I try to stick to Latin America energy and commodities around here, but humor me while I delve into a currency conundrum. Here is Bloomberg, in a long story out today about how the Venezuelan government tried to tame the exchange rate of its bolivar currency by jailing bond brokers last year. It’s worth reading to see what life is like for jailed bankers in South America (they see the sun only once a week and take on-line classes, which is probably not that different from when they worked trading desks). But there is also this, about the currency:
There was, however, another legal means of trading currencies: the bond market… During the first five months of 2010, the fluctuating exchange rate on the bond market plunged 26 percent, reaching a record low of 8.2 bolivars to the dollar on May 11.
Venezuelans who purchased bonds to obtain dollars deposited their money in foreign bank accounts. These funds could be held as savings or used to pay in dollars for imports. Bond trading was not only legal at the time; the government participated in it by issuing bonds of its own.
In late 2009 and early 2010, Central Bank President Nelson Merentes made it clear that the government believed the country’s brokerages were instrumental in Venezuela’s economic decline, according to Eduardo Fortuny, then a board member of the Venezuelan Association of Brokerage Houses.
In private meetings with the group, Merentes called on the brokers to halt the bolivar’s slide or risk a possible confiscation of their businesses, Fortuny says. Merentes declined to comment…
“There’s no economic reasoning for the weakening of the bolivar,” Chavez said on state television. “This is a huge fraud against the republic.”
Now, Chavez was wrong. There was a reason: when the number of bolivars in circulation rises faster than oil exports, that means there are more bolivars going after each US dollar. And Venezuela has been printing money like mad, for years. Here is money supply (XLS) from the central bank:
Monetary liquidity has climbed about 76 percent in the last 18 months in Venezuela. And the exchange rate has weakened by only 3.7 percent. One explanation is that oil prices are very high, and so there are more dollars available in Venezuela, reducing demand on the parallel market. The Central Bank may also portion out its dollars carefully to avoid the panics that characterize almost every currency market. But is that all there is to it?
Were the brokerages manipulating the market after all, and maybe weakening the bolivar more than it would have weakened on its own? That is, could Chavez and Merentes be right? (Not morally right — the arrests and expropriations were obviously unjust, and what has happened to these people since is even worse. I mean right that the brokerages were, one way or another, affecting the currency rate.) It’s a possibility that goes unmentioned in the Bloomberg story. One mechanism I can think of is how everyone used to dance to the tune of one blog in particular which gave the daily bid and ask figures. The person behind that blog might have been able to stir currency panics. Who knows.
Or, perhaps, is the Venezuelan government even now involved in some sort of illegal parallel currency trading in order to keep the exchange rate down?
We know that the government took part in the market before this whole crackdown — everyone in the market saw regular inflows of tens of millions of dollars. There are only a few companies in Venezuela who have dollars and need bolivars. Foreign companies working in Venezuela who aren’t yet getting paid locally would be one. And PDVSA would be the other. All other companies operating in Venezuela have too many bolivars. They get paid locally in bolivars and then need to convert to dollars, whether to take away profits or to just buy supplies on the international market. Since there are few companies setting up in Venezuela, everyone assumed that the dollars must come from PDVSA.
Also, we know that the government took part in the market afterward: PDVSA used pension money to fund a huge currency trading operation that turned out to be a Ponzi scheme.
So, what mechanism could they be using now? I truly don’t know. All I know is that if they are putting dollars into the economy at 8.5 to the bolivar, that can continue to magically inflate the company’s balance sheet and that someone, somewhere, is probably getting very rich on the buy-sell spread.
PS, if you haven’t had enough bolivar musings for the day: here’s a chart of how Venezuela’s cash supply is divided up among different bills and coins in circulation, going back to when the “strong bolivar” was introduced at the beginning of 2008. When it started, the 100-bolivar bill was worth about USD$20. That strengthened for a while as the government intervened more heavily in the market, and the 100-bolivar note was worth USD$30 for a while. Now it’s worth USD$12. So this chart shouldn’t be all that surprising. Just another way to visualize that country’s inflation. Maybe what’s most remarkable about this data set is that the government continues to mint 1-centimo coins, just as Chile mints 1-peso coins and hey, the USA mints pennies. Under popular myth (not just in Venezuela), getting rid of that coin will cause inflation.