More on the Venezuelan devaluation

January 3, 2011

When the Government decided to unify the exchange rate last week, it did something that was necessary, but at the same time it is an isolated measure that in the end does little if nothing else is done to the economy. As I have said too many times, the problem is that the Government has established so many controls of the economy, that everything is distorted and when you touch one of these distortions it reverberates negatively throughout the economy. This devaluation from Bs. 2.6 to Bs. 4.3 is one more example of that.

The Venezuelan economy contracted 1.9% in 2010, after shrinking by 3.3% in 2009. Think about this, it is eight consecutive semesters of contraction, this is a long recession by any standards and there seems to be no end to it.

The problem is in part that there are no real economists running the show. Thus, the plans and decisions which are made are simply stop gap measures to what the Government perceives are the problems. And for the Government this means spending, that is all that it seems to be focused on all the time.

But think about it, oil prices are near $80 for the Venezuelan oil basket and the Chavez Government does not have enough money to live on. And with stagflation destroying productivity, the Government decides to increase the VAT, reestablish a financial transaction tax and devaluing the rate from Bs. 2.6 to Bs. 4.3, which applied basically to food and medicines.

Jeez, if that is loving the poor, they are getting too much loving from Hugo and Giordani, because all of those measures happen to hurt the poor the most.

-The VAT is a great tax to collect for the Government, but since the poor spend all their money, it is a tax that gets them the most.

-The Financial transaction tax is only applied to those that have bank accounts, which does not include the poor, but it is a cost that will be translated into inflation.

-The 65% increase in food and medicines impacts the poor the most, as they spend more of their income on food than anything else.

-The gasoline subsidy benefits the rich the most. By now gasoline is essentially free, for $1 you can fill your tank in Venezuela (and that includes a tip too)

The devaluation is estimated will give the Government about Bs. 13 billion in additional income, about US$ 3 billion, but it could have achieved more by adjusting gasoline prices at the same time. Doubling the price of gasoline from Bs. 0.1 to Bs. 0.2, i.e. from nothing to nothing, would have given PDVSA US$ 1 billion in additional income, but would have had much less inflationary impact on the poor.

Because in the end it is a strange devaluation. It moves the Bs. 2.6 to Bs. 4.3, but PDVSA changes more of its currency at the higher rate. Thus, it generates fewer new Bolivars for PDVSA, while making it more expensive for the Government to subsidize the imports. Why not do a little of everything? Why not slide the others? Or eliminate the Bs. 4.3 and have all go trough SITME at Bs. 5.3? I guess it’s too moo much to ask of the current financial authorities to show some coherence.

But in the end, the problem is that all of the announcements are fiscal measures that benefit the Government, but there are no announcements that help improve salaries, productivity, restore confidence, reduce gas consumption and/or attack the basic distortions in the economy. So, you have the worst of shock therapy to the economy, without doing anything constructive.

The only sector that benefits from these measures are local producers, who will be able to compete with imports that were being subsidized. This will be a good year for them. Their problem is that the Government is unlikely to increase prices instantly. It will likely drag its feet for two or three months trying to delay the spike in inflation or at least spread it around.

Exporters, despite claims to the contrary are indifferent to the devaluation. They have received the higher Bs. 4.3 rate since January 2010, despite which non traditional exports did not go up in 2010.

In part the problem is that the government does not even seem to remember why it imposed exchange controls. In its control mindset, it does not even consider eliminating it, which would in the end boost the economy after the initial impact. The current system of controls is costly, time consuming and creates arbitrage opportunities (which are reduced by the recent devaluation). Simply the changes in rules, delay investment and decisions. It is preferable to have a single exchange rate and find ways of subsidizing those that really need it.

The Government loses credibility when it says that this devaluation will have little impact on inflation. over 70% of imports were made in 2010 at the lower rate of Bs. 2.6 per US$. If the Government does not allow price increases, there will be shortages, but it should not delay the approvals, they will go against is goal to get the economy moving.

I still think that 2011 may yield another negative GDP year. The wild card as usual is oil, which may move to $100 per barrel and stay there. Even then growth will be anemic, inflation will top 30% and in the middle of another oil boom, the Venezuelan economy will continue to be one of the worst ones in the world.

And guess who is to blame for that?

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33 Responses to “More on the Venezuelan devaluation”

  1. deananash Says:

    Miguel, I might add that American inflation is a tax on pretty much all the world as most major commodities are traded in…wait for it, U.S. Dollars.

