Friday, December 05, 2008
Has Venezuela already devalued?
For years now the Venezuelan currency, the Bolivar (or now the "strong Bolivar") has been overvalued. Worse, as it has a fixed exchange rate with the U.S. dollar and Venezuela has higher inflation than the U.S. it has become more and more overvalued.
I have over and over again criticized this and asserted that the Venezuelan government should do something about it as in many ways it hurts the Venezuelan economy.
Well, maybe they have - sort of.
While Venezuela has a fixed legal exchange rate it also has an extensive black market on which the Bolivar has a much lower value. The black market exchange rate can be seen here. Looking at the black market exchange rate a funny thing seems to be happening.
Whereas last year the black market rate skyrocketed until the Venezuelan government sold bonds to try to bring it down (which it did) now it has remained flat. This in SPITE of the fact that a) Venezuela isn't selling bonds to bring it down anymore b) oil prices and with it dollar revenue have dropped which should put pressure on the black market rate and c) the dollar has actually been appreciating against other currencies which should also make it worth more Bolivares on the Venezuelan black market.
So why is the black market rate stuck at about 5 BsF to one U.S. dollar?
What has been pointed out in various Venezuelan press reports is that the Venezuelan state oil company, PDVSA, is selling its dollars on the black market. This assertion is made, among other places, here.
Although I of course cannot corroborate this I think there is a very high probability that it is what is happening, given the aforementioned points.
If this is happening what are the implications?
First, it does help the government with one very big problem. With an overvalued exchange rate the biggest loser, by far, in Venezuela is the government itself. The reason is that in Venezuela essentially all exporting is done by the government and when the dollars earned from those exports are changed to Bolivars at a very low rate it is obvious who loses - the Venezuelan government.
Yet if the Venezuelan government sells money on the black market instead of getting just 2.15BsF it would get 5 BsF - clearly that is a huge gain for the government and would make the resources that it has to fulfill its budget and spending needs much larger. For example, while recently I posted on how the government is currently facing a big deficit due to it formulating its budget on the assumption of $60 oil if it gets a lot more Bolivares for its dollars it could balance its budget even with much lower oil prices.
So in fact there are probably valid reasons for the Venezuelan government to do this and it would definitely get some major benefits.
In spite of that, however, it is hard to get too excited about this because there seem to be too many drawbacks to doing things this way as opposed to setting up a formal dual exchange rate.
First, looking at the CADIVI web-site it appears that they are going to exchange about $45 billion dollars at the official exchange rate. So whatever they are doing on the parallel market it is small compared to what they are doing officially.
Second, they are still selling very cheap official dollars for such frivolous purposes as overseas travel, credit card purchases, and importation of luxury consumer goods. If they really wanted to get the full advantage of having a dual exchange rate they would stop giving out official dollars for those purposes.
Third, this would be illegal. Venezuela passed a law not all that long ago making the exchanging of money on the black market illegal. The government probably shouldn't be breaking its own laws.
Fourth, anyone else who exports doesn't have the ability to sell onto the black market (unless the government is going to let them break the law too which I doubt) and so exports are still thwarted by an overvalued exchange rate. For the same reason, imports are still getting a huge and unfair advantage of domestic production via the overvalued exchange rate [btw - the recent Frontline show on Venezuela was quite bad but it did show two clothing production co-ops which are virtually out of business. They can't get any business other than selling to the government. Think that has anything to do with the exchange rate?? I have no doubt it does]
Fifth, by doing this under the table so to speak there is essentially no oversight of this and it raises the issue of corruption. After all, how do they decide WHO they are selling these dollars to and at what exchange rate?
And last but not least they are hiding what they are doing from the general public. It has always been very problematic for me that they don't lay out their economic plans in detail and explain what and why they are doing to the general public. To me, it is very important for the public to be educated on their plans. There is often great ignorance and confusion with regard to economics and the government should be seeking to elevate peoples understanding, not further confuse them by providing incomplete or even false information. Inevitably, even with the best of plans, there will be failures and setbacks. The general public will be much more understanding of those failures if they know what you are trying to do and why. So having these sorts of unannounced policies is very far from ideal.
