Tag: Bolivar

Venezuela: Not Hyperinflating—Yet

Although Venezuela’s inflation has soared (see: Up, Up, and Away), Venezuela is not experiencing a hyperinflationary episode–yet. Since the publication of Prof. Phillip Cagan’s famous 1956 study The Monetary Dynamics of Hyperinflation, the convention has been to define hyperinflation as when the monthly inflation rate exceeds 50%.

I regularly estimate the monthly inflation rates for Venezuela. To calculate those inflation rates, I use dynamic purchasing power parity (PPP) theory. While Venezuela’s monthly inflation rate has not advanced beyond the 50% per month mark on a sustained basis, it is dangerously close. Indeed, Venezuela’s inflation rate is currently 45% per month (see the accompanying chart).

If inflation moves much higher, the legacy of Hugo Chavez’s Bolivarian Revolution will be that Venezuela joins the rather select hyperinflation club as the 57th member. Yes, there have only been 56 documented hyperinflations

Venezuela's Monthly Inflation Rates

Venezuela’s Inflation: Up, Up, and Away

Like the 2009 Oscar award-winning Pixar film Up, Venezuela’s annual inflation rate has soared sky high (see the chart below). On December 31, 2014, Venezuela’s bolivar traded at a VEF/USD rate of 171 and the implied annual inflation rate stood at 169%. In May of 2015, Venezuela’s bolivar collapsed and the implied annual inflation rate broke the 500% barrier. On May 28, 2015, the VEF/USD rate was 413, a 59% depreciation in the bolivar since January 1st. Not surprisingly, the implied annual inflation rate stood at a staggering 495%.

Venezuela's Annual Inflation Rates

Venezuela: World’s Highest Inflation Rate

Venezuela’s bolivar is collapsing. And as night follows day, Venezuela’s annual implied inflation rate is soaring. Last week, the annual inflation rate broke through the 500% level. It now stands at 510%.

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Venezuela, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). Using black-market exchange rate data that The Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year, I estimate Venezuela’s current annual implied inflation rate to be 510%. This is the highest rate in the world. It’s well above the second-highest rate: Syria’s, which stands at 84%.

Venezuela has not always experienced punishing inflation rates. From 1950 through 1979, Venezuela’s average annual inflation rate remained in the single digits. It was not until the 1980s that Venezuela witnessed a double-digit average. And it was not until the 1990s that Venezuela’s average inflation rate exceeded that of the Latin American region. Today, Venezuela’s inflation rate is over the top (see the accompanying table).

Average Annual Inflation Rates

Venezuela’s House of Cards

The story of the Venezuelan economy and its troubled currency, the bolivar, can be summed up with the following phrase: “From bad to worse”—over and over again. Yes, the ever deteriorating situation in Venezuela has taken yet another turn for the worse.

In a panicked, misguided response to the country’s economic woes, Venezuelan president Nicolas Maduro has requested emergency powers over the economy. And the Maduro government recently announced plans to institute a new exchange rate for tourists in an attempt to quash arbitrage-driven currency smuggling.

These measures will likely prove too little, too late for the Venezuelan economy and its troubled currency, the bolivar. Indeed, the country’s economy has been in decline since Hugo Chavez imposed his unique brand of socialism on Venezuela.

For years, Venezuela has sustained a massive social spending program, combined with costly price and labor controls, as well as an aggressive annual foreign aid strategy. This fiscal house of cards has been kept afloat—barely—by oil revenues.

But as the price tag of the Chavez/Maduro regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and (increasingly) the country’s central bank.

Since Chavez’s death, this house of cards has begun to collapse, and the black market exchange rate between the bolivar (VEF) and the U.S. dollar (USD) tells the tale. Since Chavez’s death on March 5, 2013, the bolivar has lost 62.36% of its value on the black market, as shown in the chart below the jump.

Chavez: The Death of A Populist … and His Currency?

Although Hugo Chávez, the socialist presidente of Venezuela, has finally met his maker, the grim reaper is still lingering in Caracas. As it turns out, Chávez was not the only important Venezuelan whose health began to fail in recent weeks: the country’s currency, the Venezuelan bolivar fuerte (VEF) may soon need to be put on life support.

In the past month the bolivar has lost 21.72% percent of its value against the greenback on the black market (read: free market). As the accompanying chart shows, the bolivar has entered what could be a death spiral, which has only accelerated with news of Chávez’s death.

 

Shortly before his death, Chávez’s administration acknowledged that the bolivar was in trouble and devalued the currency by 32%, bringing the official VEF/USD rate to 6.29 (up from 4.29). But, at the official exchange rate, the bolivar is still “overvalued” by 74% versus the free-market exchange rate.