Will the Venezuelan Government Devalue in 2012?

December 24, 2011

The guessing game has begun. Will the Venezuelan Government devalue the currency at the beginning of 2012? Clearly a devaluation is needed, Venezuela has become very expensive,  liquid reserves are quite low, imports are soaring.

If it were an economic decision, the Government would devalue. Because it is not, it is all up to Hugo the almighty and the opinion of his minister of Planning and Finance Jorge Giordani. It has been reported that there is a report sent up to Chavez suggesting the currency be devalued. The question is what will be the decision.

Up to a few weeks ago, I thought that it was unlikely that there would be a devaluation. I have changed my mind. The odds are that there will be one, I put it at 60-70% probability. Why? Because of the deterioration of the international reserves and the Government’s infinite belief that they can control inflation using intimidation. Similarly, last years devaluation was dceided by Giordani and was larger than anyone expected, so an adjustment seems likely.

How much? That’s much harder to guess. I would think about Bs. 5.5 for the official rate and about Bs. 6..75 for the SITME rate.

Only a guess. We shall see how wrong  I am…

(P.S. Chavez says GDP will close at US$ 300 billion, for that to happen the economy would have to grow 26.9% in 2011, as GDP closed at Bs. 1.016 trillion in 2010 according to the Central Bank. Divided by Bs. 4.3, that gives you US$ 236.27 billion. If there is a devaluation, then it’s smaller. I wonder why that mistake was made…)

21 Responses to “Will the Venezuelan Government Devalue in 2012?”

  1. Ma. Elisa Mellior Says:

    MERRY CHRISTMAS MIGUEL

  2. CarlosElio Says:

    Wait a minute. What is the role of the Sucre in setting exchange rates? I got somewhere the links where Chavez asserted that the Sucre would produce independence of the dollar. Or is Sucre another oops in he large collection of fuck ups of the government?

  3. Kepler Says:

    can this be a sign of what will happen?

    http://www.eluniversal.com/economia/111224/chavez-decreta-inamovilidad-laboral-hasta-el-31-de-diciembre-de-2012

    “pretend nothing bad can happen in 2012 by trying to stop time”

  4. island canuck Says:

    Merry Christmas Miguel & all the other contributors to this forum.

  5. liz Says:

    Feliz Navidad Diablillo.
    I cannot read your post right now or worry about it. I’m in the middle of some serious cooking here! But my guess is that yes, they will devaluate.


  6. Venezuelan government will not devaluate because of the “low” level of international reserves -international liquidity-. The devaluation will come as a consequence of a huge fiscal deficit or if you like following big negative cash flow taking into account the unaccountable budget administration which Chavez runs. The fiscal deficit is very close related –correlated- with the balance of payments deficit, the so called twin’s deficits, they come always together. Although I am not going into the economic technicalities and theory about this, it is not difficult to understand that in Venezuela what causes fiscal deficits is the same behind a balance payments deficit, even in an environment of fixed and politically restricted foreign exchange market. Even though following the pattern of the inflation pressures in the last year it is apparent that the fiscal deficit is not being financed by conventional funds (tax, royalties or debt) it has become very clear that the government in great deal is monetizing its deficit directly form Central Bank, something which is roughly seen from the data of sources of monetary base. In other words, oil and tax financing it is not enough to pay the expansion of government expenditure. However, markets have not been serious about it, it lost the thread of inflation path, Chavez has found his way to convince them that he is “buchon”, that is, that he disposes of huge and enough funds in both, bolivars and dollars to pay the budget bills; in some way he follows Baum history “The Marvelous Wizard of Oz” which described American populism towards the end of nineteen century (XIX). Hopefully, expected inflation and shortages will stress market reactions. The investment banks, the ones big customers of Bolivarian revolution, will someday reacts and they might spent some time to explain their investors what really happened in Venezuela.

    • megaescualidus Says:

      Alexander,

      It has been said in the past that Goverment revenue from taxes is higher than revenue from oil. Is this true today? Do you know how they compare to each other (i.e. they’re roughly equal)?


