Tag Archives: Venezuela

Venezuela – can’t print money quickly enough

The extent of the inflation crisis in Venezuela has led to people to make origami objects out of 2, 5 and 100 bolivares bank notes as they are worth more sold as souvenir items than their face value. The free market exchange rate is 3.5 million bolivares = 1US$.

Venezuela’s problems started when oil prices collapsed – 95% of Venezuela’s export revenue is from oil. With falling oil revenue and therefore foreign currency the government has less money to buy imports. The inflation figure is due to hit 1,000,000% by the end of the year and this has been mainly caused by the printing of money to finance the deficit which amounts to 30% of GDP. But there is another problem in that they don’t have enough bank notes to go around. Like a lot of things in Venezuela bank notes are imported and the central bank printer produces less than 5% of cash in circulation. Since 2016 there have been major problems with note denominations.

December 2016 – President Maduro decrees that 100 Bolivar note will be withdrawn from circulation but the larger denominations never turned up. 500-bolivar notes turn up on emergency flights but too few came and inflation had eroded the value to 20 cents.

November 2017 – 100,000 bolivar notes arrive but not enough too meet demand. Traders sell bundles of assorted banknotes for up to three times their face value – needed for small budget items such as bus fares, coffee etc.

Much of the economy runs on debit cards and bank transfers but the checkout computers cannot cope with such large denominations. Maduro’s solution here was to create a ‘sovereign bolivar’ worth a thousand times more and it will fit more easily on screens. However this will do nothing for the stemming inflation. But again they place the order with the printers too late and they will be nearly worthless when they arrive. However the overseas printers are doing well out of it.

Below is a very informative video from CNN about the on-going crisis.

Venezuela’s hyperinflation and collapsing currency

I have blogged in the past about the ongoing problems in Venezuela of hyperinflation, food shortages and social unrest. One of the consequences of hyperinflation is the loss of confidence in its economy which leads to an outflow of money and a lack of foreign investment. The result of these events is the fall in the Venezuelan currency – the bolívar. One way of monitoring its decline is the use of The Economist’s Big Mac index – it is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad – the video explains PPP and shows how undervalued / overvalued an exchange rate is relative to a Big Mac exchange rate.

According to the Big Mac index the price of Big Mac in
Caracas = 145,000 bolívars
USA = US$5.28

Purchasing Power Parity
Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries. So if we take the above example the PPP exchange rate is:

145,000 bolívars ÷ US$5.28 = 27,462 bolívars

However the Big Mac index seems to underestimate the slide in the Venezuelan currency as the black market is estimated to be around 260,000 bolívars. A US based website called DolarToday provides black market exchange rates that are updated daily for Venezuelans who cannot exchange currencies with the Venezuelan government for the dwindling supply of the US dollar. According to DolarToday, the estimated exchange rate is 230,228.36 VEF/USD in Venezuela’s free market as of 21 February 2018, which makes it the least valued circulating currency in the world – see graph from Wikipedia. Notice the reduced time for the bolívar to lose 90% of its value.

The company bases its computed exchange rates of the Venezuelan bolívar to the Euro or the United States dollar from the fees on trades in Cúcuta, Colombia, a city near the border of Venezuela. Currently, with no other reliable source other than the black market exchange rates, these rates are used by Reuters, CNBC, and several media news agencies and networks.

Therefore traders in Caracas check the DolarToday rate before presenting the bill to their customers. But local goods have no reference price and don’t keep up with the collapsing value of money – a monthly mobile phone tariff is 38,000 bolivars = 15 cents and a haircut is 25 cents. The minimum wage has increased regularly and it now stands at 800,000 bolívar = less than US$4 at the black market exchange rate.

If wages were perfectly indexed, it would serve only to speed up inflation. But their slow and uneven adjustment means the pain of hyperinflation is shared haphazardly. As Juan Perón of Argentina supposedly said, if prices take the lift, wages cannot take the stairs.

Sources:
The Economist – Hyperinflation in Venezuela – January 27th 2018
Wikipedia – Venezuelan bolívar

Gourmet chocolate the economic lifeline to Venezuela

At the end of the 18th century Venezuela was the world’s leading cocoa producer. But the rise of the oil industry in the 20th century and the emergence of Hugo Chavez saw the decline of the cocoa industry. Chavez boosted state involvement in the economy and promised to create a society of equals. However since the crash in oil prices – up to 90% of government revenue came from oil – society has been divided. Doctors and engineers rarely make as much as US$50 a month whilst other with access to small amounts of hard currency can afford gourmet products.

