Looking beyond the devaluation in Venezuela (Or trying…)

January 10, 2010

(In Spanish here)

As President Hugo Chavez seems to be having an epiphany that most of his economic policies of the last few years were wrong, I do wish someone would explain to him that taking US$ 7 billion from the international reserves simply works against him and insures that next year, he will be forced to devalue again.

Let me explain. Let us assume that oil holds up and PDVSA sells the Central Bank for example US$ 30 billion. PDVSA will get some Bs. 120 billion to spend. This means that monetary liquidity will grow by a similar amount more or less. That represents an increase of 50% in M2, i.e. even if this money does not multiply, like it will, but let’s keep the argument simple. This means that by December monetary liquidity will reach Bs. 360 billion. Assume that the Central Bank will save US$ 8 billion of the US$ 30 billion, international reserves will reach US$ 36 billion.

This means that for each 10 Bs. in circulation in Venezuela there will be one US$ in the Central Bank. In contrast, today, before Chavez removes the US$ 8 billion, the equivalent number is 6.55 Bs. per $ and in a month it will become Bs. 8.24 per $. Well, as you can see this represents too many Bolivars searching for too few dollars, much like today. There will be 50% (it is actually more, but who cares?) more Bs. in December than yesterday. This will drive inflation and devaluation, as simple as that.Nobody seems to have told Hugo, in contrast with Argentina, where a Court has voided a decree to use international reserves to pay debt and stopped the firing of the President of the Central Bank by Mrs. Kirchner over the issue. Gee, if Chavez had done that with reserves, Venezuela would have no international debt by now, but Argentineans realize it would debase the currency and create inflation, precisely what nobody seems to have explained to Hugo.

Meanwhile, the next few days are going to be filled with confusion. You have all seen reports that Venezuelans are out buying everything and they are. But beyond that, I have seen supermarkets with shelves empty of all imported things, even if they did not get dollars from the Government, like soap, or fancy cereals. And as an anecdote, all imported dog food disappeared from Friday to Saturday from the shelves, as the store simply decided to hide the stff until things get cleared up.

And there is a lot to clear up. First of all, what will be approved at the new Bs. 2.6 per $. For example, will veterinary medicines will be included or not? All foodstuffs? It will be days before we find out. The same with the second rate, where nobody really knows what will or not be included.

Beyond that, there is the problem of accounting. Currently, most companies had to register their foreign currency at Bs. 2.15 per $ (There were some exceptions, but I would bore you with that). On top of that there were rules for exporters, mostly that they had to exchange 95% of their foreign currency revenues at the official rate.

Well, now we have two official rates, so that the Government or the accounting board will have to tell companies what to do. We had a dual exchange system in the 80’s, the rules were complicated. Expect the same. Then, some companies with access to the second rate, could register things at the higher rate.

One thing I do expect is for the country’s debt to rally. There are two reasons for that: First, investors will feel the country’s ability to pay has improved. But more importantly, the Government will have many more Bolivars thanks to the devaluation, so that the deficit will be smaller and it will not be until the second semester that the Government may go back to the international markets and issue new debt. Because in the end this was the biggest fear of foreign investors, that the Chavez Government would continue endlessly issuing new debt, flooding the market with new issues that take time for the international markets to absorb them.

Then, there is the likely rise of the Caracas Stock Market. Why? A number of reasons. Even if a company will be affected by the devaluation, businesses have an intrinsic value, a paper plant, a steel plant or even a bank, cost money to set up and build. Thus, ongoing businesses are perceived as being a good hedge against inflation due to a devaluation. But there are other reasons, a plant has a value in dollars, you devalue, the plant still holds value in dollars, even if you can not move it. If you are an exporter (not many left in the Caracas Exchange) then you will get more Bs. for your exports.  Finally, many local banks hold Venezuela’s debt in US$ or the so called TICC’s, bonds whose face value and interest are indexed to the exchange rate. If this value increases from Bs. 2.15 to Bs. 4.3 (depending on what the Government says) some banks will have huge extraordinary profits in Bolivars in 2010, which should translate into nice dividends.

Inflation will be horrible in the next few months, the poor are going to feel it, just the basic foodstuffs will have to go up 20%, but there is a whole range of things that will come at the higher rate of Bs. 4.3 per US$. I do expect the swap rate to go down first, but in a few months it will be higher. Inflation is in the end a monetary phenomenon and there will be a huge monetary imbalance in Venezuela in the next few months. We will be lucky if GDP grows this year.

The sad part is that nothing has been learned from all this. Controls have never worked, because they end up exploding in your face at some point. Chavez has devalued five times. This is his second explosion (The other one was in February 2002). This one did not happen earlier because oil went sharply up in 2008. But the conditions that created are still in place. Some PSF’s have asked periodically about my dire economic predictions, here is the first explosion with more to come. Any gain in the purchasing power of the poor will be decimated over the next few months, but their surroundings, health, crime, electricity, housing, water are worse than when Chavez came to power in 1998. Eleven years and and a huge oil boom lost. As easy as that. That is the price of ignorance and doing things for politics sake. Venezuelans have seen this movie before, this time on steroids.