    Of course, we also screw lots and lots of people the old fashioned way – direct devaluation, aka quantitative easing.

  2. An Interested Observer Says:

    Miguel, I didn’t realize that PDVSA had to use the 2.6 rate for any exports, but you are right that that will be a drop in the bucket. (So the right word would be “few,” not “fewer.”) But 70% of imports were at 2.6? Really? I find it hard to believe that that much cash was available through CADIVI.

    I’m not saying that 1989 wasn’t organized, I just wonder what the organizers did to motivate people. Was it more “Let’s show them how pissed off you are,” or “Here’s a bunch of bolivars – come with us”? Kind of moot, though, as it almost certainly doesn’t affect your conclusion that people won’t hit the streets in the current ambiente.

    Kepler, I wonder if the answer to your questions is related to that conclusion by Miguel: inertia. (Your chart could maybe be a little neater, but I had no trouble reading it.)

  3. moctavio Says:

    Inflation is a tax. People don’t understand that it is the consequence of the Government doing what is good for itself, not for the people. Not enough money? Devalue! Who pays for it? The people, it is a disguised tax.

    What is interesting though, is how successful politicians that have eliminated inflation and improved economies have been.

  4. Miguel2 Says:

    Great post and factual points…the dilemma is how to get the 80% of Venezuelans it really impacts to understand what is happening to them (they are getting poorer), who is doing it to them (Chavez govt not everybody else in the world…), and why its being done (government is corrupt and inept).

    Until this dilemma is solved, the nightmare continues.

  5. Kepler Says:

    AIO,

    Sorry, I did not want to link because when I did that chart I was in a hurry and and all letters got screwed up. I wanted to remake it neatly, but haven’t got to it.
    The thing is: why doesn’t the Venezuelan media talks about this?
    And: why aren’t our people going to the secondary cities to talk about this? Venezuelan population is ignorant, it is very ignorant, but it is not stupid. If a group of 4 people with university studies but also with connections to classes C-E were just to spend an hour or two trying to write a flyer with those things, they could come up with an eye popper to show to Yulimar and Jonny Pacheco in Carora and Boconó, in Southern Valencia and in Tucupita.

  6. moctavio Says:

    PDVSA had to change 70% at Bs. 4.3 and 30% at Bs. 2.6, clearly the new Bolivars are not much compared to the number of Bolivars the Government will need to import the food and medicines at the higher price. Jose Guerra says over 70% of imports were at Bs. 2.6, that is US$ 27.3 billion that now will be imported at the higher price. Even if you believe PDVSA official export numbers 30% of that is about US$ 22 billion, below the US$ 27.3 billion.

    1989 began as an organized protest, Hard to believe that in four cities at the same time, before 6 AM , the “people” took to the streets. Then when looting began and people saw the cops doing nothing, the whole thing escalated.

    People think that as things get worse, the “people” are going to take to the streets. Forget it, it is not going to happen, least of all with the repressive attitude of the Government..

  7. An Interested Observer Says:

    Miguel, I have a couple questions for you, one from the post and another from a comment you made.

    “PDVSA changes more of its currency at the higher rate. Thus, it generates fewer new Bolivars for PDVSA”

    Do you mean it generates few – or even no – new Bolivars? I don’t see how they can actually get LESS by upping the exchange rate.

    “Venezuelans have never taken to the streets over prices…

    So what are you saying happened in 1989? I won’t dispute that there were elements organizing things (I really don’t know enough to say one way or another), but surely some of the people out there thought they were going simply to protest the gasoline price increase. I think one reason that Chavez hasn’t touched that – and won’t – is that he has always held that the Caracazo was one of his motivations for his 92 coup attempt. Abandoning that would be no longer even pretending solidarity with the poor.

    Kepler, I’d like to see that graph about oil price X-1 vs GDP growth year X. Very astute connection. Did you put that on your site? Oh wait, I found it. http://2.bp.blogspot.com/_rZbKKDohSyc/TR4GBYggbHI/AAAAAAAABuE/39NfTBG7g2Y/s1600/growthgrowth.PNG You know, as the Venezuelan economy becomes even MORE oil-dependent than it used to be, that relationship should be stronger rather than weaker. That growth is down while oil prices are up is a pretty damning assessment of Chavez’s economic policy.