Recently in Caracas there have been some 20 new businesses launched producing bars of Gourmet chocolate which retails for around US0.80 each in high end grocery stores — well out of the reach of most Venezuelans who earn less than that in a week but catering for the well-off in a two-tier system. Bars can fetch US$10 in a place like New York and Paris but bureaucracy makes this very difficult.

Although aware of these barriers one producer, Nancy Silva, is now focused on getting her chocolate to France, where she once sold a single kilo of her chocolate for the equivalent of 80 euros (US$96), which is today the equivalent of five years of minimum wage salary in Venezuela.

Venezuela cocoa beans

Venezuela produces 16,000 tonnes per year which is less than 1% of the global output and less than 10% of regional output when you take into consideration big producers like Brazil and Ecuador. However the use of Venezuela cocoa is seen as a marketing tool for shops as bars are produced with 100% local cocoa which is deemed high quality.

Many gourmet bars made in the United States now prominently advertise the use of Venezuelan cocoa but generally mix in other less-desirable cocoas. Bars made in Venezuela by contrast are made with 100 percent local cocoa.

This gives the new Venezuelan chocolatiers a leg up as they tap into the global ‘bean-to-bar’ movement, in which chocolate makers oversee the entire process of turning cocoa fruit into sellable treats.

On the second floor of an old mansion in Caracas, economist and chef Giovanni Conversi has been making specialty chocolate for two years under the name Mantuano. Sprinkled with sea salt or aromatic fruits from the Amazon, the chocolate bars are a hit in London, Miami and Panama City in specialty chocolate stores or shops that specialize in Latin American food.

Source: Reuters – Gourmet chocolate becomes economic lifeline in Venezuela crisis – 12th January

Venezuela – 700% inflation

A very good clip from CNBC – Venezuela’s economy has been in free fall since the 2014 collapse of oil prices, which left the socialist country unable to maintain its subsidies and price controls. Oil revenue accounts for 95% of its total exports but with a 50% drop in the price of oil there was limited money in the economy to buy those necessary imports. However as pointed out in the video the problems started in 2003 when there was an oil workers strike which meant that the country stopped producing oil. Furthermore with a collapsing oil price and exchange rate against the US dollar the then president Hugo Chavez decided to fix the exchange rate at 1 Venezuelan bolívar = US$1.60. Another example of the resource course.

Venezuela – Cost Push to Demand Pull Inflation

Zim Venez InflationBelow is an informative clip from Al Jazeera which looks at the worst performing economy in the world – Venezuela. With oil accounting for 95 percent of Venezuela’s export earnings, plummeting world prices have severely hit the government’s revenue stream. GDP is forecast to contract 5.6% and inflation to hit 700% in 2016. The Economist has likened it to Zimbabwe and produced a graph showing the similar acceleration in inflation.

With 80% of all food items being imported and most of its agricultural land abandoned there are now major food shortages in the country – decrease in supply – cost-push inflation. As a consequence of this consumers are trying to stockpile goods as the prices increase – this shifts the demand curve to the right – demand-pull inflation.

Authorities are trying to clamp down on shoppers stockpiling goods by taking fingerprints before buying their ration of price-controlled goods. However the law of supply and demand is never far away as speculators use the black market to sell goods at a higher price as people becoming desperate for the essentials. Furthermore, producers can get around price controls by adding ingredients to staple food which therefore makes it unregulated – Venezuelan firms have added garlic to rice, called it “garlic rice”

Venezuela suffering from low oil prices

Below is a very good video from the FT about how the fall in oil prices poses big problems for the Venezuela government already trying to cope with a shortage of basic goods. Some key points from the video:

* Venezuela has the largest oil reserves in the world
* 95% of Venezuela’s export revenue is from oil
* For every $1 fall in the oil price Venezuela loses almost $700m. A $20 drop in oil prices would result in a $14bn loss in gross revenues for the country.
* With falling oil revenue and therefore foreign currency the government has less money to buy imports. The reduction in imports includes: toilet paper, maize flour, sugar, powdered milk, medical supplies.
* People have been queuing for 2 to 3 hours for three weeks trying to get basic provisions. The further the oil price drops the longer the queues become.
* The Government have introduced mandatory finger printing in some supermarkets so people don’t try and hoard basic foodstuffs.
* The government, in trying to rally support, are slashing the prices of Chinese imported goods like fridges.
* At the heart of the problem are Venezuela’s price and currency controls
* Printing local currency (Bolivar) will keep widening the government deficit and fuel further inflation – see graph below.
* Oil exports aren’t enough to subsidise everything else


Venezuela