opportunity IRA, including contacting the lawyer and accountant that handle the details.

    Also as I mentioned at the conf., I am probably the least well-capitalized attendee of all, but envision making Panama a stutter-step in my progression toward an administrative Christina ministry in southern/eastern Africa (Anglophone–I am too Old of a Toad to learn Portugee or Frawnch). Probably Malawi or Zambia, maybe Botswana or Namibia.

    With sub-$200k to start out with–and with another chunk coming off that for Roth conversion–I have to engage brains and make PROGRESS in the next six years if I am to achieve my objective of $2 million. (Now, that is not entirely capricious, since I spent some time on the ground in the Republic of South Africa and Malawi about 18 mo. ago.–beautiful things are possible, but it takes moolah, a factor that most missionaries overlook. In fact, A man about my age of 59.5 tells me some of his offspring have gone to Indonesia with only the infrastructure they could pack into 5 checked bags plus carry-ons. Jesus did this; they are not Jesus, so I expect reports of dire “adventures.” My Navy brother-in-law said of the Submarine Service that they taught that whatever happened while submerged, they did NOT want a “learning experience.” Nor do I.)

    My offshore IRA will be up and running, and I reckon Roth-ified by mid-end of June or maybe July. I expect that it will have a net-net $53k in it. To have an idea of opportunities in Panama would surely be great so I could decide in a timely way how to invest. You heard the couple of fistfulls of dandy investment ideas floated by the various panels at the Casey Conference–most of them would take a while to play out, but all appeared to hold the promise of multiple gains. It would seem that were I to delay a Panama investment for a few years, I might be in a better position as a buyer.

    I have been in high-dollar energy construction since 1973–nuclear, refinery, pipeline, LNG–and have represented contractor, Owner, consultant, and Regulator organizations. My project participation comes to somewhere between $55 and $60 billion–I sound like House Speaker Jimmy Burns here, “A billion here, a billion there–pretty soon you’re talking about real money!”–but would be able to be more precise were the project owners more candid about what they really spent . . .

    Said all of that to say that I have been observing home building and the ancillary/supporting discipline of city planning for donkey’s years, and have a lot to unload on you . . . IF you want to hear it; if so, you must say so. I am intrigued by the concept of creating a self-sustaining community, but don’t know what YOU mean by that. Many elements would enter into such a vision (in Qatar, they cal such things “schemes,” but then they ain’t Anglish).

    My chief criticism of the ‘Vegas conference is that it did not take into account where the participants were “at.” The miracle of modern electronics makes it possible to take a Yeomanly stab at this–I have already said that I am far less well-heeled than most of your attendees would probably be.

    On the other hand, the other attendees would probably be far less inclined than I to establish a property management firm in Panama to take care of Expat properties.
    Looking forward to chatting with you sometime if you ever HAVE the time,

    • sdca

      Re: Austin’s post:
      Why don’t you just do it? Go to Panama, network a bit, offer your services, and start a property management firm?

      You don’t need Simon to do this.
      Geez,people, it’s called Sovereign Man for a reason.
      Sure, Simon may have contacts, but that doesn’t mean he needs to be a cog in your wheel just to start a project or maintain it, let alone make it successful.

      Do your thing-esp. if you are not ‘as well heeled’ as other attendees, as you said, all the more reason to create your own niche, and make the kind of contacts you need in order to do so. Your own way.

  • Marquelle

    Hmm…so Canada could go either way…

  • Dejavu Panama

    Panama is the place to be!, come and visit Panama now!

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