The Government claims that the “adjustment”, the euphemism it uses for the devaluation was due to the “speculative “attack by the oligarchy” on the Venezuelan currency. (Maduro dixit) This is actually a good line to sell to the “people”, who are unlikely to understand that in the presence of exchange controls like those present in Venezuela, it is a bit difficult to mount any sort of attack on a currency that is fixed in price and illegal to trade otherwise.
Many people ask me whether the value of the unmentionable dollar is right, will go up, will go down, etc. Given that it is illegal to mention what its value is, the discussion is not easy, as I do not want to temp the powers that be. But I can talk about monetary matters, without mentioning “that dollar” to try to give you an indication whether things are out of line or not.
The Venezuelan Central Bank long ago stopped managing the amount of money in circulation, the so called M2. In the end, if you increase M2 without control, there is inflation and you distort the economy if monetary liquidity increases faster than the availability of goods (How fast the money moves around or changes hands is also important). And in the end, that is why the Government has had to devalue repeatedly, because it has increased monetary liquidity at an average pace of 44% per year.
One way to measure this effect, is to compare M2, the total number of Bolivars in circulation, to international reserves. This is the so called implicit exchange rate, which tells you at what value you would have to convert all Bolivars into dollars, if you decided to dollarize the economy.
When Chavez got to power M2 was Bs. 10 billion and there were more than US$ 10 billion in international reserves. Today, M2 stands at Bs. 700 billion. That is, there is seventy times more Bolivars in circulation than there were in February 1999. But Venezuela does not produce 70 times more stuff, nor does it have 70 times more international reserves. That is why there has been so much inflation. Nor have international reserves increases much. In fact, they have barely doubled, despite the biggest oil windfall in the country’s history.
Let’s first look at M2, the raw number of Bolivars in circulation and how they have increased since 2005:
That is money printing at its best, an almost of factor of 15 increase in seven years . To be precise, monetary liquidity has increased by 1400%(By comparison, since the 2008 financial crisis M2in the US has gone up by 23%, which is a lot too). During the same period, Venezuelan international reserves have barely changed, the economy has grown by 32% and the price of the Venezuelan oil basket has increased by 236% (I also placed an arrow on when the Government stopped the swap market in 2010, M2 has increased by a factor of 3.4 since then)
Obviously, something has to give. You create so many Bolivars, you don’t produce more goods, you import more and you are in distortionville: High inflation, devaluation and shortages. Note the comparison between the increase of the price of oil (236%) and that of the economy (32%). This guys have done little in terms of sowing the oil.
Now let’s look at M2/Reserves in the same period. You have more Bolivars, reserves should increase at least in some proportion.
Except they did not. The implicit rate has gone from being less than Bs. 2 per US$ in reserves to being Bs. 25 per US$ in reserves. Note the arrow when the Government stopped the swap market in 2010. At the time M2/reserves was near Bs. 8, around the last value traded in the swap market.
Finally, another way to look at this, is to look at the implicit rate divided by the official rate of exchange as a way of comparison:
The dashed vertical lines are the four devaluations since January 2005. The arrow, is when the swap market was shut down. As you can see, in the 2010 and 2011 devaluations, the ratio of the Implicit/Official was pushing 4 when it was adjusted down. This time, when the Government devalued to Bs. 6.3 per US$, the ratio went down only to this value, an indication that the official rate is still overvalued compared to this indicator of the implicit rate. Thus, at Bs. 6.3 it is still cheap to buy anything imported at that rate.
With respect to the question that people always ask, the second graph should give you a guide. Think about what the rate was when it was legal and what the implicit value was then and think about where it is today. With SITME eliminated, more buyers will have to go to the unmentionable market, so there will be even more pressure now.
What this all shows is that speculation has nothing to do with the devaluations and the shortages. It is simple an idiotic and ignorant policy by Giordani et al., which does not appear will be changed in the short or medium term.
But he is still smiling…