Saturday, February 10, 2007

Another Saturday morning factoid: the price paid for Chavez big mouth

In the graph below I have plotted the evolution of the Venezuelan currency on the parallel market since Chavez won reelection on December 3, 2006 (click to enlarge).

Now, for those who might still be unaware, there is a fixed exchange rate in Venezuela. The current one is 2150 VBS for 1 USD. Of course this is totally unrealistic as the government aims at controlling the economy and as it is always the case in such scheme, when you hit the streets you can exchange all the bolivares you want but at a price. This “parallel” market (partially legal through bond swapping) is the true reflection of the health of Venezuelan economy.

In the graph you can see that after an initial relative stability, Chavez opened his big mouth late December and sent the parallel rate to up twice the official rate. Quite a record if you ask me, almost forcing an instant devaluation of the currency as the pressure is simply unbearable. But eventually some common sense must have emerged somewhere. Chavez advisors must have prevailed and decided to show that the government would pay its nationalizations at a decent price. Thus this week signature of the AES “purchase terms” yielded a fast improvement of the parallel rate.

However the question is who will pay the excesses of Chavez big mouth? One month of bloated exchange rate will have its effect on the overall inflation for the year, a year that started catastrophically by the way, with a 2% official inflation where on the food items only it hovered around 4%. Note that January tends to be a low inflation month in Venezuela and this year, with Mercal and all, it had a jump from December! We can expect this January bubble to bring us at least another couple of 2% inflationary months. After all, Venezuela imports more than half of its food and supplies and too many of these come through the “parallel” market.

And for those who still think that there is a rational for all of this nonsense I suggest that you visit Miguel and Quico to enlighten yourself as to why in economy 2+2 = 4, no matter how hard one tries to change the rules. You can educate yourself there much better than here, as the point of this post is to establish how much a silly utterance, "algo del foro de las ...." from Chavez can cost the country.

-The end-

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