The problem is that nothing structurally is being done to change the system. The origin of the problems remain, it is the effects that are being attacked. When Carlos Andres Perez came into power he tried an all front attack, he failed politically, but there were real changes. When Caldera first came to power in 1994, he also attacked the effects rather than the causes. Once he realized the country was entering hyperinflation, he changed course, trying to minimize the State and rationalize things like pensions. Oil did not help him in his last two years.

Chavez needs oil and needs to attack the distortions, but will he? I doubt it, which will bring more of the same.

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62 Responses to “Looking beyond the devaluation in Venezuela (Or trying…)”


  1. […] to devalue its currency, the Bolivar. I am not wise in the ways of economics, so I direct you here to get a legitimate analysis. From what I understand, the devaluing means there will be more and […]

  2. deananash Says:

    A.I.O. – I can’t disagree. Actually seen quite a bit of that type of treason in China lately…

  3. An Interested Observer Says:

    Nicolaas, on politics, me too. I try to talk about what good policies would be, but leave it totally to the Venezuelans to decide WHO will carry them out. From where I stand, if it’s Chavez, that’s fine by me. (Of course, he’s proven that the chance of him doing so is so small as to approximate zero, but that’s another matter.) I’m a strong believer in Adam Smith’s concept of specialization, and the blogosphere – hey, the world – would be a better place if more people simply stuck to what they were good at.

    As for the “blame” issue (in retrospect, that may have been too strong a word), I think that was mostly prompted by this comment (and nothing from dean – I know from prior reading where he is coming from): “Denial just delays your proper response.”

    The “proper response” does not rest in the hands of anyone reading this blog, so that struck me as inappropriate – seeming to place blame where there is no responsibility. Maybe I’m just bothered by your use of “you” – you’re making it very generic, but I haven’t been reading it that way. I can adjust, so no worries.

    Dean, I would argue that removing Chavez might do something towards that end. It would remove a major source of division, which might – MIGHT – enable different groups to get together, find common ground, and work towards a broadly beneficial solution. In the current environment, such a concept is impossible, since it’s essentially viewed as treason. And we all know that trying to make your country a better place is the lowest of all forms of treason, right? As Bill the Cat used to say, Gag. Ack. Barf.


  4. When the whole country does that, then you will stabilize your whole country´s non-monetary economy.

    Any single company can do this on its own too. It will maintain the real value of its capital and all other constant items stable or constant in the company.

    There is, however, one special requirement when a company does it by itself when the whole country is not yet doing it:

    That company has to be able to sell all its products and provide all its services AT THE DAILY PARALLEL RATE.


  5. I stated:

    “That will stabilize your non-monetary economy at whatever rate of hyperinflation and low inflation.”

    I meant to state:

    That will stabilize your non-monetary economy NO MATTER WHAT the rate of hyperinflation or inflation.”


  6. Normally your companies listed on your stock exchange will have to implement International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. Still, your stock exchange must pass a regulation to that effect.

    If your tax authorities do not pass a law or regulation that they accept restated values in terms of IAS 29 for tax calculation purposes, implementing IAS 29 will have zero effect in Venezuela especially as far as tax receipts for the government is concerned.

    Implementing IAS 29 – as it is presently formulated – will do little to improve the situation in Venezuela. It will do nothing and it can do nothing to your hyperinflation in your money.

    Why? Because IAS 29 requires your companies to carry on as absolutely normal and do all their accounting in the normal way with Historical Cost Accounting. Since you entered into hyperinflation in Nov 2009, all your companies with a Dec 2009 year end and which have to implement IFRS, will have to apply IAS 29.

    2009 is over. They all applied Historical Cost Accounting. Now they have to restate those year-end figures at the year-end CPI (which is 167.4) to make the statements “more useful”.

    http://www.bcv.org.ve/excel/4_1_7i.xls

    Then they will carry on doing normal business in your hyperinflationary economy while they will do their accounting in Historical Cost Accounting as normal during 2010. Everything will be as normal.

    At the end of 2010 they will have to restate their Historical Cost financial statements at the CPI at the end of 2010. It will be 30 or more percent higher. But they will be able to maintain the real value of their capital, retained profits and all other contstant items as at the beginning of 2010 – only if your tax authorities accept the IAS 29 restated values as the new real values for those items.

    This will do nothing to hyperinflation.

    IAS 29 CAN be used to stablize your non-monetary economy like Brazil did for 30 years from 1964 to 1994 with indexation. BUT, not as it is formulated at the moment.

    IAS 29 only requires restatement now at the end of 2009 (with end of 2008 values restated too for comparison purposes) and then again restatement at the end of 2010 at the end of the year CPI rate.

    To use IAS 29 to stabilize your non-monetary economy (you know it can do nothing to hyperinflation in your money) ALL your companies in Venezuela have to do their DAILY accounting for ALL ITEMS ……………. AT THE PARALLEL RATE.

    Once they do their DAILY accounting at the DAILY…….. PARALLEL RATE …… then they also have to do their monthly, three monthly, six monthly and year-end accounts at the DAILY …….. PARALLEL RATE …….. at those month ends, three month ends, six month end and year end.

    ALWAYS AT THE DAILY PARALLEL RATE.

    That will stabilize your non-monetary economy at whatever rate of hyperinflation and low inflation. Your central bank and your government have to solve the problem of hyperinflaiton in your money.

