Happy First Anniversary, Hyperinflation... When Will You Go Away?

It’s been a year of hyperinflation in Venezuela, with a yearly rate that ravages consumers’ purchasing power and devours companies left and right. Just where does it ends?

Photo: Independent retrieved

In a year, Venezuela broke Latin America’s hyperinflation record.

With an inter-year rate above 800,000%, it’s 35 times higher than the 24,454% of Bolivia in the 80s, and economists caution that the rate still hasn’t reached its peak. Forecasts predict it could be as high as 50,000,000% next year.

The only certainty consumers have when going to the market in Venezuela today, is the amount in their bank accounts. It’s hard to know how much a product or service will cost on a shopping day; even though we prepare to find higher prices than those of the previous week, the increment is always shocking.

Since November 2017, Venezuela’s economy is drowning in hyperinflation. The monthly inflation rates that used to surpass 50%, went up to 233% in September, and 148% in October that year, according to estimates of the National Assembly’s Finance and Economic Development Committee. The Central Bank hasn’t published these figures since December, 2015.

According to this estimate, in October, prices increased 3% daily and the inter-year inflation rate reached 833,997%. This process is deteriorating consumers’ purchasing power at dizzying speeds, compromising companies of different sizes and sectors.

“In terms of purchasing power, there’s a 95% drop when you see the whole year,” Ecoanalítica director Asdrúbal Oliveros told Caracas Chronicles.

In a year, Venezuela broke Latin America’s hyperinflation record.

Since the consumer is buying less, companies have been forced to reduce their production. According to the Industrial Situation Survey of the Federation of Industrialists of Venezuela, in the second trimester of 2018, the production of consulted companies dropped by 91%, compared to the same period last year.

The low demand is the main factor for this decline, they say, and nearly half of the sector’s companies used less than 20% of their installed capacity.

“Companies can no longer hold, they’re forced to adapt,” says economist Tamara Herrera, head of the firm Síntesis Financiera, exclusively for Caracas Chronicles. “Both individuals and companies start to think of how to compensate this loss of purchasing power, through increased prices and salaries. But the spiral is impossible to contain and our productive apparatus is in severe decline.”

Carlos Larrazábal, head of Fedecámaras, warns that hyperinflation has pushed some companies to cease operations, but he can’t say a number: “The companies that manage to survive are the ones that handle their cash flow efficiently and guarantee supplies in this hyperinflationary tragedy we’re living.”

Companies also face difficulties to estimate costs and prices in an economy without available official figures. “How to predict what’s the value of replenishing inventories?” says Larrazábal. “Because if you’re buying any item and you’re going to sell it, your minimal aspiration is a return of the capital invested (…), and an extra utility that might allow you to pay for your business’ rent.”

The Venezuelan economy has contracted nonstop since 2014 and, by the end of this year, it may be reduced by half, as per forecasts of the International Monetary Fund and private firms.

A cycle with an end…

This is the first time Venezuela has been in hyperinflation, but the process isn’t unknown in Latin America. Six countries in the region have experienced it (and overcome it) between the 1970s and 1990s: Chile, Bolivia, Nicaragua, Argentina, Brazil and Peru. The duration and rates varied in each case, with Nicaragua recording the longest episode (nearly five years, since mid-1986).

Companies also face difficulties to estimate costs and prices in an economy without available official figures.

This is the 12th month of Venezuela’s hyperinflationary process, which economists say will end, although nobody knows when. “The matter of duration is intrinsically linked to the level and political maturity of leaders and societies,” says Tamara Herrera. “Countries with democratic fragility and resistance to reforms face a more lasting process.”

“I’d like to say that we’ve seen the worst of the hyperinflationary cycle, but sadly we’re in an intermediate stage,” says Asdrúbal Oliveros. “In other words, inflation must accelerate a bit more for this breaking point to take place.”

The International Monetary Fund predicts that inflation will reach 10,000,000% in 2019, but Oliveros says that this is a very conservative forecast: “If the monthly inflation rate in Venezuela holds around 250%, which is a viable scenario, in the next 12 months, inflation might reach close to 53,000,0000%.”

Various analysts agree that, to stop hyperinflation, the country would require an integral economic plan that encompasses, among other things, monetary and tax stabilization. “The hyperinflationary spiral can only be stopped by economic authorities, because people’s basic trust is a requirement to apply an economic plan,” in Herrera’s words.