      • You are right, fiscal non-oil revenues (taxes, etc.) are larger than oil revenues. Oil revenues however play the role of “marginal fiscal revenues” that is, its economic impact is “stronger” than the non-oil revenues, I would say something these revenues are like the “mono” of the packet. We have to say too that in some way they are positively related, since at more oil revenues, it is normal to have increased non-oil fiscal revenues. This was true up to 2003, when the government decided to fix the exrate, and to manage it politically. On the 24 of January 2003, Chavez declared “the control exchange rate we are imposing is political”, it looks that many does not remember that speech, or forgot it. From then Chavez started the process of recapitalization of private sector enforcing a complicated exchange rate system which was politically managed, so government non-oil revenues started growing in some respect due to a more efficiency by SENIAT, but mostly as a consequence of the expansion of the international trade, imports, (tariffs, duties, IVA, etc.) , which operated under a dual exchange rate system, the CADIVI one with full restrictions, privileges and corruption, and the parallel market or dollar permute. There is another important aspect of public finances which needs some words. Oil revenues is received by government in bolivares, national currency, but that income flows in because the oil export comes in dollars; but it happens that the oil is government property (please refer to Art. 301-303 2000 Constitution and to the Organic Hydrocarbons Law) so oil revenues gained by PDVSA are the same as of government in this way: ORE for consumption and investment) is the residual of ORX (from exports) – ORG (paid to government as royalty, tax, dividend, etc.), in other word, oil income PDVSA utilizes for its own investment as it has to keep oil production at level and compensate the natural depletion of oil rigs, is what remains from what government takes, for example, looks at “credito chino” and you will see this picture in crude. Now, let’s go back to your question. I have in my notes this small chart which I hope will help to see the partial picture of oil and non-oil government revenues. Be aware that impact of both into the economy is a little bit more complicated than it’s appear at first glance, since government revenues have to be adjusted by the govern income behind the line, that it the fiscal deficit (indebtedness and thaw way it is financed). My number below does not consider other government revenues than ordinary.

        year OGR%GR NOGR%GR GDP % FD%GDP
        2008 13.9 55.1 3.2 5.1
        2009 7.6 35.4 5.4 7.2
        2010 7.9 40.2 -3.1 6.4
        2011 8.5* 46.1* 0-2 7.1
        2012 9.1* 49.1* 0* 8.5*

        * my estimations

  7. moctavio Says:

    I am talking about a devaluation at the beginning of the year, the reasons are mostly political, not technical. from the point pf view of the Government, the fiscal deficit is what they have created and will continue to create up to the election, they are not shameful about it. Their problem now is that they don’t have as much reserves as they did and they can’t give as much dollars via Cadivi without running in to problems. (Including the fact they brought the gold home, tying their own hands) Last year they devalued for the same reason, imports will stay constant, but they will get more Bolivars for their dollars, thus they will have more to spend. The problem is inflation, but they really think they can scare the private sector into not raising prices. I think they will fail, it is either very high inflation or widespread shortages. They will choose the first.


    • Let me be more precise and disentangle, what you try to say, I tried not to be too technical about it. However, is some respect, what you try to say is explained in my last post. It is worth reed it again. Each devaluation is political, not only in Venezuela, everywhere. Note I am distinguishing devaluation from depreciation, mosca!!. The sources very well known; and why?. Simple. On the one hand, the inflation as monetary phenomena, produced by Central Bank which prints and digitalizes lot of “cheap” money is a political -decision- (look at A Monetary History on USA, a handbook by M. Friedman) and comes from a government fiscal deficit (expenditure if you like) financed with that money produced by the Central Bank. So, devaluation is of course political, there is no “technical devaluation”; I was left puzzled for this expression, of “technical devaluation”. However, I guess, you were referring to “depreciation” which is product of market forces reacting to the variables which explains prices, etc. Government does not “depreciate” de currency, its occurs every minute or second accordingly with expectations, and these, on the quality of information economics agents possess, so depreciation is a continuous adjustment in the currency regarding market conditions. A devaluation takes place when government or Central Bank or both manage a fixed (whatever the reasons to fix it) exchange rate regime and decide –politically motivated- when price of foreign exchange is not possible to sustain, or in our case, Venezuela, since the devaluation will give government more money at the cost of inflation. But remember something very important, what we are talking is on “inflation tax”!!!. So we are again at the beginning of government fiscal deficit. I am not going into the technicalities about why inflation is a tax; it would make longer this comment, which is already long, but I guess we are more or less on the same track.