    Applying IAS 29 at the DAILY PARALLEL RATE DAILY would mean you run your non-monetary economy in real values:

    All salaries, wages, rentals, pensions, issued share capital, retained profits, capital reserves, all other items in shareholders equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and all other non-monetary receivables, etc have to be valued at the DAILY PARALLEL RATE. These items are all constant real value non-monetary items and they have to be valued in units of constant purchasing power by applying the DAILY PARALLEL RATE – if you want to stabilize your non-monetary economy.

    You will completely stablize your non-monetary economy. You can grow your non-monetary economy like that as Brazil did during period in those 30 years from 1964 to 1994 even though they had 2700% hyperinflation in their money.

    So, you all have to apply the DAILY PARALLEL RATE to everything that is not money or a money loan.

    IAS 29 defines trade debtors and trade creditors as monetary items. That is a total mistake. They are constant real value non-monetary items and their nominal values have to be updated in terms of the DAILY PARALLEL rate over time.

    I know this is all new. However, it is correct.

    It is, in principle what Brazil did for 30 years from 1964 to 1994. So, you cannot say you can not do it. Brazil is a much bigger country than yours. They did that.

    Good luck.

    I am here to help.


  7. Espadachin,

    Thank you. They have to. They have auditors. Their auditors know what the IASB´s rules are regarding hyperinflation in terms of International Accounting Financial Reporting Standards and how that will affect US and other companies that have subsidiaries in Venezuela.

    At the moment is an accounting technicallity because of IFRS and the IASB definition of hyperinflation.

    You have just officially entered into hyperinflation, i.e. cumulative inflation approaching or exceeding 100% over three years. The general population still does not see it as hyperinflation although the already act in many of the ways that are encountered during hyperinflation.

  8. espadachin Says:

    Here you go Nicolas….
    “TUPPERWARE BRANDS CORP SAYS WILL ACCOUNT FOR VENEZUELA AS HYPERINFLATIONARY”

  9. deananash Says:

    Nicolaas, he was probably referring to my comments as I SQUARELY place the blame for Chavez on the Venezuelan people’s shoulders.

    In fact, I say – and have said for many MANY years now – that Chavez is merely a symptom of a much worse “disease” (ignorance + stupidity). Getting rid of Chavez does nothing to solve this problem.

    I’m sorry for the minority of Venezuelans who aren’t the problem, and especially sorry for those Venezuelans who are fighting to fix the problem, MO being a perfect example. There surely are millions of Venezuelans in one of these two camps.


  10. Interested Observer,

    Thank you for the reminder. I generally try and keep out of politics. I am not at all interested in politics.

    I don´t place the blame on the people in Venezuela. I apologize if I did. What exactly were you referring to? That would help me not to do it again.

  11. An Interested Observer Says:

    “It may put you back 10 or 20 years in development”

    That strikes me as an optimistic estimate.

    Nicolaas, I don’t have any issue with your suggestions (though it seems that, while you’re talking about dollarization, Miguel is talking about floating – either of which would be better thatn the current situation but would address the problem differently), but I take issue with you placing the blame on people here. The responsibility rests squarely on Hugo’s shoulders, and “vote him out of power” is not nearly as simple as it seems. Please stick with economic advice and leave the politics to others. One is clearly your forte, but only one.

  12. Mkael Rosenkilde Says:

    If you look at the proces of getting CADIVI dollars as an investment:

    Before the devaluation:

    Market value of your Bs is 1/5.5 USD (assuming a dolar paralelo at 5.5 BsF/USD)

    Expected return on your investment (if you receive your CADIVI dollars) is around 156% ((1/2.15) / (1/5.5) – 1).

    Expected time of investment = 1 year (I’m not sure about this one, help me out here please. This is the expected time from application untill you receive the dollars from the CADIVI).

    After the devaluation:

    Market value of your Bs is still 1/5.5 USD (assuming a dolar paralelo at 5.5 BsF/USD)

    Expected return on your investment (if you receive your CADIVI dollars) is around 27% ((1/4.30) / (1/5.5) – 1).

    This means that if a rational investor before the devaluation would demand a return on investment of 156% for giving his BsF to the CADIVI, this investor will not take on the investment with the CADIVI with a mere 27% return now after the devaluation.

    The rational investor will go to the parallel market and he will not switch to the CADIVI until the return on investment is back at 156% which means that a dolar paralelo should trade at around 11 BsF/USD.

    I assume that the new CADIVI exchange rate will make it easier for the CADIVI to fullfill the applications (it is cheaper for them) and that will lower the return that a rational investor will demand (he will now demand somewhat less than 156%). But even if he only demands 120%, the dolar paralelo would still have to be around 9.5

    What do you think of my view?

  13. deananash Says:

    Gabriel, both “corruption” and “personal interests” are present around the world, in ALL economic systems. So I’m sorry to inform you that Venezuela doesn’t own a monopoly on either of them. This is merely the very tired and worn excuse from communists around the world.

    Chavez spelled out his intentions quite clearly way back in ’98. Of course, long before that, via his actions in trying to overthrow the democratically elected government in the early ’90’s, he was equally transparent.

    Only FOOLS would hand the keys to the kingdom to such a narcissistic individual.

    MO – You’re ideas back then are still timely. Too bad that the country remains ignorant of basic economics. And geez, there must be a word for people who remain willfully ignorant. Oh yeah, it’s stupid.

