Thursday, January 14, 2010

No good options... 

The evidence of the Chavez administrations bumbling, incompetence, disorganization, and incoherence has been so fast and furious over the past 48 hours that it is almost impossible to keep up with.

So, time to start looking for some alternatives you say?

Ok. We always need to keep our eyes open for new leaders who might have something truly good to over. It's just that in Venezuela, as hard as we might try, it seems impossible to find them.

As evidence of that lets look at something from one of Venezuela's major political parties - the UNT (Un Nuevo Tiempo). Recall, this is a fairly new party but it was the party that presented the opposition to Chavez in the 2006 presidential elections.

They had their first "Ideological Conference" not too long ago. And they lived up to my mantra of you learn the most about people when you can see them when they think no one is watching.

Here is a picture from the conference:


There is only one thing worthy of note in this picture - the banner to the right of the speakers table. It lists what apparently are the most important values of the UNT. And what are those values?

Well, there is only one that stands out - Private Property. The is in bold white and is easily the most readable part of the banner.

Below that and less visible we have "human rights" and "personal security". Somewhat important I guess, but not nearly as important as "private property".

Finally, there is something of so little importance on the top of the banner that it can hardly be made out - I think it says "free unions".

Anyways, we can note that on this banner there is nothing about economic development, poverty, jobs, education, or the environment. About the only thing on that banner that most people could relate to is personal security.

There is a lot more that could be said about how messed up that banner is and how indicative it is the the complete and utter bankruptcy of ideas on the part of the "opposition". But I think it is just too obvious to be worth me spelling it out in a post.

Let me just leave it at the following:

Chavez may indeed by horribly inept and leading the country on a downward slope at this point. He also presents no clear and consistent ideas on how to better the country. Therefore, I would agree the country needs a big change, both in leadership and direction.

But to pretend that the people who represent the "opposition" to him present a worthy alternative is simply ludicrous.

Which is why until something else comes along the only sane place for most Venezuelans to be is in the Ni-Ni camp. It sucks, but right now there just aren't any good options.


Tuesday, January 12, 2010

This is why it is so hard to take them seriously. 

First we have the Planning Minister come out and say that the purpose of the devaluation was to promote exports and help small and medium industry.

That is certainly a very welcomed change and good.

Then we have the Commerce Minister talking about how if prices go up too much as a result of the devaluation (which is actually the idea of the devaluation but apparently the commerce minister hasn't gotten the memo yet) the government will start importing school utensils, toys, and even cars and the very overvalued rate of 2.6BsF per dollar.

Finally, four days into this devaluation and no one yet knows at what price dollars from non-oil exports will be exchanged - 2.6 BsF per dollar or 4.3 BsF.

Combine all this with the fact that this represents a 180% degree turn from what they have been saying for the past few years and, well, it is hard to take them seriously.


Monday, January 11, 2010

The Venezuelan Devaluation: Its' causes and possible consequences. 

By now everyone knows the big news about Venezuela devaluing its currency significantly against the dollar.

Although it is too early to know all the details of what is happening, nor how they will be followed up on and administered in the future, we can do some analysis of what caused this and go through a few of the possible outcomes.

First the causes.

There were two things that made the devaluation inevitable.

1) The Bolivar was becoming more and more overvalued each year due to inflation in Venezuela being high yet the exchange rate to the dollar remaining the same. This created a bigger and bigger hole in the government's budget that could only be solved by devaluing.

Here is an illustration of that problem (all numbers are just approximations to make the point).

Lets say that in 2006 the expenses that the government needed to pay for with oil revenues were $86 billion Bolivares. If they had $40 billion dollars in oil revenue which they converted at the exchange rate of 2.15 Bolivares per dollar they got their 86 billion Bolivares and were set.

Lets fast forward two years to 2008.