In sum, it looks like Venezuela already does have a dual exchange rate - if only to a limited extent and unofficially. Still the way it is being done probably makes its potential benefits overwhelmed by negative consequences.
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I have over and over again criticized this and asserted that the Venezuelan government should do something about it as in many ways it hurts the Venezuelan economy.
Well, maybe they have - sort of.
While Venezuela has a fixed legal exchange rate it also has an extensive black market on which the Bolivar has a much lower value. The black market exchange rate can be seen here. Looking at the black market exchange rate a funny thing seems to be happening.
Whereas last year the black market rate skyrocketed until the Venezuelan government sold bonds to try to bring it down (which it did) now it has remained flat. This in SPITE of the fact that a) Venezuela isn't selling bonds to bring it down anymore b) oil prices and with it dollar revenue have dropped which should put pressure on the black market rate and c) the dollar has actually been appreciating against other currencies which should also make it worth more Bolivares on the Venezuelan black market.
So why is the black market rate stuck at about 5 BsF to one U.S. dollar?
What has been pointed out in various Venezuelan press reports is that the Venezuelan state oil company, PDVSA, is selling its dollars on the black market. This assertion is made, among other places, here.
Although I of course cannot corroborate this I think there is a very high probability that it is what is happening, given the aforementioned points.
If this is happening what are the implications?
First, it does help the government with one very big problem. With an overvalued exchange rate the biggest loser, by far, in Venezuela is the government itself. The reason is that in Venezuela essentially all exporting is done by the government and when the dollars earned from those exports are changed to Bolivars at a very low rate it is obvious who loses - the Venezuelan government.
Yet if the Venezuelan government sells money on the black market instead of getting just 2.15BsF it would get 5 BsF - clearly that is a huge gain for the government and would make the resources that it has to fulfill its budget and spending needs much larger. For example, while recently I posted on how the government is currently facing a big deficit due to it formulating its budget on the assumption of $60 oil if it gets a lot more Bolivares for its dollars it could balance its budget even with much lower oil prices.
So in fact there are probably valid reasons for the Venezuelan government to do this and it would definitely get some major benefits.
In spite of that, however, it is hard to get too excited about this because there seem to be too many drawbacks to doing things this way as opposed to setting up a formal dual exchange rate.
First, looking at the CADIVI web-site it appears that they are going to exchange about $45 billion dollars at the official exchange rate. So whatever they are doing on the parallel market it is small compared to what they are doing officially.
Second, they are still selling very cheap official dollars for such frivolous purposes as overseas travel, credit card purchases, and importation of luxury consumer goods. If they really wanted to get the full advantage of having a dual exchange rate they would stop giving out official dollars for those purposes.
Third, this would be illegal. Venezuela passed a law not all that long ago making the exchanging of money on the black market illegal. The government probably shouldn't be breaking its own laws.
Fourth, anyone else who exports doesn't have the ability to sell onto the black market (unless the government is going to let them break the law too which I doubt) and so exports are still thwarted by an overvalued exchange rate. For the same reason, imports are still getting a huge and unfair advantage of domestic production via the overvalued exchange rate [btw - the recent Frontline show on Venezuela was quite bad but it did show two clothing production co-ops which are virtually out of business. They can't get any business other than selling to the government. Think that has anything to do with the exchange rate?? I have no doubt it does]
Fifth, by doing this under the table so to speak there is essentially no oversight of this and it raises the issue of corruption. After all, how do they decide WHO they are selling these dollars to and at what exchange rate?
And last but not least they are hiding what they are doing from the general public. It has always been very problematic for me that they don't lay out their economic plans in detail and explain what and why they are doing to the general public. To me, it is very important for the public to be educated on their plans. There is often great ignorance and confusion with regard to economics and the government should be seeking to elevate peoples understanding, not further confuse them by providing incomplete or even false information. Inevitably, even with the best of plans, there will be failures and setbacks. The general public will be much more understanding of those failures if they know what you are trying to do and why. So having these sorts of unannounced policies is very far from ideal.
In sum, it looks like Venezuela already does have a dual exchange rate - if only to a limited extent and unofficially. Still the way it is being done probably makes its potential benefits overwhelmed by negative consequences.
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