    [Not all Venezuelans, of course, but a majority.]


  14. As far as I can remember in the case of dollarization, the parallel rate and the official rate tend to be the same as the dollarization date approaches.

    Obviously, not everyone will be the same off: but, never in the past has a country suffered like under hyperinflation because of dollarization.

    Everybody who is in hyperinflation want to dollarize if the can, normally if the have the USD. In Zimbabwe they did it without government USD. Hyperinflation wiped out the value of the ZimDollar in any case. So the government did not have to buy any ZimDollars from the population: there were none to buy.

    Your case is different.

  15. moctavio Says:

    No, you would right after devaluing, all prices would have to go up, some by 200%, so a Venezuelan would have to pay more tomorrow than today, afterwards, once the system adjusts I agree with you.


  16. moctavio:

    “You would have a huge spike in inflation” That is impossible: US Dollar inflation is currently 0.4%. That is determined in the US economy. Not in the Venezuela Dollarized economy. Your inflation – if goods were freely available – would also be 0.4$. Goods are not freely available: till they become more freely available in a stabilized dollarize economy, your USD inflation would be higher – only a few percentage points because the population will have a limited supply of US Dollars once they have received their US Dollars at the 6.85 rate.

    There have never in the past been a huge spike in inflation because people only get USD at the agreed change over rate. Prices for products are also set at that rate. Shortages result in price increases, but, people have limited amounts of USD. They can´t push prices up. With what USD?

    Please note: I am a constant item accountant: that´s all.

  17. moctavio Says:

    Nicholas: With current numbers you can convert all Bs. to $ at a rate of 6.85 Bs. per $. You would have a huge spike in inflation and collapse in demand, but afetr three or four months, inflation would be in single digits.

  18. moctavio Says:

    You can only export what you are good at, it is hopeless to export what you cant be competitive at, if Colombia devalues, we will deal with it. Let’s do oil, cocoa, coffee,big time. let PDVSA become the largest oil company in the world. Let’s save 15% of the budget every year into a real FIEM


  19. I only know how to stabilize your non-monetary economy during hyperinflation.


  20. Joropoman, the change-over is at a rate: 6.15? I don´t know. It is not my area. I am a contant item accountant. I only kow how to stabilize your non-monetary economy.

  21. Joropoman Says:

    MO: Ok like Borat said in his movie: I like it!

    But still let’s analyze it together, there are some cons of dollarizing. I.e if Colombia devalues we are less competitive to produce (from a cost perspective), attract FDI, and of course export Non-Oil goods. Still, actual situation is such a mess that I just do not see another viable option than dollarizing. A full devaluation to the 6.15 level will be political and economic suicide as the population won’t sustain the inflationary pressure and lost of purchasing power.

    Nicolas: We do have sufficient flow of US$ (PDVSA revenues in 08: US$100 bn) to maintain a dollar based economy. How we converty (as you say “buy”) all goods into US$ is another question. Furthermore, if the gov’t does a good job in regulating the banking system and the banks have a proper protfolio and risk mgmt in place we could potentially (once we gain credibility in a few years) attract foreign savings into here, or at least avoid the eternal outflow of funds to quality assets and/or quality zip codes

    just some thoughts before i leave my office…..


  22. I can show you how to stabilize your non-monetary economy – like Brazil did for 30 years from 1964 to 1994 while they had 2700% hyperinflation per annum.

    You all seem to be in total denial: you are at 105% cumulative inflation over 3 years. Eveybody knows that is officially hyperinflation.

    Everybody except all of you.

    Strange.

    Denial just delays your proper response.

  23. moctavio Says:

    Here are my thougyts on that from 5 (15?) years ago

    http://devilsexcrement.com/2004/11/27/what-venezuelas-economy-needs/


  24. To Dollarize the government has to have enough US Dollars to replace/buy all Bolivars from everybody in the economy.

    Do you have enough US Dollars for that?

    I think maybe you have.

    The right way is obviously to vote him out of power and have a proper economy.

    If you do not do that, you may go the way of Zimbabwe: right down to very low: Then you most probably will dollarize in any case like they did – and they had NO foreign currency reserves.

    It may put you back 10 or 20 years in development.

  25. Joropoman Says:

    Miguel Octavio: Do you think the solution is to Dollarize the venezuelan economy? As Ecuador, El Salvador, Panama and other smaller islands have done? Give me 3 arguments in favor of $ and 3 against please.

