Venezula's currency plummets in value

[BrainGlutton]

According to the International Herald Tribune. An official devaluation is expected despite government denials.

What caused this?

Does it discredit Chavez’ economic policies and his “socialism for the 21st Century” (discussed here) in general?

What does it bode for Chavez’ ambition to put together an alternative international association in Latin America?

[appleciders]

I wouldn’t swear that it’s unintentional. China has for years kept its currency weak in order to attract foreign factories.

[BrainGlutton]

@appleciders

I wouldn’t swear that it’s unintentional. China has for years kept its currency weak in order to attract foreign factories.

Attracting foreign investors does not seem to be high on Chavez’ list of priorities; he has driven several major ones out of the country.

[Bryan_Ekers]

@BrainGlutton

Attracting foreign investors does not seem to be high on Chavez’ list of priorities; he has driven several major ones out of the country.

Maybe those were ones that wouldn’t play ball his way, and he’s now in a position to invite new investment under the conditions he wants. Companies looking to build refineries and whatnot won’t like it, but with a low Venezuelan currency, they might think it worthwhile.

[Sam_Stone]

This is an intentional move on Venezuela’s part to allow its currency to float. As soon as the fixed exchange rate was removed, the currency plummeted in value.

It plummeted in value because the international community is devaluing Venezuelan investment. There has been massive capital flight due to Chavez’s policies - you might remember that I predicted exactly that many months ago as we first started talking about him. Venezuela’s economy has been propped up by high oil revenues, but its fundamentals suck because of Chavez.

[E-Sabbath]

Well, that, and his tendency to nationalize businesses mean people don’t really want to invest in Venezuela at the moment. They might have all their effort ‘stolen’. And what kind of a investment would that be?

[Sam_Stone]

Chavez has also been funding his ‘revolution’ with borrowed money, and Venezuela has an 8 billion dollar deficit, which is a pretty large amount for a country with its GDP. As a result, Chavez has to cut spending by 7% next year.

His policies have also triggered an inflationary cycle, which is going to primarily hurt the ‘worker class’, the very people he claims to want to support.

It’s going to get worse. And he’ll blame it on the evil U.S., multi-nationals, capitalists of all stripes, and pretty much every other scapegoat in the International Socialist playbook.

[CBEscapee]

@Sam Stone

His policies have also triggered an inflationary cycle, which is going to primarily hurt the ‘worker class’, the very people he claims to want to support.

If I’m not mistaken inflation is lower now than when Chavez first become President. Also inflation was over 100% shortly before he was elected, when Venezuela was being run by Chávez opponents. Correct me if I’m wrong.

[BrainGlutton]

@CBEscapee

If I’m not mistaken inflation is lower now than when Chavez first become President. Also inflation was over 100% shortly before he was elected, when Venezuela was being run by Chávez opponents. Correct me if I’m wrong.

According to Wikipedia:

Venezuelan officials estimated the economy contracted 7.2% in 1999. A steep downturn in international oil prices during the first half of the year fueled the recession, and spurred the administration to abide by OPEC-led production cuts in an effort to raise world oil prices. (The petroleum sector dominates the economy, accounting for roughly a third of GDP, around 80% of export earnings, and more than half of government operating revenues). Higher oil prices during the second half of 1999 took pressure off the budget and currency. With the president’s economic cabinet attempting to reconcile a wide range of views, the country’s economic reform program had largely stalled. The reforms were mainly in microeconomics such as the reduction or abolition of education and hospital fees. The government sought international assistance to finance reconstruction after massive flooding and landslides in December 1999 caused an estimated US$15 billion to $20 billion in damage.

There was a sharp drop in investment and a general recession during 2002 and 2003. Total GDP decreased 18.5% during the first semester of 2003 compared with the same period in 2002. This is the steepest decline in Venezuelan history. The hardest hit sectors were construction (-55.9%), petroleum (-26.5%), commerce (-23.6%) and manufacturing (-22.5%).

In 2002, the Venezuelan economy, as measured by Gross domestic product (GDP), contracted by 8.9% compared to 2001. The petroleum sector, which contracted by 12.6% in 2002 as compared to 2001, was adversely affected by a decrease in exports of petroleum products resulting from adherence to an OPEC quota established in 2002 and the virtual cessation of exports as a result of a national strike by forces intent on removing Chavez from power,The non petroleum sector of the economy contracted by 6.5% compared to 2001. This situation was accompanied by a significant devaluation of the Bolivar during 2002, which resulted in an accelerated inflation rate. The inflation rate, as measured by the CPI, was 31.2% in 2002 compared to 12.3% in 2001.

