Investment Opportunities with Bank CD's & Commercial Paper......Why are US Dollar Interest Rates Higher Offshore? 

To start off our conversation, lets begin by taking a look at Panama.  Since the legal currency of Panama is the US Dollar, finding US Dollar bank accounts or Dollar denominated investments is obviously not a problem.  Interest rates will certainly be slightly higher than US interest rates for items such as savings accounts or Certificates of Deposit, but not by much.  This is because with the US dollar as the currency, US Federal Reserve Board policy will have a very direct impact on local interest rates in Panama.  The real benefit to investors, from a strictly financial point of view, is of course that interest earned from your bank investments are 100% free from Panamanian Income Tax.  This is true regardless of who owns the account, or how the account is titled.  

As of November 1999, Panamanian Bank savings accounts currently are paying an average of 4.5%.  Some banks may of course offer a higher rate, but this is the net average.  With regards to CD's, most banks offer a maximum time limit of 18 months.  Current interest rates for CD's will range from 6% to 7.5%, depending upon length ot time.  Interest earned on CD's is usually credited to your savings or checking account monthly.  Both local checking accounts, and International US Dollar checking accounts are available with most banks. 

US dollar bonds and commercial paper instruments are also available in Panama, but the truth is, that demand and limited supply of commercial paper means such investments are hard to come by at the moment.  Why is that?  Well, since Panamanian banks seem to have plenty of money to lend at  very competitive rates, companies can often find a good lending rate without having to issue bonds , or go into the capital markets.  This is the only reason, and not due to any problems with the Panamanian economy.   

The Dominican Republic, on the other hand, does not use the US dollar as it's legal currency.  The country has their own currency, the Peso, which freely floats in exchange versus the dollar and other major currencies. Current exchange rates are approximately 16 Dominican Peso for each 1  US Dollar.  While the Dominican Republic does not use the dollar as legal tender, this does not mean that US Dollar savings accounts or CD's are not available.  Quite the contrary is true. The only exception to this rule is US dollar denominated checking accounts.   

Since the Dominican Republic does want and need US Dollars for international trade, interest rates offered on US dollar based accounts or investments will usually be higher than local US or Panamanian Bank rates.  With regards to bank savings accounts, the current US Dollar rates are about 5%.  Bank CD's for 90 days or more will offer rates up to 7% or 8% depending upon the bank, and the amount invested.  Bank CD's do pay interest monthly, and interest is 100% free from Dominican Income Taxation. 

Aside from higher bank account interest, the more attractive returns are to be found in the commercial paper instruments.  Commercial Paper, which is in effect a very short-term bond 
(90 days or more), will offer yields up to 10% tax-free.  It is very possible to secure this kind of return on even a 90 day maturity.  Since Commercial Paper investments also normally pay interest monthly, investors have the opportunity to create an investment portfolio that offers a steady monthly income.  

If investors plan on living in the Dominican Republic, returns are even higher for Peso denominated investments.  Bank savings accounts pay on average, 6.75% to 7.5%, with Bank CD's paying up to 14%.  Peso denominated Commercial Paper can offer investors yields up to 21%, depending upon the amount invested and the length of maturity. 
 

Banks, and companies wishing to borrow US dollars, are in direct competition with either US banks or other domestic companies (such as Pepsi, IBM, and Hewlett-Packard to name just a few).  Investors can either deposit their dollars, or loan their dollars to a company by buying a bond, locally in the US, or they can "auction their money to the highest bidder".  In order to attract US dollars, foreign banks and foreign companies need to offer higher rates to make an investment or deposit more attractive to investors.  This is just plain economic competition.  The same goes on domestically in the US, when one bank offers a higher rate than another, or when one company offers a higher interest rate on their bonds than another. 

With the case of the Dominican Republic as an example, companies can either try and borrow US dollars, and pay the prevailing interest rate for that currency, or borrow in their own currency and make an exchange into dollars.  Often enough, if the interest rates are higher in their own local currency, it may be to their advantage to borrow US dollars instead.  To illustrate this further, let us consider that the local interest rate in Dominican Pesos can reach up to 20%.  There are a few factors or reasons for this, and often have nothing necessarily to do with the strength or weakness of the economy. Other factors, which would be too much to discuss here, are also at work (such as the central bank, or consumer demand).  In any event, you would agree, that based on that inference alone, borrowing US Dollars at 10% makes more sense.  This is especially true if the money is needed to finance trades or purchases with the US.