    In favor:

    1) We have access to US$ (more than many countries in Latam), thus the gov’t can still keep somehow monetary policy tools
    2) It will eliminate ALL distortions brought by this senseless control regime (no more speculation, with CAPITAL S)
    3) Ecuador also an oil exporter has controlled inflation and some Macro stability since it adopted the US$ as a currency
    4) It will facilitate transactions in the country and “sincere” our economy since real estate, imports and many real goods are traded in US$

    Negatives:

    1) We will formally loss our monetary policy (ability to devalue and make Venny exports more attactive)
    2) In general on an adjusted PPP basis the cost of goods should go up, uncovered inflation, (as it happened in Spain with the Euro adoption)
    3) We will be more dependent to the US$ value than ever (anywhere we are..but this will be the crowning of the dollar based Venezuelan economy)

    any other thoughts? very welcome

  26. LD Says:

    … thinking about this, this could be a propaganda action, say months before the AN-election you will be able to put your name on a list for a car, well, maybe at the end you don’t get the car… but you will be thinking at the election, that you are going to get one…

  27. JB Says:

    Ya les metio el ultimo clavo…www.changovez.com

    JB

  28. LD Says:

    If you thought this was crazy enough, take a look at that:
    Samán dijo: que este año se prevé colocar en el mercado 60 mil vehículos (en convenio con China e Irán) calculados a un dólar a 2,60 bolívares fuertes, lo que “empujará” los precios a la baja. (http://www.enfoqueregional.net/modules.php?name=News&file=article&sid=13414)
    Uuuuh? Not at the 4,30 rate, but to the lower rate?! And this would be nearly 60% of internal demand, so enough about promoting national production!
    Is this a lie, a confusion or is this to happen?

  29. HalfEmpty Says:

    I want me some FIAT money!
    Enough for a Abarth tuner 500 anyway.

    0/FIAT Money!

  30. concerned Says:

    Roger,
    Maybe it’s just nerves but the parallel has jumped to 6.5 since Friday.

  31. Roger Says:

    I wonder how this will effect money laundering. Having two exchange rates would seem to make the transactions look legal.?

  32. An Interested Observer Says:

    “One of your bankers already suggested dollarization in Venezuela”

    I think Hugo would sooner kill himself than admit that the evil empire’s currency is the right standard for his fiefdom. And given his demonstrated level of willingness to die for his country back in 1992, we can just call that probability infinitesimal and move on.


  33. Gabriel,

    You are in hyperinflation. There is no doubt about that.

    The definition of hyperinflation is 100% cumulative inflation over three years. Your cumulative inflation is now over 100%. It is 105% cumulative inflation over 3 years. That is officially hyperinflation.

    The International Accounting Standards Board defines hyperinflation in IAS 29 Par 3, (e) as follows:

    “Hyperinflation is indicated when the cumulative inflation rate over three years is approaching, or exceeds,100%.”

    According to the Central Bank of Venezuela the official data are as follows:

    CPI Cumulative

    Dec 2006 81.66132166

    Dec 2007 100.00 22.5% over 1 year

    Dec 2008 131.9 61.5% over 2 years

    Dec 2009 167.4 105.0% over 3 years = hyperinflation

    Cumulative inflation over three years to December 2009 is 105.0%. That is hyperinflation. Venezuela is certainly officially in hyperinflation.

    Here is the link to your Central Bank data: http://www.bcv.org.ve/excel/4_1_7i.xls

    PricewaterhouseCoopers is one of the Big Four global accounting and auditing firms also stated that on 17 Dec 2009. I gave you the link to their article on a previous post.

    You are officially in hyperinflation. Your companies now have to do their accounting differently: according to IAS 29.

    Here is the link to the PricewaterhouseCoopers article:

    https://pwcinform.pwc.com/inform2/show?action=applyInformContentTerritory&id=0920175412162144

  34. Gabriel Says:

    I think the inflation is higher than reported but it doesn´t reach to be an hyperinflation..
    Please, Deananash…. when you said:

    I would argue that PROBLEM ONE is the ignorance and stupidity of the majority of the Venezuelan population. Since we’re ALL born ignorant, stupidity deserves most of the blame.

    were you included in this group? because I think the problem in Venezuela is not the ignorance. Because if the stupid or ignorance won us in the last elections, we have a lot of things to learn from them… I mean, I don´t think that the majority of venezuelans are like you said. I think the really problem is the corruption and the personal interests


  35. Hi Gabriel,

    Yes, you certainly are in hyperinflation- already since Oct 2009 and definitely since Nov 2009 – depending on which CPI you use. According to the Consumer Price Index on your banks website you are now at 105% cumulative inflation since December 2006. That is hyperinflation according to the definition by the International Accounting Standards Board.

    PricewaterhouseCoopers stated that you are in hyperinflation on 17 December 2009:

    https://pwcinform.pwc.com/inform2/show?action=applyInformContentTerritory&id=0920175412162144