  8. moctavio Says:

    El Caracazo was organized. Caldera with low popularity increased the price of gasoline continuosly and nothig happened. If Chavze ahd the popularity why not do it? He wasted his goodwill.

  9. megaescualidus Says:

    Kepler,

    The Government (i.e. Hugo) has short term and long term objectives. For now, the short term objective is to win (at all cost) in 2012, thus obtaining 6 more years towards the long term objective (perpetuity in power as long as possible). In other words, for the government the cost-benefit analysis (pain people are feeling vs. risk of not winning in 2012) is done towards the short term objective. From the Government’s perspective any other outcome other than winning in 2012 is not accectable.

    Miguel,

    I partially disagree with you when you say that historically Venezuelans haven’t taken to the streets due to price increases. Though the “Caracazo” was ignited by as complex set of causes, gas price increase was a major one. It is thought of as “the gift” from the Government all Venezuelans are entitled to (even those who don’t directly benefit from it – i.e. those who don’t drive a car, truck, bus, etc.) And, it is the single Government controlled price that could make people take to the streets. This is why Chavez hasn’t touched it.

  10. CarlosElio Says:

    Great post and comments regarding the devaluation itself. What about the “policies” that made the devaluation necessary?

    I’d like to ask Mr Giordani about the economic reasons the government had for establishing a two-tier exchange rate a year ago. Assuming there were economic reasons, what changed in the landscape of the economy for rendering such a decision untenable now?

    To illustrate, let’s assume that the two-tier system created favorable conditions for non-traditional exports and now there is no need to support that type of export. Or less assume that it allowed the government to fulfill international commitments that have been fulfilled now. Or some other reason that can be verified by economic analysis.

    Most likely the two-tier system was pulled out of chavez ass, like most of his policies. Perhaps it allowed him to appear concerned for the welfare of citizens.

    Advisor: Mr. President, the current exchange rate is unsustainable. We need to devalue the currency.
    chavez: No way, jose. We would look weak, defeated. We need to defend the process.
    Advisor: We will run out of green-bucks and you will not be able to send hard currency to the Cubans
    chavez: Holly shit, that’s not acceptable. OK, let’s be creative here. A two-tier system and we call it “currency architecture to defend the poor” or some other grandiose bullshit of those that come out of my ass with so much regularity.
    Advisor: Let’s analyze the consequences of such a policy, Mr. President. It would be a logistical nightmare, will encourage more corruption, the swindlers would have a feast. I think it is wrong to have a two-tier system.
    chavez: shut up. Do as I command. I am the people.

    My point is that whatever calamities the two-tier system bestowed upon the Venezuelan economy were artificially created by the expediency with which officialdom obeys chavez tantrums. An economy run to please the whims of a single guy will create pain for all the citizens.

    Repeat my question: upon what constellation of reasons was the two-tier system created? What changed in the economy that made a revision necessary? Or was it only political expediency to please chavez?
    I read Giordani’s explanation: a gobbledygook to say nothing.

  11. Kepler Says:

    Miguel,

    I want to see the worst case scenario: how the government could still pull this for a couple of years without their voters being hurt (too much). We are clear the government could try to pawn anything it can just to keep gaining time and power.

    So, I wonder: do we know if most of those dollars at 2.6 were going to Mercal? Perhaps they were going to a couple of amigos pretending to be Mercal and part also to people like Daniel Duquenal, who sell to food producers who may not be Mercal providers? (see his post on that…perhaps he knows a bit about who else is getting that kind of dollars and what sector was the biggest benefitiary)

    I know from people working in public hospitals that the mafia with medicine has taken horrible proportions. I mean: hospital directors who buy on a massive scale from abroad and do anything to multiply their money (overpricing and selling to their own hospitals and much worse)
    Perhaps this is a Giordani thing to make it less attractive to them and the money they can save from that can be put in subsidizing the Mercal food?
    (or at least that is their attempt)
    No sé…pregunto yo.

  12. moctavio Says:

    Kepler, that is the puzzle, what the Government did was to increase the price at which Mercal food is imported by 65%, either the Government subsidizes it all, getting no benefit from the devaluation (in fact, it would be the opposite effect) or it increases prices.

  13. bobthebuilder Says:

    Great post. I too wonder why the Government didn’t go further than this devaluation. I guess the answer is they just plan to take a little from here, a little there etc. to make things more palatable.

