Art by José León @lion_mix
Brought to you by the letters W, T and F… (Source: https://www.venezuelaecon.com/)

As the nation finds itself staring into the abyss of Constituyente-geddon, uncertainty over the future is as intense as ever. In this context, the bolivar is screaming of major chaos coming ahead. The price of a US dollar has spiked violently in the past days and closed last week above the Bs. 8,000 mark for the first time, according to the Home Depot clerk who has the country by the bucks. Prices are ripping higher by several hundred bolos every day, pushing to infinity and beyond, or the Bs. 10,000 mark. Whatever comes first.

What a beautiful time for a currency crisis!

Omens of doom

None of the messed up stuff happening to our poor bolivar should have taken us by surprise. The signs of the impending collapse were there all along. We’ve been keeping tabs on them for a while.

Back in September of 2016, we covered Omen # 1: Maduro & Co. decided to switch the monetary policy regime into full-blown money bazooka mode. Coupled with the ugly trajectory of the government’s fiscal balance at the time and no signs of change in the political front, our verdict was crystal clear: the bolivar’s gonna get pummeled.

None of the messed up stuff happening to our poor bolivar should have taken us by surprise. The signs of the impending collapse were there all along.

A couple of weeks later, as liquidity flooded the country’s money markets and the black market rate took off to never look back, we wrote about Omen # 2: the reason behind the monetary about-face was a hole in the public budget that the government sought to cover with a boost of cheap credit. In essence, the banking sector liquidity freed up by the Central Bank was forcefully directed towards mega-sized bonds issued by Bandes and Fondo Simón Bolívar (two colossal entities with the power to spend literally trillions of bolivars with zero accountability). Huge red flag; huge. We reiterated our somber view on the local currency and braced for the worst.

Some I-told-you-so’s bring you no joy. The price of the dollar in bolivars has jumped eightfold in the past year and nothing suggests that the trend is going to reverse soon. Looking at the historical chart, we can see that the dollar was pinned down at the 1,000 bolivar mark for several months in the midst of a dramatic decline in the rate of depreciation. All it took was a change of mind in the monetary policy regime to break the de-facto currency peg and set the foreign exchange demons loose.

Prices (in log-scale) and Year-over-year rates of change in the VEF/USD parallel market rate. Source: Dolartoday.com, own calculations.

Having said that, we are not alone in our view. Save for the occasional Twitter troll, there’s more or less a consensus on the ins-and-outs of the foreign exchange mess. UCV Professor Leonardo Vera recently published an amazing paper synthesizing this consensus view in the context of the latest years of chavista/madurista economic (mis)management. In summary, we tested positive for all the currency crisis warning signs a long while ago:

  1. Real appreciation of the currency, which destroyed the competitiveness of the non-oil local industry? CHECK
  2. Stubbornly keeping a fixed exchange rate with persistently-high inflation? CHECK
  3. Shock in the country’s  terms of trade (in our case, a crash in oil prices)? CHECK
  4. Massive buildup in external debt? CHECK
  5. Equally-massive drawdown in liquid FX reserves? CHECK
  6. Increase in money supply relative to bank reserves? Self-inflicted CHECK
  7. Boom in domestic credit? CHECK
  8. Self-fulfilling cycle of inflation-depreciation? Well, duh. That’s what we’re living now.

Omen # 3: DICOM’s epic failure

Perhaps the most troublesome sign of the crash is that an old trick in the government’s book didn’t work at all this time. After several missed deadlines, the new DICOM was unveiled in late May. Just like the defunct Simadi and Sicad 2 systems, the mechanism was sold as the nemesis of the black market; unlike these two duds, though, there wasn’t even the slightest hint of a bounce in the value of the bolivar after starting up.

Local economists are pointing at the obvious: there’s not enough supply of dollars in the Central Bank’s coffers – not even at a dramatically weaker level of around 2,200 USD/VEF – and there will never be enough supply in the system for as long as the government insists on ignoring an inconvenient fact: holding Bolivars for anything other than consumption of local goods and services makes absolutely zero economic sense.

Of course, a cynic could also argue that the DICOM is flawed by design. The system shares three key elements with every single foreign exchange experiment of the Maduro era: inane bureaucracy to get into the game, a below-market clearing price of dollars, and ultimate discretion by the government on the allocation of dollars among participants. It’s the perfect cocktail for massive rent extraction through influence peddling and currency arbitrage, with zero intention whatsoever of bringing order to the foreign exchange market or benefitting the local industry.

You know things are messed up when satirical news outlet El Chigüire Bipolar has the most accurate flowchart of the new Dicom system to date…

“Did you think they were really gonna give you greenbacks?” Source: elchiguirebipolar.com

 

Bottom line, as long as there are multiple exchange rates, the situation will not improve.