    “Venezuela enters hyperinflation
    What is the issue?
    Inflation in Venezuela has been high for a number of years, and cumulative inflation for the three years ending
    30 November now exceeds 100%. Venezuela should therefore be considered a hyper inflationary economy, and IAS 29,
    ‘Reporting in hyperinflationary economies’, should be applied by entities in Venezuela in financial statements for the
    year ending 31 December 2009. IAS 29 should also be applied to restate the financial statements of subsidiary entities
    based in Venezuela before they are included in the consolidation.
    This ‘Straight away’ explains why Venezuela is now hyperinflationary and the consequences for financial reporting.
    Why is Venezuela hyperinflationary?
    Quantitative factors
    IAS 29 states that a cumulative inflation rate over three years at or approaching 100% is an indicator that an economy is
    hyper inflationary. Entities in Venezuela have previously used the Consumer Price Index (CPI) to measure inflation,
    although the CPI covers only the cities of Caracas and Maracaibo. The cumulative three year inflation rate using this
    index exceeded 100% at the end of October 2009.
    The National Consumer Price Index (NCPI) has been developed to cover the entire country but only has data since 1
    January 2008. Some entities have used a blended NCPI and CPI to measure inflation; the cumulative three year
    inflation rate using this index is 101% at the end of November 2009.
    Qualitative factors
    IAS 29 also requires a number of qualitative factors to be considered to determine whether an economy is
    hyperinflationary. The qualitative characteristics in the case of Venezuela are as follows:
     The population in Venezuela prefers to keep its savings in US dollars or other hard currencies.
     The exchange rate to the US dollar is fixed by the government at Bs2.15/US$1 and has not increased since
    2005. However, the access to US dollars at the official exchange rate is limited to a list of goods and services
    determined by the government.
     Delays in obtaining US dollars at the official exchange rate and the removal of some products from the official
    list of items that may be imported using US dollars have led to an increase in transactions using a parallel
    currency market – a legal mechanism to buy hard currency outside the official arrangements. The exchange
    rate in the parallel market is now approximately Bs6/US$1.
     Many prices and agreements in Venezuela are calculated in US dollars, using the parallel exchange rate.
     Sales and purchases are generally calculated using the parallel exchange rate, giving a margin for protection
    that is higher than the official rate of inflation.
     Many prices are linked to the inflation index, as price controls on some goods and services keep the inflation
    rate at a monitored level. Interest rates are set by the Government and are controlled at high levels but are not
    linked specifically to inflation. Wages are increased in many cases by inflation or a specific index.
    The qualitative indicators also indicate the characteristics of a hyperinflationary economy.
    17 December 2009
    Straight away
    IFRS bulletin from PricewaterhouseCoopers
    Who is affected?
    Entities with a Venezuela Bolivar functional currency – restatement is required
    IAS 29 para 4 and IFRIC 7 para 3 require the financial statements to be restated in the reporting period in which an
    entity identifies the existence of a hyperinflationary economy. IAS 29 should be applied as if the economy had always
    been hyperinflationary. Transactions in 2009 and non-monetary balances at the end of the year should be restated to
    reflect a price index current at the balance sheet date. The comparatives and the opening statement of financial position
    at the beginning of the earliest period should also be restated to reflect a price index current at the balance sheet date.
    A summary of the accounting required by IAS 29 and the restatement process is available for internal and external
    users on PwC inform (and internally on the IFRS NoE). A more detailed description of the restatement procedures and
    some illustrative examples are contained in Chapter 6 of the IFRS Manual of Accounting 2010 and the publication of
    Financial Reporting in Hyperinflationary Economies – Understanding IAS 29. Venezuela will also become
    hyperinflationary under US GAAP. The US accounting model is different to IFRS and entities will transition to
    hyperinflation accounting and apply the principles required by US GAAP in 2010.
    Entities with a subsidiary that has a Venezuela Bolivar functional currency
    Group reporting – hyperinflation
    A parent that reports its consolidated financial statements in a currency of a non-hyperinflationary economy (a ‘stable
    currency’) should restate the financial statements of a subsidiary with the Venezuelan bolívar as its functional currency
    in accordance with IAS 29 before inclusion in the consolidation. All amounts for the current period should then be
    translated into the stable currency at the closing rate for inclusion in the consolidation. The comparatives, which were
    presented as current year amounts in the prior-year financial statements in a stable currency, are not restated (that is,
    they are not adjusted for subsequent changes in the price level or subsequent changes in exchange rates) in
    accordance with IAS 21 para 43 and IAS 21 para 42(b). The resulting difference is recognised as a movement in the
    equity items to which it relates.
    Group reporting – translation
    The rate used to translate a net investment is often the dividend remittance rate, but another rate may be more
    appropriate if the proceeds would in practice be remitted in another way. Where a country has multiple exchange rates,
    judgment is often required to determine which exchange rate qualifies as a spot rate that can be used for translation
    under IAS 21. An entity should consider whether currency can be obtained at an official quoted rate and whether the
    official rate is available for immediate delivery and is therefore a spot rate. A normal administrative delay in obtaining
    funds would not mean that a rate is not a spot rate.
    Management should consider the level of access to the official exchange market in Venezuela and whether the official
    rate is a spot rate. Where an entity is unable to access money on the official market on a timely basis, it might be
    appropriate to use the parallel exchange rate to translate the results and balance sheets of foreign operations that have
    the Venezuelan Bolivar as functional currency.

  36. Gabriel Says:

    hello, we are not in hyperinflation if we follow the economics theories but I think that we´re going to have one of the more higher inflations at the end of this year.
    Chavez said: THESE POLICIES ARE GOING TO HELP THE EXPORTATION, and It should be, but the really problem is. ¿what are we going to export if the industrial sector has been eliminated?’

    Say hi, from Venezuela..

  37. Kepler Says:

    Thanks.
    So…farmacia…patent and trade…it should have been obvious, shouldn’t it?

  38. espadachin Says:

    MO: We are in agreement then.
    By the way. Anyone have a any information on the USDs that have been approved fro delivery by CADIVI but have yet to be delivered? What amount is it? At what rate will they be transacted?

  39. jpCCS Says:

    Saman studied Farmacia in UCV, and was a professor there for many years. Know this because people I know took classes with him (in Facultad de Farmacia).