    The bigger question is if the Government keeps on going at this pace how long will it take to get the country to a fully fledged communist state?

  14. Richard Says:

    Originally the introduction of commodity trading was in buying and selling of farming roduce. In the 1800s wheat, Barley, Corn and other field grown produce were involved along with livestock (cattle and pigs). Standard procedures were used in the USA at this time and other food produce was gradually introduced. As quality can vary Commodity Trading needs certain measurable standards to be used so it’s appropriate use can be established.

  15. Kepler Says:

    Miguel, I am not sure food prices for the poor will increase so much. I will ask around, but as I remember, some aunts of mine (former Chavistas) living in a C area, retired teachers, were buying most of their food at a Mercal. Other people I know – in better-off areas – tell me those Mercales are very far away, they don’t have everything, etc.
    Another person I know tells me in her village there is a “mini mercal” managed by one of her countless cousins and that is a given pattern throughout Llanos and many other areas. I don’t know…should be good to have hard figures about Mercal’s reach, but then even Mercal authorities may not have them.

  16. Kepler Says:

    Thanks, Miguel. I had seen in Wikipedai it was by several orders cheaper than in the second cheapest place, Lybia. Still, the price was in dollars, so I was not sure what “dollar” that was. It is absolutely mental.
    Roy made very good points.
    I wonder if those riots in Bolivia were as “spontaneous” as the ones in Venezuela in ’89.

    Gweh, I just leave it at this: your wishes are not only against any law, which is enough, but they are also by any chance counter-productive.
    This would be nothing:
    http://en.wikipedia.org/wiki/Jorge_Eli%C3%A9cer_Gait%C3%A1n#An_unclear_crime_of_homicide
    Multiply that by 10 and we would have a situation for Venezuela in 2010 as opposed to Colombia in 1940-50, with the primitive weapons and little money.

  17. moctavio Says:

    They have done this before, move money from Fonden to BCV, so Chavez can then move it back bombastically

  18. GWEH Says:

    Kepler, see my previous comments.

  19. GWEH Says:

    OT: amateur hour at state dept.

  20. CARLOS Says:

    Miguel… I see Central Bank reserver moved form 27 Billions in DEC 30 to 29.5 Billions in DEC 31. It looks like data manipulation like gold revaluation, some PDVSA bonds registered as foreign currency, and so on… Nobody would believe BCV received 2.5 Billions of fresh foreign currency the last day of the year. Any clue?
    BTW.. some figures seem to show there are more than 20 BsF for each real US$ in the BCV (foreign deposits, foreign bonds, and so on).. Is it true?


  21. Venezuelans have never taken to the streets over prices…

  22. loroferoz Says:

    “And yet, as irrational as the current situation is, raising the price (even by a modest amount) is probably the one thing guaranteed to make the people take to the streets in protest.”

    An important part of the Venezuelan take on socialism, with a small-caps s, as practiced in the “Fourth Republic”, and also an important part of “Socialism”, with big-caps S, as practiced in the “Fifth Republic”.

    Talking with people, you find that poor and rich alike agreed and agree in considering this a way of getting some back from a larcenous and ineffective government, as well as a birthright. Don’t you talk to them about inflation!

    So, the Venezuelan world view is unsustainable, it was long before Hugo Chavez rose to prominence. What I said in my previous comment could be said of any “Fourth Republic” government and oil. Hugo Chavez earns distinction in pulling all the stops, checks and balances, and in actively trying to destroy private activity. In accelerating and deepening the decay of the Petrostate, of Venezuelan populism and of the associated attitudes that go with it. He is getting to be nothing less than a practical reductio ad absurdum; or rather, reduction to utterly insane reality of such attitudes as Venezuelans have developed with the Petrostate.

  23. Roy Says:

    Price of gasoline:

    It is the same as it has been for years, in spite of the inflation. That means that the real price has been dropping all this time. I usually pay with pocket change. To fill up my car costs less than 50 cents at the parallel market (real) exchange rate. By real world standards, this is for all intents and purposes, free.

    Ironically, because the actual costs of running a gasoline filling station (cost of investment, labor, maintenance, etc.) far exceed the revenue generated by gasoline sales, the government (PDVSA) not only does not charge BP for the gasoline it delivers, it actually PAYS BP and the other service stations a subsidy to operate the service station!! I am rather surprised that they haven’t all been nationalized yet.

