Venezuela grapples with 56% inflation - FT.com
Venezuela grapples with 56% inflation
By Andres Schipani in Bogotá
First Venezuela, then Argentina. Both countries devalued last week. But, while Buenos Aires eased some controls to try to tame the plunge of the peso, Caracas tightened controls in a bid to rein in galloping inflation.
“The comparison between Venezuela and Argentina is a valid one,” says Leonardo Vera, a Caracas-based economist. Yet, he adds: “Argentina still has some ammunition to fight the current situation, while Venezuela is running out of bullets.”
Economists point to several similarities between the two countries, although Venezuela’s policy making problems are in many ways more severe.
Both countries are suffering from capital flight that has depleted reserves. Although Venezuela earns about $100bn a year from oil, its foreign reserves have tumbled to $20bn from about $28bn a year ago. Argentina, meanwhile, which has been losing $1bn of reserves a month, has about $29bn of foreign reserves.
Both countries also have high inflation. Argentine inflation is more than 25 per cent a year, according to private estimates, while Venezuelan inflation is more than 56 per cent. Venezuela’s high rate is in part because of severe currency controls that have limited imports and exacerbated shortages from newsprint to car parts and ceremonial wine to celebrate Mass.
Both countries have also long needed to make a currency adjustment to staunch a capital flight and also help to close fiscal deficits with the higher local currency value of their exports that would follow a devaluation.
Yet both have been loath to devalue because of the political cost of the move and the inflationary spike that could follow.
Indeed, Rafael Ramírez, Venezuela’s energy minister and president of oil company PDVSA, who also acts as vice-president of the economy, announced last week what economists subsequently called a devaluation by stealth, although Mr Ramírez pointedly said: “This is not a devaluation.”
First, he created a dual exchange rate system. The existing official rate of 6.3 bolívars would remain for essential goods such as medicines and food; a second floating rate, presently 11.3 bolívars per dollar, would be used for certain investments, remittances, travel allowances and airline tickets.
Then, on Friday, President
Nicolás Maduro introduced a price control law that sets a 30 per cent cap on company profits. Anyone found guilty of hoarding, overcharging, or “destabilising the economy” faces
heavy prison sentences.
With every new control, the parallel, or black market, dollar will keep going up, and so will the price and scarcity of milk, oil, and toilet paper
The government also cut the amount Venezuelans could spend abroad on credit cards; by contrast, Argentina in effect raised limits. Caracas also trimmed the amount that could be spent on foreign items purchased over the internet; Argentina did the same last week, only days before letting the peso slide.
Economists were doubtful that the Venezuelan semi-adjustment would work and said that it was likely to lead to an even higher increase in the black market rate, already 12 times higher than the official rate. By contrast, in Argentina the black market rate of 11 pesos per dollar closed on Friday about 33 per cent higher than the official rate.
“The price control scheme . . . generates perverse incentives that only fuel speculation and shortages,” said Humberto García, an economist with the Central University of Venezuela.
“With every new control, the parallel, or black market, dollar will keep going up, and so will the price and scarcity of milk, oil, and toilet paper.”
Indeed, last week one international airline cancelled flights out of the country for a couple of days because of the uncertainty, while others reportedly stopped ticket sales, and Venezuela’s hard currency bonds plunged to their lowest level in two years.
“
Our economy continues to have huge imbalances, which unfortunately have not been addressed,” Ecoanalítica, a Caracas consultancy, said in a note to investors. “The time for postponing the inevitable and implementing half-measures has passed.”