  40. Kepler Says:

    OT: does anyone know where I cand find Eduardo Saman’s cv? Where did he study? What? What has been his experience before Hugo came to power?


  41. Miguel Octavio, do you accept that Venezuela is in hyperinflation? Or are you also still in denial like Chávez?


  42. Money is not part of the non-monetary economy. The non-monetary economy is also called the real economy in contrast to the monetary economy.

  43. espadachin Says:

    MO:
    1. I am in no disagreement with you over the fact that the Venezuelan CB is broke and irresponsible. Nor am I trying to claim that they have been effective in reducing the monetary base or mantaining it at an appropiate level.

    2.
    “Or look at January last year, Chavez withdrew US$ 12 billion from reserves, there was no decrease AT ALL in the monetary base or monetary liquidity. How do you explain that?”
    This transaction would not have reduced the monetary base, it would have simply kept it the same. Let’s look at a rough example of what might have taken place:
    The BCV transfers the USDs to the government’s account. The government needs to sell those USDs in order to buy Bs. from someone and use those Bs. in order to buy ad spaces to put Chavez’ face*. A foreign corporate that has Bs in cash receives USDs from the goverment so that they can give them to their shareholders abroard and the goverment gets their Bs. Those Bs. simply went from the bank account of the foreign corporate to that of the Government.

    *http://noticiaaldia.com/2010/01/el-nacional-destinaran-bs-140-millones-para-promover-culto-a-chavez/hugo-chavez-19/


  44. Moctavio there is no inflation in Zimbabwe. They have dollarized. They have no monetary economy.only a non-monetary economy.

    One of your bankers already suggested dollarization in Venezuela.


  45. Hold no money and you cannot lose value. You have to hold the right non-monetary items and your accountant has to stop Historical Cost Accounting even thought it has been approved and authorized by the IASB and everyone uses it.


  46. Hyperinflation has absolutely nothing to do with the destruction of your real economy. Money is not part of your real economy. Money is only part of your monetary economy.


  47. Moctavio and Espadachin, do you realize that it is your accountants who are unknowingly destroying your non-monetary or real economy and not Chavez with hyperinflation?

  48. espadachin Says:

    MO:
    I think I agree with OW’s comments. When PDVSA or any exporter sells USDs to the Central Bank then the CB credit the bank account of that company with “freshly minted” Bs. These Bolivares never existed previously and are now being created. This is when the monetary base is increased. (Responsible central bank’s around the world would then turn around and issue some sort of deposits to banks or enter into “reverse-repo” transactions to remove this extra liquidity that has been created.)

    On the other hand, if the CB transfers the USDs to the government and then they sell those USDs to have Bs. and pay salaries, the Bs. that the Government is purchasing are simply changing hands.


  49. […] Octavio is Looking beyond the devaluation in Venezuela (Or trying…) and foresees another devaluation next year: Let me explain. Let us assume that oil holds up and […]

  50. firepigette Says:

    I agree totally with Amieres.

    This is not an epiphany.Chavez has a well developed reptilian brain.

    Until more people see this, we are doomed.

  51. moctavio Says:

    In fact, what you describe is a currency conversion system like Hong Kong. If Venezuela had that inflation would be 5% or less. We had that until the early 70’s by law.

    But I can show you mathematically that things work the way I say: In 2005 reserves were 26 billion and M2 was 42 billion Bs. the exchange rate was fixed in Feb. 2005 at Bs. 2.15. Since then, reserves have gone up (until Chavez removes 7 billion, which will not kill any Bs.) by US$ 9 billion. Under your scenario, M2 should have gone up by 9×2.15 billion Bs. or 18.35 billion, but M2 has gone up by Bs. 198 billion, a factor of TEN difference. Put another way, reserves have gone up by 34%, but M2 has gone up by 400%.

  52. moctavio Says:

    OW: That is not the way things have worked in Venezuela, when PDVSA gives $ to the Central Bank, the Central Bank prints Bs. that PDVSA goes out and uses, but those Bs. do not get cancelled when CADIVI goes money out. If that were the case, then monetary liquidity would not have increased last year, because the Governmnet gave out more dollars than it received, but M2 went up 20%. Under this Government, BCV issues new Bs. to PDVSA and those Bs. stay there unless PDVSA issues a bond in $ or something like that. That is the way things have worked out and are part of the problem. This year will be even worse, because the Government needs those Bs., salaries will be increased, the fiscal deficit will be covered by the devaluation and the like. In any case, note that I assume that for each Bs. given to PDVSA only one Bs. is created in M2, that is the most optimsitic case, for each Bs. given to PDVSA at least another Bs. will be created by the financial system.

  53. Kepler Says:

    Amieres is right 100%.

    Do you remember year 2004 with the regime giving away thousands of red bags with a NO outside, full of food?
    That is it now, plus some mixers, mattresses, etc…all made in 中国

    Ow: private enterprises developing are not Hugo’s desire.

  54. Col. Sanders Says:

    OW, nobody cares what you think. You have crashed and burned so take your Chavista ass back to where you came from you disrespectful and lying PSF

  55. amieres Says:

    I don’t buy the epiphany thing, Chavez is just saying what he has to make the devaluation look good. He is a consumate liar. He doesn’t care about internal production or exports he’s been working hard for many years to destroy the private economy, for him it’s an enemy. Anyone with some money, that is not on his side, is his enemy.
    He had to devaluate because he needs the extra cash for the electoral campaign this year, those 7 billion are going to flood the country with gifts, hand outs and ads. Just wait and see, it’s going to be a carnival.