    And yet, as irrational as the current situation is, raising the price (even by a modest amount) is probably the one thing guaranteed to make the people take to the streets in protest. Yet, by this time, even doubling the price wouldn’t make much of a difference, so the Government studiously ignores the problem, making it worse with each passing year. Actually, since practically the entire actual cost of the production and delivery of the the gasoline is now subsidized, it can’t get much worse than it already is.

  24. Hans Says:

    Wow even NTV in germany cites you…

    http://www.n-tv.de/wirtschaft/Venezuela-wertet-Waehrung-ab-article2259766.html

    I am realy supprised who is reading ure blog.

    Regards and a realy good new year

  25. moctavio Says:

    0.095 bolivars per liter

  26. Kepler Says:

    Miguel, what’s the price now per litre?

  27. moctavio Says:

    Manuel: Precisely, it should be tied, but gasoline is so cheap, the impact is minimal. If you double the prices of gasoline. the increment is $1 per gasoline tank. That is irrelevant compared to parts, cars, even salaries pf those involved. I was not talking about making them equal to world prices, just double it, which still is like 4% of world prices.

  28. loroferoz Says:

    Folks used to argue with me that Hugo Chavez had control of oil. That was enough for him to do about anything. Even turn us into Cuba Mk II complete with communism. I used to counter that you are Venezuelan, but seem to be born yesterday, you need to observe how Venezuelans act and have acted before.

    I argued that corruption, greed of public officials, lawlessness, historic lack of fiscal discipline (include total monetary liquidity) and our brand of “Socialism” (populism and demagoguery in it) are more than enough to eat up oil revenue, in fact they were “caused” by it. Like a cancer or parasite that grows and eats faster than it’s host can produce nourishment.

    I joked that the drag and the losses the former cause would get WORSE (read bigger) as oil prices rose (much faster than the oil price), and as the govt. centralized control of it and distributed oil money according to political criteria. In fact that they rose EXPONENTIALLY. That only faster exponentially rising prices of oil (impossible) could provide enough nutrients for the parasite to keep going and not begin eating the host…

    Kepler shows it with numbers, which have an infinitely greater credibility than subjective appreciation and of course, jokes.

    I realize now that reality can overwhelm exaggeration and fiction and that at that point jokes like mine become understatement and deadpan delivery.

    There’s a “bubble” being now prepared by Central Banks around the world with their unconscionable currency devaluations “war”.

    My “worst” case scenario is that oil prices will rise up to 2012 and beyond, affording Hugo Chavez a better than good chance to win the election by handing out freebies. Then will come the adjustment, which they call “bust” and the precipitous fall in oil prices. Corruption and populism will have grown accordingly in the meantime. You will have a lot of not very savvy but greedy people, Venezuelans, with sky-high senses of entitlement and a disastrous economic situation to go around. This, I hope, will do Hugo Chavez and the idiocy of Venezuelans in once and forever. It will also do in a number of Venezuelans.

    I can only hope that my country will learn the lesson and not become a basket case.

  29. Manuel Says:

    Great post Miguel. For an ignorant in economics like myself, these comments are really illuminating. But I have a question. You say, “Doubling the price of gasoline from Bs. 0.1 to Bs. 0.2, i.e. from nothing to nothing, would have given PDVSA US$ 1 billion in additional income, but would have had much less inflationary impact on the poor.” But you surely know that gasoline price is tied the price of transport (of people and goods), which does affects the poor directly. See the problems in Bolivia! Although I agree that the gasoline subsidy is ridiculous, can you explain dummies like me what the best way to fix that problem?

  30. George Says:

    Look at the guy – HOW can it not shrink…

  31. geronl Says:

    In our country we call devaluation “Quantitative Easing” because politicians would not dare call it what it is.

  32. Kepler Says:

    Great post, Miguel. Pity there is no one like you to explain that as the Shadow Minister of Finance for PJ, UNT or whatever.

    I was plotting oil price hike of year X-1 against GDP growth of year X and could see a clear relationship until a couple of years ago but now Chavismo is such a cancer that the hikes are not enough.
    This year we got about 26% higher oil prices. In previous years, that would have contributed to a GDP growth of about 8% for the next year, but no way that will happen in 2011. Still, I do think they will have something like 0.5%, my bet.

    I suppose Hugo used Morales as guiney pig to try to see how an increase in petrol prices would come now.


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