Work Abroad but earn in USD

Saturday, April 23, 2005

The Risks of Living Abroad on Foreign Currency

Today, a reader brought up a very valid point that I'd like to share with everyone and then discuss.

Reader's Comment

As an Argentinian I can say that I agree with what is stated in this post. The only thing I would like to say to this possible expat is that his U$S 1000 will be tied to the exchange rate against our local currency, the Argentinian peso. This is about 3 to 1 nowadays, but it could change. Most likely the peso will stay as it is now or will devaluate. But no one can give a 100% guarantee that will be the case...

Currency Risk

When you're living or doing business in one country, but your primary income is from another country, you have currency risk. If the value of your home currency declines relative to the value of the country you're living / doing business in, you're going to be in trouble. Even normal currency fluctuations are going to cause your income to go up and down on a regular basis.

My business faces this exact situation every month. I earn the vast majority of my income in dollars from US businesses. Then, each month, I have to do a foreign currency exchange from dollars to pesos. Thus, my Argentina expenses vary by a few hundred dollars each month, depending on the exchange rate at the time. Sometimes the rate swings in favor of the dollar and I pay less, other times it swings toward the peso and I pay more.

If I were a large multinational corporation, I'd probably buy a currency option with a bank to protect myself from these currency swings. I choose to risk it. International banks aren't interested in writing currency options for small businesses. If your sales aren't in the tens of millions, you really don't have a lot you can do about currency swings. Now, if I was truly worried, I could take 2 or 3 years operating expenses and convert to pesos right now, locking in today's rate. I don't want to tie up that much capital in pesos, however, so that's not an option for me.

What Else Can Be Done

There are some things you can do to make this a less frightening situation. One of my office's biggest expenses is rent. I removed the currency risk from this expense by signing a lease in dollars with my landlord. See, some Argentine companies are also fearful that the peso could further drop in value, so they are willing to make a contract with you in dollars. When you do this, you shift currency risk from yourself to the landlord.

Since I earn my income in dollars, there is no risk for me to pay in dollars. The landlord takes the risk that the dollar will fall in value versus the peso and he'll be earning less in peso-terms, should the peso strengthen against the dollar. As the risk taker, he also has the reward should the peso decrease in value, relative to the dollar. In that case, I'll be paying more each month than I would had I signed a lease in pesos.

I don't care about this, however. As an technology consulting company, I don't care if I could have made some money by the peso's fall. I am not in the currency speculation business. I would much rather have someone else take potential currency gains in order to protect myself from potential currency losses. I like to have predictable and stable expenses each month. So, anytime I can pay for something in dollars, I jump at the chance. I'd rather have someone else take the currency risk than me take it.

Implications For Retirees

Retirees are going to be faced with this same problem. Their pensions are providing them income in dollars, not pesos. If the peso strengthens against the dollar, they'll find themselves with less spending power here in Argentina. Just like my business takes steps to lessen this risk, retirees can do the same.

First, retirees can ask to sign their leases in dollars. With the most recent bout of inflation happening, there's probably even more landlords willing to do this. As a retiree, your rent will be one of the largest expenses you have. Most people spend 25-33% of their total income on housing. By paying your housing expense in dollars, you've taken a large portion of your income off the table as far as currency risk is concerned.

You can also convert a larger amount of your money to pesos when you think the exchange rate is in your favor. Suppose it has been hovering along at 2.9 for awhile and it goes to 3.0. You could very easily convert 6 months worth of living expenses at that time and protect yourself for the next six months from any further drop. Keep in mind, however, that should the dollar strengthen even more and go to 3.1, you've just lost out.

The Good News

Unlike devaluations which rapidly cause a currency to sink in value, re-valuations take a lot of time. In 1991 when the Argentine government instituted the 1:1 convertibility program, citizens had to trade in their old australes at a fixed exchange rate for the new pesos. Similar to the conversion to euros in Europe, the prices of every good and service were also switched over from australes to pesos at the same fixed exchange rate (or maybe plus or minus a few percentage points in either direction).

After the switch over, the real buying power of all the citizens stayed the same. If the Argentine government were to ever try to re-value the peso, a retiree's buying power in dollars would still be the same. A return to 1:1 would be a very gradual process, much like the euro's strengthening against the dollar. First we'd see rates at 2.8:1, 2.5:1, 2:1, and 1.5:1 over a course of months and years. A retiree's buying power would be gradually declining over this period as the peso strengthens against the dollar.