In between 2006 and 2008 lets assume there was 25% inflation per year for a total inflation of 50% (no compounding to keep it simple). This means the governments expenses, salaries for employees, supplies, pensions, scholarships, etc, would also go up by 50% so that in 2008 the government would need $129 billion bolivares from oil. But if it earned the same dollar income from oil, $40 billion, they still only got 86 billion Bolivares, as the exchange rate was still stuck at 2.15 bolivares per dollar.

The creates a big deficit - they need 129 billion Bolivares from oil but they are only getting 86 billion.

This is a deficit of 43 billion Bolivares - all because the governments expenses went up by 50%, due to inflation, while their revenues stayed flat, due to the fixed exchange rate.

Clearly, this is something that gets worse as time goes by and is ultimately unsustainable.

The Venezuelan government was only able to deal with this problem for as long as it did because the oil revenues in dollars kept going up - at least through 2008. But as soon as they stopped rising, or even declined, this budget deficit caused by the fixed exchange rate became a huge problem.

That is the most likely immediate cause of Friday's devaluation.

2) The other problem was that having your currency overvalued makes imported items very cheap in Venezuela and makes Venezuelan exports very expensive.

This is a very well known phenomena and causes what is known as the Dutch Disease - as your non-oil exports are too expensive no will buy them and as imports are very inexpensive local industry can't compete and shuts down.

As the exchange rate becomes more overvalued, and the Bolivar was becoming about 20 to 25% more overvalued each year due to Venezuelan inflation and the fixed exchange rate, Venezuelan industry fared worse and worse. In fact we saw that borne out in the economic statistics when in 2008 while the Venezuelan economy as a whole was still growing but manufacturing already went into a recession and declined.

Had the the exchange rate continued as it was and kept getting more and more overvalued Venezuelan industry would have completely collapsed. Hence, the Dutch Disease effect of the overvalued currency also made maintaining the exchange rate as it was impossible.

Those are the main two reasons for the devaluation.

Interestingly, all government announcements have only mentioned the latter - ie that they devalued to help Venezuelan industry. In fact, when Venezuelan Finance Minister Ali Rodriguez was asked point blank by Vanessa Davies if the government had a deficit and that was why it had devalued he said no.

He was not being forthright. In fact the government has been running deficits and even with the rise in oil prices was still in a very tight spot. With an election coming up the government needed more money and with it already having a deficit caused by a fixed exchange rate there was an obvious option - devalue.

Government pronouncements to the contrary I believe the reason for the devaluation was the governments deficit and lack of funds at the same time it was facing an upcoming election for which it needed a lot of money.

Next we turn to the probable consequences of this.

First we will discuss what has already happened as a result of this, what could occur depending on what policies the government follows, and finally what I believe the final outcome will be.

To start off, what has already happened? That is simple. The Venezuelan government, with this one single announcement, just fixed its budget problem. It will now have billions and billions more bolivares coming in for each oil revenue dollar so as of this moment the budget deficit is definitely gone.

Not only that, but they surely have plenty of bolivares to spare. Therefore the Chavez government has plenty more money to spend on social programs, subsidies, public works, and any other projects it wants to undertake.

So right off the bat problem number one from up above, the budget deficit, is completely fixed.

However, while the government's shortage of funds was likely the more pressing issue that led to the devaluation it is problem number two, making your own industry completely uncompetitive, that is more important. After all, when you are a underdeveloped country the last thing you want to do is cause little industry you have to decline.

This brings us to the next part of the analysis, how this will likely effect the Venezuelan economy and what are some possible actions the Venezuelan government might take.

For starters, the devaluation over night puts Venezuelan industry in a much better position to compete and should slow the wasteful and harmful flood of cheap imports coming in Venezuela.

Consumer goods will cost a lot more (yes there will be additional inflation from the devaluation but it is actually desired and has positive consequences) but that is the whole idea. They cost more and so people buy less of them - exactly the desired outcome. Hence, the drop in imports of consumer goods is also pretty much assured.

Along with that Venezuelan industry should start to do better. Instead of buying imported clothes, for example, the Venezuelan textile industry should start to reactivate as Venezuelans buy more Venezuelan made clothes. Similarly, Venezuelan non-oil exports should also start to improve.

