Articles
Consideration for estimating in currencies pipped to the dollar, and the dollar... June 2021 by Tony Minihane
I have been thinking a lot over the last few weeks about the extensive over printing of the US Dollar and how the perpetual devaluation of purchasing power will affect inflation.
Did you know that 75% of all the USD$ in existence were printed in the last 12 months.
The effect already in the US is seen in an almost weekly hike in retail and food prices, and in Florida house prices are rocketing at rates not seen since the build up to the 2008 crash (which is potentially on the horizon again now).
In consideration to our estimating function it it worth noting that:
Dollar to Pound
In the last 12 months the dollar to pound has gone from $1.22/pound to now $1.42 . A 14% purchasing power lost against the pound.
Dollar to Euro
In the last 12 months the dollar to euro has gone from $1.12 to $1.22. An 8% loss of purchasing power.
The $ over printing is not over yet, far from it. The risk we have to cope with is how this loss of purchasing power affects our estimates accross countries who's currencies are pipped against the Dollar.
Almost everything is imported to the MENA region and the fact that we are pricing everything in USD effectively put a great risk in the estimating uncertainty which we wither need to price in using the 3 point template I set up for Amaala (and I believe is still in use on other projects) to show this risk in the 'pessimistic' range and carry that forward to the total. Simple things like German A/C units could rise in another 6 months by 20% and think how many of those are across the region!
Also we need to be mindful of top tier US companies are taking advantage of 'Biden's stimulus' by taking $ billions in interest free government backed loans which in term allows them to buy and stockpile materials (EG Lumber in the US has gone up as much as 250% in 12 months and is so volatile that merchants have stopped putting prices up as they are changing daily! (see below chart). Given that almost all of the Red Sea projects currently being designed and built along the Saudi Arabian coastline have buildings that include many types of timber structures, where is that being imported from? There are many major Tier One US companies operating in the MENA region and if they use this stimulus money to do the same in this region then there is the potential for the hyper inflation of products and materials to occur here too.
How is this being priced into projects who's procurement may not start for another 12 months?
Of course we also need to understand that UK and EU based salaries over the last 12 months have gone down by 14% and 8% respectively relative to the Dollar, so how are major projects in countries who's currency is pipped against the Dollar going to attract new staff from UK and EU when their effective salaries are now reducing each year without re-balancing this? The potential increase in staff and in-direct costs on multi Billion Dollar projects is no small drop in the ocean.. And there are not enough locals educated and with sufficient experience to fill all of these posts...
References
Lumber prices in US over past 12 months
https://markets.businessinsider.com/commodities/lumber-price?op=1
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To give you a true measure of the economic crisis the US is hurriedly racing toward, the CEO of Pantera Capital summarized it best in a letter to investors last year (Cointelegraph):
“The United States printed more money in June than in the first two centuries after its founding. Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.”