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Venezuelan update

Wednesday 24 September, 2014

I attended this event @ the Council of the Americas awhile ago on Venezuela’s economy. The panel consisted of Alehjandro Arreaza, economist @ Barclays, Aaron Freedman, VP/Sr. Credit Office @ Moody’s, & Francisco Rodriguez, Director & Sr. Economist @ Bank of America/Merrill Lynch, & moderator Christopher Sabatini, Sr. Director @ Americas Society/Council of the Americas.

Generally, inflation is leading to devaluation of the currency, which leads to inconsistent fiscal policy. The exchange rate is unsustainable. They need to change course, but can’t devalue. The exchange rate subsidy doesn’t help their constituents-it just gives fiscal rents to importers. Inflation is up because they are just printing money instead of devaluing the currency. There are arbitrage opportunities with devaluation while the politicians get richer. The problem is as import prices go up, demand goes down, to there is no politically expedient solution.

The government also doesn’t recognize the magnitude of the level of debt. Declining oil prices make things difficult for Venezuela. They must address these imbalances.

It’s tough to get money out of Venezuela these days. There is a black market, but that’s dicey. Auto makers there have fallen off a cliff. Unfortunately companies can no longer repatriate profits & pay for imports. Strategic & essential industries can get preferential access to currency.

Another problem is with an overvalued currency, you can’t tell which are bad imports. The system is impossible to administer. The exchange rate is limited to maintain control, like in Cuba.

There is a difference between a low income economy like Cuba’s, & Venezuela. Macroeconomic distortion has simply led to financial disintermediation. They must address all imbalances-devaluation is not enough. Venezuela won’t necessarily default-that probability is only 10%, but they are suffering a death by 1000 cuts. If the price of oil destabilizes, watch out. Oil production has declined, but it’s unsure if they’ve reached the bottom. Consumption is up, but that’s distorted.

Q&A
Despite a devaluation a year ago, nothing happened. It’s not likely to get better. Capital flight is $20M/year. They need a more flexible exchange rate system.

Venezuela is rated 1 notch below Argentina in credit ratings. Both have balance of payments problems. Venezuela is more combustible.

How long this can go on is a political & economic question. Regulation is no good in a volatile economy. Argentina tried & failed. Another problem is you can’t increase spending after a devaluation.

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