The Dollar’s Decline Doesn’t Stop at US Borders

Panama and the Global Dollar Problem

Today, we delve into the bag of Ask El Jefe questions and the one we pull out is from Steve M., who has brought up an interesting query regarding Panama and the US dollar. To wit:

“Panama uses the American dollar as their currency. What are the implications of moving to a country that is based on the US dollar? Especially based upon all that you are describing with a devaluation of the dollar to try to manage the $38 trillion in debt.”

This is an excellent question because it speaks to a reality a lot of Americans often overlook: The globalization of the dollar.

More than 30 countries have tied their economy to the US dollar, either officially or unofficially. And by the Federal Reserve’s reckoning, about half of all dollars in existence circulate outside the US.

So what happens when the dollar sends waves of joy or agony through those countries all over the world?

Panama tied itself to the dollar way back in 1904. While the country does have its own currency, the Balboa, it’s pegged to the dollar at a 1:1 ratio, so where the dollar goes, the Balboa follows.

Moreover, Panama’s economy is deeply intertwined with USD, with roughly 40% of local GDP coming from the Panama Canal, which collects crossing fees in dollars. Plus, the country’s small size means it must import a great deal of products, all of which are paid for in USD.

You can probably see the problems emerging: As the value of the dollar declines, the cost of living in Panama climbs.

Since all transactions, wages, debts, and assets are valued in USD, a weakening dollar erodes purchasing power for imports, particularly food, electronics, and fuel that come from non-US sources. So those items would become more expensive. That would mirror inflation in the US itself but could be amplified in Panama due to its heavy reliance on imports.

Imports from the US, assuming they’re grown or produced wholly from US inputs, would probably fare alright in Panamanian terms since there are no foreign materials that could cost more to buy. That list would include various raw and finished food products, and things like cookware and artisanal products.

Transportation costs for getting products into Panama and moving them around the country would probably be higher because Panama imports oil and gasoline. A weaker dollar would potentially push those costs higher because oil is priced globally and, so, a weaker dollar generally pushes up the price of oil in USD terms. (There are some offsets here based on the global economy, but by and large, a weaker dollar means higher oil and gasoline prices.)

Locally sourced goods and services might escape some of the inflation that a weakening dollar would impose. So that would be local produce, meats, and fish.

Rents and utilities might not escalate in price as quickly. Utilities that rely on natural gas would very likely see a slower rate of inflation because they’re pulling in LNG from the US that is already priced in dollars, but the risk is that a weakening dollar means increased demand for US LNG globally, which then would put upward pressure on nat-gas prices in America. So that’s a bit of a push-pull situation.

Finally, Panama is a financial hub globally. Depending on the degree to which the dollar weakens, Panama could see a decline in financial-services demand. That would lead to slower economic growth locally, which Panama might struggle with because the country doesn’t have a central bank to manage the economy, like say providing stimulus.

It all sounds bad, but it probably wouldn’t be radically different from what you’d face in the US.

And even if the state decided to revert back to using the Balboa instead of dollars, that would be meaningless unless Panama decoupled the Balboa and allowed it to float freely… but then you’d need a central bank. It gets complicated.

My best advice would be to treat any potential dollar instability in Panama just like you should anywhere: diversify your currency holdings. Hold dollars, but also hold euros, yen, and Swiss francs, just to be safe.