THE DOLLAR IN THE EYE OF THE CHURCH HURRICANE - VENEZUELA

Throughout 2018, but especially during September, we Venezuelans witnessed a historically aberrant economic phenomenon. Since November 2017, the same month in which hyperinflation began, the prices of goods and services in the local basket, grouped under the NCPI, have risen 10.1 times faster than the price of the dollar in the market. not official. For this reason, life has become more expensive in dollars.

As a result of the event, evident for any affected Venezuelan, a debate has arisen around its possible causes and its (im) possible indefinite continuation for the future. However, there are those who remain skeptical of its occurrence because they find small exceptions, islands that, for one reason or another, have experienced hyperinflation to a lesser extent and have consequently become less expensive in dollars.

The discussion about its possible causes is complex. To understand how we move from the initial point to the present point is necessary to analyze what happened in the first, what happened to break the apparent dynamic stability, and what happens in the present. We have modeled the variations in the terms of trade since 1991 and it is clear that, except for 3 atypical periods, Venezuela had a relatively stable equilibrium real exchange rate.

The real exchange rate is, basically, the relationship between the cost of a basket of goods in a country and the cost of that basket in the market of the countries with whom it trades. Since local prices are denominated in bolivars and foreign ones are not, it is necessary to homogenize them through the nominal exchange rate used in the economy. An undervalued nominal exchange rate makes local goods relatively cheap, and an overvalued nominal exchange rate makes local goods relatively expensive. Consequently, the variation in the terms of trade and the real exchange rate is the difference between the variation of local prices, international prices, and the nominal exchange rate.

Under the nominal exchange rate of the unofficial market, as of the end of 2012, Venezuela experienced a substantial depreciation of its real exchange rate. Only one year later, Venezuela became 2.6 times cheaper than it was. The nominal exchange rate depreciated at a faster rate than inflation, and in 2015 Venezuela was already 11.8 times cheaper on average than it had been between 1992 and 2011. From 2015 to 2017 there was a slight adjustment, and in its annual peak in November 2017 Venezuela was 7.1 times cheaper than in the period of relative stability last. That was the situation prior to hyperinflation: Venezuela was cheap and, for those of us who are not part of the government circle with access to subsidized dollars, importing was not a round business.

The relative cheapening was driven by saving pressures. Venezuelans, both companies and households, demanded currencies for coverage and for years pushed the price of the dollar upward. Economic theory would normally preach that, faced with a relative cheapening of the Venezuelan basket, the rest of the world would demand our goods and the demand for bolivars would increase as our exports increased. However, the Venezuelan productive apparatus did not have sufficient capacities to react by increasing its production and supplying an increase in exports sufficient to offset the real exchange rate. Venezuela lost a golden opportunity that lasted 6 years.

Really overvalued
Since then, nothing has been the same again. We estimate a contraction of 23.5% in economic activity and a fall in real wages of 95.0% by 2018, even taking into account the salary increases decreed by President Maduro. In this scenario of widespread impoverishment of consumers and companies, the demand for dollars for coverage has been reduced. Consumers have adjusted their consumption basket progressively, so that now a greater proportion is allocated to food consumption and a lower proportion to savings.
In a way, the savings, or delayed consumption, has become a luxury that Venezuelans are not able to access. In hyperinflation, there is only money for the short term. And faced with a demand for dollars for reduced savings coverage, the price of the dollar has become cheaper. Just as the drop in clothing consumption has taken a back seat, and its prices have risen at a lower than average rate, dropping 98.7% against food in the last 12 months, the drop in savings has the 98.3% dollar was cheapened in that same period.

On the other hand, the counterpart of the cheapening of savings is the loss of purchasing power of those who have their savings in dollars. For them, life has become more expensive in dollars. On the one hand, as some quickly point out, there are products that have become more expensive in dollars than others. In some cases, such as education and telecommunications services, this is related to the distortions imposed by the government directly. In others, it is related to the recomposition of the average Venezuelan consumer's basket, as it is poorer than in the past.

