Devaluing from Afar
Hugo Chavez hasn't been heard from for a while. To be precise, he hasn't been heard from since December 11, when he underwent surgery in Cuba. However, he apparently still directs economic policy from his sickbed.
His most recent action was to make Venezuela the latest entrant in the 'currency war' by devaluing the official exchange rate of the Bolivar by 32%. Venezuela's inflation rate is at about 22%, and the new Bolivar exchange rate of 6.3 to the US dollar still has a long way to go until it reaches the black market rate of 19.53.
The main reason for the – quite unpopular – official devaluation appears to be the country's growing budget deficit. Venezuela's government mostly lives off the country's oil revenues. Ever since Chavez replaced the former management of the state-owned oil company with his cronies and confiscated the oil assets owned by foreign companies, oil production has been in free-fall, but oil sales still provide the biggest chunk of government revenue even so. By devaluing the Bolivar by 32%, the dollar revenue from crude oil sales will increase commensurately in Bolivar terms. Presto, budget deficit problem solved.
Chavez uses the budget to distribute various goodies to voters, a very successful strategy so far. The last election seems to have strained the budget quite a bit though. Devaluations are unpopular because they mean that things consumers like to buy (such as TVs) will cost a lot more henceforth.
On the other hand, there was actually a shortage of such goods anyway, as the government had begun to ration foreign exchange. Moreover, since both the old and the new exchange rate are unrealistic, more devaluations are likely to follow later this year.
“Venezuela devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies ahead of possible elections later this year.
South America’s biggest oil producer may have to call elections if Chavez, who hasn’t been seen for two months after undergoing cancer surgery in Cuba, dies or steps down. He ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar starting Feb. 13, Finance Minister Jorge Giordani told reporters yesterday in Caracas.
A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation that reached 22 percent in January.
“While a weaker currency may stoke inflation, it may also ease shortages of goods ranging from toilet paper to cars because the government was restraining the supply of dollars it allocated to the private sector as it waited for a more favorable rate”, said Francisco Rodriguez, a Latin America economist at Bank of America Corp. in New York.
“Any tackling of the massive economic distortions, even if far more is required, is positively viewed by markets,” Kathryn Rooney Vera, a strategist at Bulltick Capital Markets, said in an interview from Miami. “We expected more, and more is indeed needed to correct fiscal imbalances and adjust economic distortions, but this is something and there may be more to come.”
The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, mostly from oil sales done in dollars, according to Caracas- based research company Ecoanalitica.
Chavez last devalued in December 2010 when he weakened an exchange rate on so-called essential goods by 40 percent, unifying the two fixed foreign exchange rates it had at the time. In January 2010, he had created a multi-tier exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports. The move prompted Venezuelan consumers to rush to buy appliances including flat-screen televisions before prices were adjusted.
While Bank of America’s Rodriguez estimates that devaluing the currency will reduce the government’s budget deficit by half, he said the government will have to take further measures within the next year.
“It gets them through their most urgent problem which is to generate more bolivars to finance the current spending flow,” Rodriguez said. “This is a move that will turn out to be temporary. They will have to devalue again by the end of the year.”
An inflation rate of 22% p.a. usually doesn't just drop from the sky. It sounds as though the Bolivar printing press has been kept quite busy. Quite possibly the budget deficit was in part financed by the central bank.
Let's consider those shortages for a moment though. “Ranging from toilet paper to cars”? Does Venezuela not even produce toilet paper? We somehow doubt it. However, there have been scattered reports about shortages of food and many other non-durable staple items of daily consumption in Caracas over a number of years.
The main reason for these shortages is simply that the economic policies imposed by Venezuela's government don't work. For instance, similar to what Argentina has recently done, Venezuela has tried to stymie inflation by imposing price controls on food and other items. This has driven many small businessmen to the wall – small butchers, bakers and the like had to close up shop, as the government-imposed maximum prices no longer covered their costs. Shortages of the items concerned are the inevitable result. No doubt the distorted exchange rate and the rationing of dollars also play a role – see for instance .
However, such reports already made the rounds in 2007, and , well before the recent rationing of dollars began. Here is for instance an excerpt from a 2007 article (this was when oil prices had just rallied to all time highs, mind). It correctly blames the price controls for the shortages:
“Welcome to Venezuela, a booming economy with a difference. Food shortages are plaguing the country at the same time that oil revenues are driving a spending splurge on imported luxury goods, prompting criticism of President Hugo Chávez's socialist policies.
Milk has all but vanished from shops. Distraught mothers ask how they are supposed to feed their infants. Many cafes and restaurants serve only black coffee.
Families say eggs and sugar are also a memory. "The last time I had them was September," said Marisol Perez, 51, a housewife in Petare, a sprawling barrio in eastern Caracas.
When supplies do arrive long queues form instantly. Purchases are rationed and hands are stamped to prevent cheating. The sight of a milk truck reportedly prompted a near-riot last week.
Up to a quarter of staple food supplies have been disrupted, according to Datanalisis, a public opinion and economic research group. To Chávez's detractors the scarcity is evidence that his revolutionary "21st century socialism" is driving South America's oil power towards ruin.
Government price controls on staple foods are so low that producers cannot make a profit, they say, and farms and businesses hesitate to invest in crops or machinery, or stockpile inventories, for fear of expropriations.
"We've warned about this from the beginning – all of these price controls in the long run end up producing shortages," Ismael Perez, of the industry group Conindustria, told Reuters.”
Clearly, shortages of basic food items are nothing new for Venezuela. The devaluation from one unrealistic exchange rate to another, only slightly less unrealistic one, won't alter the fundamental problem. One wonders whether the looming ascendance to the throne of vice president Nicolas Maduro – Chavez' designated heir – will change anything. Probably not, considering that his slogan is “I am Chavez”.
Hugo Chavez and his heir designate, Nicolas Maduro: the two seem to have merged, as Maduro lately asserts: “I am Chavez”.
(Photo credit: Matilde Campodonico / AP)
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “Boli-Splat”
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...