However, there are a few unknowns that affect all of this.

First, it is not clear what exchange rate applies to non-oil exports. Do exporters get paid the new 2.6 bolivares per dollar rate? If so, that is still so overvalued that it would make exporting completely unprofitable and there will be no growth in exports. Exporters will only have a chance if they get the 4.3 bolivares per dollar rate. This should be clarified shortly.

Second, will the exchange rate be allowed to become overvalued again? Remember, the exchange rate is still fixed - it is just fixed at a different rate. If Venezuela continues with high inflation and leaves the rate unchanged in the coming years than the Bolivar will become overvalued again very quickly and they will be right back to square one.

This is a particularly critical point because most investments take a couple of years to start producing so that potential investors would have to be confident that that Bolivar won't be way overvalued again in a couple years time. Right now, private investors will probably have no such confidence and hence won't make any new investments. Consequently, it will be up to the government to lead the way and make large investments in industry itself. At the same time, the government should make timely devaluations as needed to make sure the Bolivar does not become overvalued again.

Third, it is quite possible that they didn't devalue the Bolivar enough - ie, that is still somewhat overvalued. Determining the correct valuation of a currency isn't easy. My guess based on relative costs in Venezuela as compared to the United States and other Latin American countries is that the Bolivar is still overvalued and that they probably should have devalued to at least 5.5 Bolivares per dollar. However, that is just a guess on my part, just like the Venezuelan government made a guess when it picked 4.3 Bolivares as the correct value.

Given the proceeding, how will we know when this devaluation worked with respect to making Venezuelan industry more competitive?


In the past few years we have seen manufacturing under perform most other non-oil sectors of the economy. That is, when the rest of the economy was growing at say 9% we saw manufacturing growing at a much slower rate of 4% or 5%.

If the devaluation is working we should see that the manufacturing sector starts to not only grow faster than it has been (recently it has been shrinking rapidly) but it should start to outperform other sectors of the economy.

That is to say, if the non-oil sector of the economy grows 1% this year then manufacturing should grow 3,4 or 5%, outperforming the economy as a whole and in particular things such as commerce, transportation, and communications.

If that doesn't happen, or doesn't happen to the extent they want, that would be an indication they should devalue more and make the exchange rate even more favorable for Venezuelan industry.

One ancillary point to all this is that the government will need to ramp up investment in industry significantly. The private sector is very unlikely to invest much in the short term because of their general unease over the business climate as well as the very legitimate concern that the government just did this as a temporary fix for its budget problem and will let the exchange rate get overvalued again.

Hence, while the government now has a lot more money to spend on social programs, and it should have more social spending, it needs to make sure a VERY large portion of its new found resources are invested in the productive sectors of the economy - industry and agriculture. That too is key if the country is truly to reduce its dependence on oil revenues, as Chavez now says he wants to happen.

In sum, for this important measure to be truly successful the Venezuelan government needs to make sure that 1) the more favourable exchange rate applies to non-oil exports 2) that the exchange rate is not allowed to become overvalued again and 3) that the government itself greatly expands its investments in industry.

And finally, what in my estimation is the most likely course of action the Chavez administration will take?

Sadly, I cannot be an optimist. I believe that what likely forced the devaluation was a very big hole in the governments budget that could only be plugged via a devaluation.

Chavez's and other government officials pronouncements of wanting to diversify the economy and start exporting are not convincing to me. After all, why start saying those things now in January 2010 when they have been true all along?

Moreover, Chavez has up until now clearly focused on the political more than the economic. Hence, its hard not to see this as something of a one time action designed to simply help them in an important upcoming election.

Therefore, I believe they will allow the Bolivar to become overvalued again and they will spend most all their new resources on winning votes rather than investing in Venezuela's future.

In other words, I think it is not only possible, but likely, that there will be no lasting benefit from this devaluation.

But, as always, hope is the last thing to die...


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