In this sense, while food has risen 8,213.8% in dollars so far in 2018, alcoholic beverages have increased 904.6%, and clothing and footwear is only 75.7% more expensive in dollars. As evidenced by the graph, the most critical moments of the phenomenon have been the last weeks. Opportunity (for him) that matters After months of adjustment, it seemed that the increase in life in dollars should have culminated earlier. The arguments to think it were not scarce. In the first place, salary increases and bonuses of the country's national identity card could have been directed towards saving in foreign currency, but those who have been converted seem to have directed them towards consumption, pushing inflation and widening the gap even further in the face of depreciation of the type of change. Second, the real exchange rate crossed the barrier of our assumption of the historical equilibrium real exchange rate. This means that, at the moment, Venezuela is more expensive than it was historically in equilibrium. But not only that, at the end of September the country reached a historical peak not seen for 188 months, in January 2002. It was expected that, either due to savings or import pressures, the unofficial market exchange rate would change. depreciate faster. Although this last week has seen signs of the beginning of a more accelerated depreciation, this is still insufficient to compensate the way traveled. Faced with an overvaluation of 45.8% of the real exchange rate with respect to historical equilibrium, the current situation has certain negative implications, but for some it may represent an opportunity. Although there is certainly a risk of exchange volatility, it is also true that there are import opportunities for goods that are already cheaper abroad.

Assuming that certain bureaucratic restrictions on imports, such as internal "no-production certificates", have been reduced, there may be greater opportunities to import goods whose high turnover of inventories allows foreign exchange risk to be hedged. Some foods fit this description, especially if they are sufficiently accessible to be demanded by a relatively more impoverished population.

As the table shows, during the first semester there were indications that private non-official imports could have been favored by the appreciation of the real exchange rate. During the first semester of 2018, the real exchange rate was 13.2% more favorable to non-official imports than during the same period in 2017. Although there are stronger reasons to explain a year-on-year increase of 132.7% in the unofficial imports, such as a surplus in the flow of government currency of USD 1.9 billion that was not reported in reserves or other public funds, it is possible that the influence of the real exchange rate has also played an important role.

November will raise the bar in the fire test
The last quarter of the year is at record lows in the competitiveness of our non-oil exports in the international market, and at historic highs in the competitiveness of imports to Venezuela. Seasonally, this last quarter is atypical both in inflationary terms and in real exchange rates.

In the face of traditional holiday festivals, both religious and electoral, the government tends to give up both its fiscal policy and its monetary policy. Salary increases, which this year will be accompanied by increases in direct transfers to the country's card, are added to other substantial expenses to expand the fiscal deficit that is financed by issuing money. For this reason, seigniorage -or monetary financing- has reached its monthly maximum in November during the last 7 years without exception. In 2010, eight years ago, it was the second month with the most seigniorage just after December.

During the last 7 years, the seigniorage of each November has been, on average, 14.8 times greater than the rest of the months. In 2017, with a relatively high seigniorage in all months of the year, November was only 2.8 times greater than the rest. In any case, it is clear that both November and December are two exceptionally irresponsible months, both fiscally and monetarily for the ruling party, and the inflationary and monetary implications are not minor.

Since 2012, November has, on average, an inflation 29.6% higher than the monthly inflation than the rest of the months, and 64.7% higher in the case of December. However, although inflation is relatively more aggressive in the last months of the year, the depreciation of the exchange rate is usually even more abrupt. In fact, in 7 of the last 8 years, the exchange rate has depreciated at a faster rate than inflation during the last 4 months of its respective year. That is to say that, since 2010 and with the sole exception of 2015, the real exchange rate has depreciated between September and December.

A hypothesis on the phenomenon of real depreciation suggests that it is usually caused by an increase in the proportion of income dedicated to saving, in relation to the marginal propensity to consume of the rest of the months. There is also usually an increase in imports to supply the relative increase in consumption. Between both pressures, in theory, they depreciate the nominal exchange rate and, more importantly, depreciate the real exchange rate.

To avoid this phenomenon, the government has probably tried to propose alternatives to saving in dollars, such as the mediatic "gold" highlights, or the "petros savings plan". Although it is possible that there are certain Venezuelans without access to the unofficial market of dollars that try to access these instruments, especially the gold titles, both alternatives are obviously terrible options for saving and there will continue to be a preference for the dollar market.

Finally, in the long term, the discussion adds additional degrees of complication. The Venezuelan economy has suffered structurally significant damage during the last 20 years. Trying to calculate what is the real exchange rate of external equilibrium, or the optimal real exchange rate in 2018 or 2019, is an exercise that will have to wait until after the dust settles. However, there are arguments to argue that our real exchange rate will not return to its levels between 2012 and 2017. It is relatively more appreciated or more depreciated than the historical, hardly reach the level of distortion experienced in the past 6 years.