  56. ow Says:

    Your points about the effects of taking the $7 billion from the BCV are correct. it is a problem.

    But I am not sure what you say here is correct:

    “Let us assume that oil holds up and PDVSA sells the Central Bank for example US$ 30 billion. PDVSA will get some Bs. 120 billion to spend. This means that monetary liquidity will grow by a similar amount more or less. That represents an increase of 50% in M2, i.e. even if this money does not multiply, like it will, but let’s keep the argument simple.”

    Aren’t you leaving out all the purchases Venezuelans make of dollars from the BCV (Cadivi)? That is, just as PDVSA selling dollars increases the number of Bolivars in circulation others selling Bolivares to buy dollars takes Bolivares out of circulation.

    So assuming nothing else happens (and of course the $7 billion is something else but I am just trying to go over this one part of your post) the net increase in Bolivares should be the DIFFERENCE in the number of dollars PDVSA sells to the BCV and the number of dollars VEnezuelans buy from the BCV.

    At least, I think that is how that would work.

  57. Savi Vila Says:

    Your calculus is near mine: 8 for the same reasons.

  58. deananash Says:

    The opposition should be marching demanding that Chavez TAKE MORE CONTROL.

    At a minimum there should be a parade honoring his ‘glorious’ achievements. Floats could include these topics: regularly scheduled blackouts, compared to the old-fashioned, spur-of-the-moment kind; Banks & Corruption; New & Improved CANTV; Rojo Rojito PDVSA (and it’s every decreasing production; tainted elections (I’m being very generous here); Low-income housing; street children; etc…

    I’m sure you could easily come up with 100 floats. There is simply so much to celebrate. Regarding my previous comment, surely the float leading the parade should be the one celebrating the “mision” that made all Venezuelans ‘literate’.

  59. moctavio Says:

    And yes, Chavez will not get rid of controls and will continue his policies of destruction.

  60. moctavio Says:

    No, Chavez and his Cabinet are actually trying to say inflation eased thanks to their policies (I actually think inflation is higher than reported)

    The companies in the toughest spots are those that sell a the official rate, but do not get dollars from the foreign exchange control office. Some have slowly realized what a folly was to do things at the official rate and just gave up asking the Govt. for dollars. With the deval, their only increase immediately will be that custom duties will be calculated at the higher rate, a 100% increase.

  61. deananash Says:

    “The problem is that nothing structurally is being done to change the system. The origin of the problems remain…”

    I would argue that PROBLEM ONE is the ignorance and stupidity of the majority of the Venezuelan population. Since we’re ALL born ignorant, stupidity deserves most of the blame.

    Chavismo is merely the latest manifestation of this.

    Of course, there are other problems, but this one trumps them all. Likewise, the solution to this first one will lead the way to conquering the rest. However, NOTHING like this is ever going to happen as long as Chavez is in power.


  62. Moctavio,

    The right solution for Venezuela is obviously to unite all rates at the parallel rate. But, that is a fantasy with Chavez in power.

    Hyperinflation is always and everwhere a monetary phenomenon. Hyperinflation can only destroy the real value of Bolivars and other Bolivar monetary items. Nothing else.

    So, keep no Bolivars over time and you will be fine.

    Putting your money on the stock exchange if you have money to invest there, is a very good idea.

    For normal people they have to spend their Bolivars the moment they get them. It is obviously the best to buy items that are priced at the parallel rate and updated and sold at that rate.

    Any company that can sell its products at the parallel rate can do well in Venezuela. The company´s accountant just have keep no Bolivars over time and price all sales at the parallel rate. With purchases at the parallel rate the company just need a proper gross margin to guarantee over net profits.

    Then the accountant has to value all constant real value non-monetary items in the company in units of constant purchasing power by applying the parallel rate. That includes capital, retained profits, all items in shareholders equity, trade debtors, trade creditors, taxes payable, all other non-monetary payables and receivable, etc.

    The secret is to be able to sell at the parallel rate. If a company can do that, everything will be fine.

    Obviously, if the government would float the Bolivar and there is just one rate, everything will improve when your accountants value all consant real value non-monetary items as described above DAILY at the single or parallel rate.

    Are there companies in Venezuela that sell at the parallel rate?

    It is a fact that hyperinflation can only destroy the real value of your money and other monetary items (money loans) and nothing else.

    Your accountants destroy the real values of constant items in your companies implementing the 700 year old International Accounting Standards Board authorized generally accepted tradition real value destroying Historical Cost Accounting model that includes financial capital maintenance in nominal monetary units – the IASB authorized very popular accounting fallacy. Financial capital maintenance in nominal monetary units per se is impossible even though the IASB authorized it in the Framework, Par 104 (a) in 1989 and everyone world wide uses it. It is still and utter and complete fallacy and impossible under inflation and especially under your hyperinflation.

    Moctavio, does Chavez accept that Venezuela has been in official hyperinflation since Nov 2009?

    Nicolaas Smith
    http://blogs.fin24.com/realvalueaccounting
    realvalueaccounting@yahoo.com


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