Henkel García answered some questions regarding this new stage of the Venezuelan monetary crisis.
By Caracas Chronicles – Econ Nerds
Aug 26, 2022
So, why are Venezuelans freaking out about the dollar exchange rate again? Here’s a summary from our daily briefing:
The bolívar depreciated 11.69% against the dollar in 24 hours, as the official exchange rate was set to B. 7.83 per dollar by the Venezuelan Central Bank (BCV). In the same period, the street dollar (or black market dollar) jumped 22% up to Bs. 9.33. In fact, in four weeks the black market dollar increased by over 44%. On Thursday, the BCV said that it injected 200 million dollars into the banking system to stop the dollar from increasing. However, economist Asdrúbal Oliveros said that “due to the magnitude of the devaluation, stabilizing the exchange market will take time and resources.” Economist José Manuel Puente said the bolivar is “extremely overvalued” and warned that the “current exchange rate might hit 20 bolivars.” This means that the exchange rate is a lot lower than its real value. Puente said the BCV wasn’t “an independent entity, it hasn’t been autonomous or a technical authority, and that’s one of the problems.” No amount of last-minute spending or closed stores to keep the price of goods will reduce the impact of another devaluation that destroys purchasing power. The BCV never stopped issuing bolivars that weren’t backed to finance the regime.
You get the picture.
To understand the abrupt change in recent weeks, we asked economist Henkel García what the government and the Central Bank are doing to contain the situation and a possible forecast for the future.
What was the government doing to keep the dollar stable? What changed in the last few days?
“Every week the government had been making major interventions that varied between $100 million and $200 million of dollar allocations to the banks for sale to their clients. The quotas were fairly regular in the amounts allocated, and the frequency helped maintain the stability of the dollar price.
But in recent weeks we have seen a coincidence of three events that stimulated the devaluation of the bolivar.
First, that quota was broken in the last few days. It began to decrease and then the dynamics changed: it went from being a fixed and regular allocation, to being an auction in which each bank had less access to dollars. So we saw a significant decline in the availability of foreign currency.
Second, there was a 36% increase in the monetary base, which is due to a significant injection of public spending. While there are different spending items, the bonuses paid at this time of year will be reflected there, as well as the salary increases demanded by public workers and educators. This, along with other expense items, had a significant increase compared to the previous week. Those two events coincided creating tremendous pressure.
Third, we must add the expectations of the people. In Venezuela, we have already experienced hyperinflation and we know that we have to take refuge in a hard currency so as not to lose purchasing power.”
How can the government contain it now?
“The government had issued some bonds denominated in bolivars but indexed to the dollar, a kind of hedge bond, an instrument targeting the treasury of large companies so that they would not have to buy dollars and they could have an instrument (resembling the dollar) to later sell for bolivars at the official exchange rate of the day. This is part of a continuous game played by the treasuries, which protect themselves in dollars and then buy bolivars according to their needs. This strategy did not have an important reception, and there the capacity to bring liquidity and monetary base was lost, which is precisely the purpose with which these instruments are used: they seek to extract base money from the system.
…
Read More: Caracas Chronicles – Explainer: Dollar Rising
…