Simple as that. Not even the Sala Constitucional can overturn the Law of One Price.

17 COMMENTS

  1. Today Bocaranda closed his column with;

    Converso con el padre de un joven guardia nacional, muy preocupado por la violencia a la que los han obligado a actuar contra otros jóvenes de su misma edad en las marchas de estos setenta días. No justifica los robos de dinero, celulares y zapatos a la gente que golpean o detienen. Pero me explica que tienen más de dos meses sin descanso, sin bolsas Clap, sin sus quincenas a tiempo. “con solo un celular robado y vendido solucionan el mercado bachaqueado de por lo menos dos semanas, dependiendo del modelo” …

    Is this another symptom of the currency crisis? Are they having trouble paying their goons?

    Then there is the reshuffling of the military leadership except for Padrino Lopez in the aftermath of yesterdays shooting, someone will be tightening their grip on the military and it may not be Maduro.

    • Of course he justifies it, in the next sentence. As for paying goons, they pay in bolivars and those are infinite. If they had to pay them in dollars would be a hell of ablot more difficult.

    • Even with a change of government, how to chnage the mentality of these young goons? That what they do is unacceptable, for even a cell phone. The brainwashing has taken it’s toll. Until that is solved nothing imprtant changes, just more mierda tropical..

  2. This is all great news. Chaos is the VZ peoples friend. Protests are getting out of control. Oil prices are tanking. The Bolivar is heading to 10k, and blink, to 20k. Military Reshuffle, Ortega Díaz is now “out of control”. Maduro is surely peeing his pants. The end is near

    and before someone comments that this “Great News” is actually “Great Pain” for the VZ people, I agree.
    But living in a stable dictatorship (to me) means, no change.

    • “But living in a stable dictatorship (to me) means, no change.”

      I really like this, and your perspective makes total sense.

  3. No change so long as there’s some dollars to bilk through gaming the exchange rate. But those are vanishing and dwindling fast as the Bolo shoots the moon. I always heard it said of socialism that soon as the money is gone, military loyalty is also quickly gone. That forces change. Problem is, Maduro and camp CANNOT change. Don’t expect a quiet exit on this one…

  4. What’s more, just today in Cancún (Mexico), Sargent Delcy Rodrigues, referencing the OAS’ insistance on freeing political prosoners, etc., said that the only way to them comply was to “send in the Marines.”

    As we’ve seen, even the best intentioned remarks about the political situation in Venezuela is jeered as as “meddling,” and the dictatorship with not and cannot be told anything from anybody = impervious to change or negotiation. This kind of blockheadedness is bad theater to watch – Delcy and crew are Homerically overmatched by modern political and economic realities – and it’s torturous to watch it bleed on like this. I honestly think Maduro will hang on till he’s spent and his circle or crooks has looted every last thing of value (including the future). Wonder what kind of gold reserves are left? Head some disturbing answers to that one.

    Friends who know I have immediate family in CCS often ask how things are going in Ven. and no words seem to do.

  5. Is the jump in the Bs. black market rate an indicator of accelerating inflation? In other words, are we getting close to start throwing the H-word around?

  6. Venezuela is now the country of the all-over-again. It is unbelievable but nobody can stop the destruction. It is indeed a very “extraña república”.

  7. The people and remaining businesses should withhold paying any taxes also. The government can’t come after everybody. The costs associated with collecting the taxes may be higher than the value of the collections.
    Why fund the people that are shooting at you?
    This will put additional pressure on the regime. At some point the straw that breaks the Camel’s back is going to trigger a rapid and chaotic collapse.

  8. I thought at first once it hits 8,000 ball game over. Heck, 10,000 is the new bar now. I agree with Juan, these guys are not going easy. But once CLAP is CLAP and does not come anymore (except to PSUV militants) and the dollar at 10,000 people will start coming down from the hills looking for heads to roll.

    I heard one VTV dupe saying “we can solve this all in 2 hours once bario people from the hills come down”. The thing is that the Chavistas do not have El Pueblo this time. With the government so focused on opposition protests, this could be the elephant in the room. So ironically we might see this “all solved in 2 hours”, but the amount of economic self-destruction that has to take first will be unbearable in an already unbearable situation.

  9. The point on the state of things in Venezuela is the so-called “Efecto Oliveira-Tanzi”. Which is basically, the effect of inflation over government income (taxes). This is the reason behind the lack of payments to FAB soldiers. inflations is faster (grows in minutes) than collecting money for public coffins (monthly frequency). There is logic in adding robbery to the job of being soldiers: the goods (t-shirts, pants, watches, food, mobile phones, etc) are more valuable than the money put in their bank accounts. It’s illegal, weird and senseless, but that’s the way it is. To change this mindset the job will last for over 3 generations (54 years at best). If it changes

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