Realistically, there would be no way for you not to notice. Each month you'd be forced to make larger and larger exchanges of dollars to pesos just to meet your basic monthly expenses. Eventually you'd decide that it was no longer affordable to live in Argentina and you'd have to find somewhere else to go where your $1000 USD would give you good buying power.

So, there is no need to worry that you might come to Argentina today and find that next week your dollars only buy 1/3 of what they used to. That is, of course, unless the USA suffers a huge and rapid devaluation. I won't get into that right now, since that is another topic all together...

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5 Comments:

Anonymous Gary said...

Actually, the US Dollar stands to lose value against currencies like the renminbi and yen through revaluation. Just about every currency is losing value against silver and the South African Rand right now.

4/24/2005 12:22:00 AM  
Anonymous Anonymous said...

Thousands of years of history have proven that GOLD and to a lesser degree silver are the only real money. Also, to some extent diamonds and the like.

It's only a matter of time before the dollar takes a huge fall. The US requires 2 Billion a day in borrowing just to operate. Not to mention the 54 Trillion in derivatives outstanding. Yes, that is Trillion.

The rest of the world is preparing to shift from Dollar's to Euro's for international oil transactions and the gold backed Dinar is coming very soon.

That's why the US is all over the world trying to "Secure the NY/London Empire".

The biggest ponzie scheme in the history of the world is about to collapse and it's called the Federal Reserve Bank.

It could be that the Peso trades 1 to 20 for the dollar when this occurs. Of course if this does pan out nobody will want dollars...

4/24/2005 03:05:00 AM  
Anonymous Gary said...

Right now, silver is more undervalued than gold and has outperformed it for the past couple of years. The gold:silver value ratio is way out of its historical whack so my investments are much more heavily skewed toward silver than gold.

For what it's worth, I'm not counting on my dollar savings for my plans to retire to Buenos Aires. The US will probably experience something a lot like Argentina did back in '02. If our Asian creditors repatriate their dollar-denominated debt holdings, the dollar will lose value against every other currency (including gold and silver) and our domestic debt and mortgage markets would collapse.

4/24/2005 03:26:00 PM  
Blogger Blogging for Fun said...

Good points all, but I started out with the same line of reasoning and ended up deciding to put my dollars into a basket of commodities. The theory here being gold, silver, and most other commodities will experience increasing demand due to China's growth, while increasing the supply will require at least a decade of increasing investment in infrastructure. The advantage here? I don't have to be right on the value of an individual commodity, such as gold or silver, but only on the general trend for most commodities.

Since I am seriously looking at ex-patriating to Argentina within 2 years at the most, currency risk has been much on my mind. With this path even if the most dire situation occurs with the dollar the basket of commodities should not only hold value -- as the value is tied to demand from China, not the US economy -- but continue to gain in value as China continues to increase its demand.

Of course 10 years from now when this has all run its course I will need another strategy, but I am willing to figure that out when it gets a bit closer.

Anyone see any obvious flaws in my reasoning?

5/16/2005 02:09:00 PM  
Blogger apartmentsba.com said...

Expat,

I was in the same situation as you. It's remarkable how we went through our "thought processes". Of course, there was no website to help me. Luckily, I thought things through fairly well. All of the things you listed, I already used before I moved down.

I have been publically posting since 2002 that the fair value for the peso was 2.75 - 3.25. In fact, when it went 3.8 to the dollar I took a significant portion of my savings and I started buying Pesos. I knew just as the Peso was overvalued for 10 years, the dollar was over valued as well. I was right. I'm not in the currency trader either but I was right. I purchased back all the U$S at less than 2.95 after I moved here. It was a proper play for me.

After I moved down here, I did just what you said. I took 3 years of estimated living and operating expenses and I converted it to Pesos. It will give me protection if the Peso did rise in value. Argentina has a lot of problems. I don't see the Peso rising significantly anytime soon.

I make all my income in u$s dollars. It doesn't matter what the exchange rate does. I will continue to make dollars. However, the operating expenses are all in pesos. I have 9 full-time employees so if the dollar weakens it will be much more expensive to operate.

I did the same thing as you with rent. A major portion of my monthly expense is my rent. I have an office in one of the best neighborhoods in the entire continent. That comes at a price. I negotiated with the owner to pay the rent in u$s instead of pesos.

I'm not sure if you rented as an SRL (corporation) or as an individual but I rented as a corporation so the taxes were higher.

Anyway, as you are about to find out...currency risk will always be a factor living here in Argentina. It sounds like you are making the smart decisions. You might want to try hedging some of your savings into pesos just in case the peso stregthens.

Good luck.

5/18/2005 01:11:00 AM  

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