In an attempt to support the bolivar and bolster the government’s declining level of international reserves, as well as to mitigate the adverse impact from the oil industry work stoppage on the financial system, the Ministry of Finance and the central bank suspended foreign exchange trading on January 23, 2003. On February 6, 2003, the government created CADIVI, a currency control board charged with handling foreign exchange procedures. The new exchange control regime fixed the U.S. dollar exchange rate at Bs. 1,596 = U.S. $1.00 for purchase operations, and Bs. 1,600 = U.S. $1.00 for sale operations, and established the compulsory purchase and sale of foreign currency through the central bank. The current exchange rate for purchase operations is Bs. 2,150 = U.S. $1.00.

The economy grew by a remarkable 16.8% in 2004 when compared to 2003, led mostly by non-petroleum sectors - the oil industry directly provides only a small percentage of employment in the country. International reserves grew to US$27 billion. Polling firm Datanalysis noted that real income in the poorest sectors of society grew by 33% in real growth in 2004.[citation needed]

While Macroeconomic Stabilization Fund (FIEM) decreased from U.S.$2.59 billion in January 2003 to U.S.$700 million in October, central bank-held international reserves actually increased from U.S.$11.31 billion in January to U.S.$19.67 billion in October 2003. Despite the slowdown in PDVSA output and resulting royalty payments to the central bank, reserves are currently 31.1% above their levels one year ago, as foreign exchange transactions remain suppressed.

There is considerable income inequality. According to official sources, the percentage of poor and extremely poor among the Venezuelan population increased from 39.4% in 1995 to 48.1% in 2002, but then in 2005 decreased to 34% [citation needed].

Unfortunately, it does not mention what the rate of inflation was just before Chavez took office in 1998.

[CBEscapee]

@BrainGlutton

According to Wikipedia:

Unfortunately, it does not mention what the rate of inflation was just before Chavez took office in 1998.

It was 103.2% in 1996 and down to 30% in 1998. Also it should be noted that while Chavez opponents were running the economy the bolivar devalued over 1100% percent between 1990 and 1998 from 50.58 to 564.50.

This kind of information is conveniently omitted in the Western press whose half truths are used to portray Chávez as the boogeyman.

[BrainGlutton]

@Sam Stone

Chavez has also been funding his ‘revolution’ with borrowed money . . .

Borrowed from whom? I thought he had funded it mostly with oil revenue. (And why do you put “revolution” in quotes? Revolutions do not, by definition, have to be violent or unconstitutional – do they?)

[Duke_of_Rat]

@E-Sabbath

They might have all their effort ‘stolen’. And what kind of a investment would that be?

I thought we called that “the re-distribution of wealth”.

[Tristan]

@CBEscapee

It was 103.2% in 1996 and down to 30% in 1998. Also it should be noted that while Chavez opponents were running the economy the bolivar devalued over 1100% percent between 1990 and 1998 from 50.58 to 564.50.

This kind of information is conveniently omitted in the Western press whose half truths are used to portray Chávez as the boogeyman.

That would probably be because it’s just so darn easy to call someone a boogeyman when they are acting just like a boogeyman.

[CBEscapee]

@Tristan

That would probably be because it’s just so darn easy to call someone a boogeyman when they are acting just like a boogeyman.

Beauty is in the eyes of the beholder. Do you think Bush is a boogeyman?

[E-Sabbath]

@Duke of Rat

I thought we called that “the re-distribution of wealth”.

Same thing. When the President does it, it is not a crime. Point is, if it’s your weath that might be redistributed, are you especially interested in investing it?

[BrainGlutton]

According to Dow Jones’ MarketWatch, Venezuela is taking the brunt of a “global credit crunch.”

NEW YORK (MarketWatch) – In a fresh example of how the global credit crunch is hitting emerging markets, Venezuela’s overnight lending rate climbed to as high as 90% Thursday after the central bank said it has suspended open market operations meant for pumping liquidity into the market.
The average overnight rate had been at an average of 22% on Wednesday. Venezuela’s central bank said it has suspended open market operations, but added it would maintain credit assistance operations, according to a statement published on its Web site Wednesday.
“The squeeze in the Venezuelan money market is yet another example that the global credit crunch is becoming visible in emerging markets, especially in the most imbalanced economies and in countries with a weak financial architecture like Venezuela,” said Lars Christensen, senior analyst at Denmark’s Danske Bank.
“This story is not an isolated Venezuela story, but rather a developing trend,” he said, adding that money markets in both developed and emerging markets aren’t functioning well at the moment.

The story says it’s also hurting Russia.

[TokyoBayer]

BrainGlutton, Iknow it must be so much work opening scores of GD treads, even if it only involves cutting and pasteing, but you’re not even doing that now.

[BrainGlutton]

@TokyoPlayer

BrainGlutton, Iknow it must be so much work opening scores of GD treads, even if it only involves cutting and pasteing, but you’re not even doing that now.

:dubious: I beg your pardon, I’m doing considerably more than that now.

[TokyoBayer]

Did you read the thread I linked to?