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)
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “Boli-Splat”
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold and Negative Interest Rates
The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Weekly Resistance Levels in the HUI
Options Expiration Ante Portas - Just as a Resistance Level is Reached After we had penned our little missive on the breakout in gold stocks on Monday, it dawned on us that an options expiration takes place this week. Normally, gold stocks decline into the expiration date. Don't hold us to this, but the last time we remember call writers being forced to delta-hedge their way out of trouble in gold and silver stocks right at the end of an expiration week was sometime in 2006. Given...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- China – A Reversal of Urbanization?
Economic and Demographic Changes We have discussed China's debt and malinvestment problems in these pages extensively in the past (most recently we have looked at various efforts to keep the yuan propped up). In a way, China is like the proverbial “watched pot” that never boils though. Its problems are all well known, and we have little doubt that they will increasingly find expression. China's credit bubble is one of the many dangers hanging over the global economy's head, so to...
- State of Fear - Corruption in High Places
Mr. X and his Mysterious Benefactors As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia's “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank's customers, a certain Mr. X, in truly staggering amounts. A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty...
- Why All Central Planning Is Doomed to Fail
Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works. A bunch of famous people with a simpleton view of how the...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Getting it Wrong on Silver
Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
- Argentina – The Times, They Are A-Changing
Our Argentine “Ranch Rebellion” Is Over… for Now… BUENOS AIRES, Argentina – Not much action on Wall Street yesterday. The Dow sold off slightly. Gold and oil were up a bit. How about here in Argentina? “Everything has changed. Everything.” Mauricio Macri shortly after his election – indicating that he actually has a plan. Photo credit: Enrique Marcarian / Reuters One of the analysts in our Buenos Aires office explained how the recent...