  8. Andres F Says:

    I think, if they were using any reasoning at all, last year they devalued because the difference between the real value of the bolivar and the official one was too big. Right now it is not, so maybe they won’t.


    • Chavez and his officilas do not carry out “rational economics” as the one you mention, (nomanal exrate deviation from its equilibrium) they do for fiscal reasons, easy; goverment (treasury) sells oil in dollars in international markets, bring dollars to Central Bank and exchange it for bolivares, y they devaluate the bolivar in relation to de dollar (or and foreign exchange) it will get more bolivares for that dollar, and morte fiscal revenues.So when Chavez devaluates what he is estimating is de amount of bolivares are nedded to finance the fiscal deficit, very easy.

      • megaescualidus Says:

        Wouldn’t an outsider think the Government could devaluate at any point (even in electoral 2012) since prices of basic food items (milk, coffee, etc.) are regulated, and “availalbe” at Mercal? Though reality is much more complex (items are not always available at Mercal, and commonly their quality is “questionable”, to say the least) hasn’t this propaganda been very effective with the lower classes? And, on the other hand, couldn’t this same person say what gets instantaneously affected (i.e., flat screen TV’s) is consumed by the middle class (“los oligarcas”)?

        I’m purposely posing my questions over simplified, but yet again, to an outsider, wouldn’t they carry more than a spec of truth? And then, if the Government’s strategy for electoral 2012 is to “fund” every possible Mission (God damn misiones), if cash is running low, wouldn’t a devaluation make sense to boost cash-on-hand?


        • I agree with you. If Chavez plans to do it for these “political reasons” is going to do it tomorrow or Friday, it is my prophecy, I thing is going to happens accordingly on last day the year, as he did in 2010. Giordani might come on Saturday and say the government is unifying the exchange rate (unifying is wrong but he could say that), so CADIVI dollar will jump to 5.3, but government will continue to import at 4.3 Bs/$, and private sector will has 5.3 Bs/$ but not in SITME, in CADIVI, that is a 20% devaluation. Something like that is happening right now. However, you have to consider that is a huge negative cash flow in government budget, it means that it need a straight devaluation for everyone including itself, That will depends if government suffers from money illusion, and I bet it does. Government is already serving -selling food- to nearly 50% of population, even more since it is importing to provide private sector market. The problem with government is that they use “socialist calculus” which does not include market distortions provided by government when intervene in economy as it is doing, so a liter of milk imported by private sector will cost less in comparison the same litter imported by government, which cost the same at retailers, however the reposition costs are higher as they have to , include “market” distortions, corruption, etc., etc.

  9. bobthebuilder Says:

    I predict the devaluation in November/December next year. Chavez always leaves it as long as possible and besides a devaluation now would disturb his campaign trail.

    And yes, that means I believe by hook or crook Chavez will win the election.


    • That is not a prediction, in economic sense, said, what do you are taking it is a selfcomplished prophecy, that it is!!, do not cvalle it guess, because the devaluation is gloing to take place, but we do not know when, however, if we go to the economics of prices formation, we could adjust out prophecy, and so on,,,,,,

    • megaescualidus Says:

      I disagree. If, as Alaxander Guerrero wrote above, fiscal deficit is on the order of 8.5% of GDP, and it is determined that extra cash is key to win the 2012 elections, I do think the Government would devaluate sooner than later.

      The current main thing for the Government (i.e. HC) is to win the 2012 presidential elections thru an aggregate of every possible means (legal, or ilegal, including raw populist measures as the god damn misiones). If more cash is needed (for the misiones, for example), one quick way to “create” it and see its propaganda effects on time for the 2012 elections is devaluating soon, and later on, after the elections, they will deal with the extra debt and deficits. This is my theory.


      • No, we agree indeed!!. My last frase says “…if we go to the economics of price formation, we could adjust out prophecy..”. It means that looking at price formation, we have to adjust it since -price formation- the source of inflation is fiscal deficit which is financed by “pure money base”, that is printed and digitalized money. We, including Chavez are in some kind of “vicious circle” he need money to finance his missions, but tha money is “by-producing” inflation at the same time. He bets that he will with the “Ley de Costos y Precios” and the regulation repress inflation. I think that he will be in the middle of what he intends to get. People supports more inflation than “escasez”, it is less painfully.


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