Venezuela (2013): No Surprise, No Relief
Daniel Volberg, New York.
This article appeared in the February 2013 issue of Current Economics with permission of the author.
Key Concepts: Devaluation| Exchange Rate|Bolivar Fuerte
Key Economies: Venezuela
While the precise timing of Venezuela’s move to devalue the bolivar fuerte from 4.290 to 6.292 was unknown, the move had long been anticipated by Venezuela watchers as well as by the parallel rate (see Exhibit 1, below). And while the aim of the devaluation announced on Friday, February 8 was to shore up a deteriorating fiscal balance and stimulate an economy that has been suffering from significant shortages of basic goods in recent months, we are skeptical on both fronts. Indeed, our initial reading from the timing of the move is that it demonstrates that the authorities feel comfortable that they have solidified their base and that they expect they will be able to avoid having to call an election any time soon even in the event that the president’s situation deteriorates further.
While we believe that the devaluation was long overdue, we doubt that it will be enough to arrest the macro deterioration in Venezuela. We would highlight three macro and political economy impacts of the devaluation.
Too Little, Too Late
The devaluation has so far failed to arrest the slide in the parallel exchange rate, which is now trading at nearly Bs$23/dollar (see Exhibit 1). While in our view that level may be artificially weak – driven partly by rationing of hard currency to certain sectors of the economy, it still signals that even post devaluation the official exchange rate remains misaligned. Furthermore, the decision to eliminate the SITME system for international bond trading reduces an important source of hard currency previously available at the 5.3/dollar exchange rate. Importers in need of hard currency are now left with the National Currency Commission (CADIVI) that has a track record of dragging out for many months the process of filling requests.
No Course Correction
We doubt that the devaluation is big enough to turn around Venezuela’s troubled public finances. While there is a paucity of up to date fiscal data in Venezuela, we estimate that the maximum potential improvement in the fiscal accounts due to the devaluation is roughly 2.7% of GDP and indeed we suspect that the likely impact is closer to 1% of GDP. While devaluation provides more bolivares fuertes for every dollar of oil revenue, Venezuela has seen an important increase in US dollar-denominated expenditure. Whichever estimate turns out to be right, it is far short of the needed adjustment. After all, in 2011, before last year’s election-related spending binge, Venezuela posted a fiscal deficit of -11.6% of GDP; a fiscal deficit greater than the budget shortfalls of all the other major economies in the region combined. And during 2012 – an election year – the fiscal results only deteriorated as spending soared. We are estimating that the fiscal shortfall in 2012 may have exceeded 12% of GDP despite elevated oil prices.
Nor does the devaluation materially alter the
trade-off between inflation and shortages of basic goods.
And the devaluation is unlikely to alleviate materially the dollar shortage in Venezuela. Official data reporting large current account surpluses appear inconsistent with independent estimates of Venezuela’s oil exports, dramatic decline in reserves and the large increase in external debt. Our estimate of an adjusted current account based on a combination of official data and independent estimates of Venezuela’s oil exports suggests that Venezuela’s balance of payments may be posting a current account deficit rather than the official surplus. That would help explain the dollar shortage prevalent in Venezuela. One way devaluation could potentially alleviate such a shortage is through reducing the demand for imported goods by making them more expensive. However, we suspect that this is unlikely to be a meaningful effect given that an increasingly interventionist state has curtailed domestic production of substitutes for many of the imported goods. Thus, until policymakers engineer a more wholesale policy regime change, we expect Venezuela will continue to rely on imports to satisfy domestic demand.
Nor do we expect the devaluation to relieve the dollar shortage by boosting exports. The combination of a still overvalued exchange rate with an inhospitable business climate means that we do not expect the devaluation to translate into a material increase in non-oil exports.
The only good news is that the devaluation’s impact on activity is likely to be modest – we expect no recession. Subdued but positive growth remains our base case scenario. After all, we expect solid domestic demand, financed in part by continued public sector largesse.
No Regime Change, No Elections
Furthermore, given the likely inflationary consequences of the devaluation, we suspect that it is evidence that authorities are not contemplating elections anytime soon. Indeed, the week before the devaluation, the authorities postponed the upcoming municipal elections from April to mid-July. Some Venezuela watchers continue to expect elections this year given that the constitution mandates elections 30 days after the president is found permanently absent. We suspect that the decision to devalue suggests that the political establishment is comfortable that the president’s health is sufficiently manageable that such an event remains highly unlikely.
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