a plague o both your houses

Ssssh! Venezuela is being responsible..for heaven’s sake don’t tell anyone

The graph above shows how Venezuela’s currency, the Bolivar (previously known as the VEB, now called the Bolivar Fuerte, aka ‘VEF’ since Jan 1st when three zeroes were lopped off the rate) has performed versus the US dollar in the semi-official parallel market since May 2006. (click on the chart to get a better look). From a rate that fiddled around 2.65 to the dollar for years, the parallel rate started moving up in 2006 and really picked up steam in 2007 to peak at 6.80 to the dollar on Nov 1st ’07, which was over three times the official rate. (remember, the VEF is pegged at 2.15 to the dollar for most transactions, with estimates of how how of the total traffic is carried by the official CADIVI body ranging from 80% to 90%).

But since that peak, the VEF has reversed course and has moved back pretty sharply, with today’s parallel rate at 4.0 the bid and 4.2 the ask. That’s one helluva downward move, but strangely enough the good news hasn’t been picked up much by the English speaking press.

Amazingly, press coverage was much more intense when the VEF parallel was losing all that ground against the dollar last year. Headlines on Venezuela with words like falls, plummets and loser were common. Comparisons with the Zimbabwean dollar made it to (supposedly) serious newswire services, and still do the rounds of the less informed blogchatterers today. The Miami Herald and the stupendously biased media inside Venezuela had its own little field day.

So what happened? What stopped the prophets-of-doom merchants in their tracks and forced them to change tack and make up stories about Chávez and cocaine trafficking or Chávez and terrorism or Chávez and babyeating (joke…I think) instead?

Well, basically the Venezuelan money guys (the economy ministry, the central bank etc) have started implementing sensible monetary and fiscal policies. This chart shows the big change; it shows M2 money supply in U$ dollars.

We can see that money supply more than doubled in the 18 month period to November 2007 (which makes Bernanke’s helicopter look like a paper plane, it’s that bad). But it just might be that those in power have recognized the error, because since the end of last year and through to now, the gov’t has stopped printing money like the clappers and has actually shrunk the amount of VEFs in circulation. The fact that this chart and the parallel rate chart look similar is not a coincidence, by the way. There is a direct relationship between the amount of money a country prints and what that money is worth…just ask Alan Greenspan, Ben Bernanke, or Nick Sarkozy (poor guy can’t sell his goods’n’services to ‘les yankees’ any more).

This last chart shows how badly the Venezuelan reserves have sunk since that crazed Chávez got his sweaty palms on power….I mean, just look at how that line tails off…so irresponsible…spending a whole country’s reserves like that.

Oops!! Forgot!! I put the dates on backwards, so 2008 is actually on the LEFT hand side (1997 on the RIGHT hand side) and reserves have been climbing all this time….how silly of me (*cackling laughter in background*).

Yes, as we can see Venezuelan international currency reserves have climbed significantly through the period, from around the U$15Bn mark of 10 years ago to the U$30bn+ figures of today that also includes the U$8Bn or so Chávez siphoned off in early 2007 to pay for social program funding (see that quick dip there?…that was the withdrawal).

When it comes to forex rates for developing nations, the amount of reserves tucked away in the central bank is pretty important, as it gives a ballpark idea to how much each unit of local currency is worth. In Venezuela’s case, there’s currently 151.9 billion VEFs in circulation in the country. There’s U$31.7Bn in the Banco Central reserves. This means each dollar held by the state backs up 4.78VEFs*.

That the parallel rate came down from the highs of November isn’t so surprising, given the new dose of pragmatism recently seen (no more printing press mania), and the VEF moved back into the 4s range. It has also been helped along by another new policy, that of the bank selling reserve dollars directly to banks to cut down parallel market demand (you can see that in the last part of the currency reserves chart; so far this year reserves are down U$2.8Bn as the central bank buys up the VEFs and hands out the dollars). This has pushed the VEF past the reserve equilibrium and down to the 4.0 exchange of today. The forex might fluctuate round this point for a while, but the longer-term tendencies now are likely to be dictated by changes in reserves holdings and VEF M2 rates more than doom’n’gloom reporting. Venezuela has got its currency under control again, and a further outbreak of responsibility will see the country get on an economically firmer footing. The ball’s in your court now, guys………make those petrodollars work for you.

There’s plenty more to say about today’s Venezuela and its economy, and not all of it is good. But the thing that really pisses me off is how you only get to hear about the bad stuff in English, and anything that the country does well is never reported by western media. Tell it like it is, that’s what I say.

*If you like, imagine that all of a sudden the whole population of Venezuela decided to knock on the central bank’s door and demand they swapped VEFs for dollars…the central bank would have enough to give 1 US dollar for every 4.78 VEF that were handed to them).

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