Has the Venezuelan Bolivar Finally Bottomed? | Messages from Nicolas Maduro

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The Venezuelan bolivar appears to have finally bottomed out after years of excruciating, relentless losses that have rendered it almost worthless and plunged millions into abject poverty.

The currency has traded around 4.5 per dollar for the past four months, a newfound stability that has come without much need for support from policymakers.

It’s a moment that at times seemed never to come as inflation spiraled out of control, the government kept trimming zeros from the bolivar – six were only dropped in October – and the economy plunged deeper into chaos. But a handful of forces have joined forces to slow the collapse — at least for now.

It starts with oil bringing more and more hard currency to the country as international prices rise and local production surges after a decade of decline. Gold mining also brings in dollars, as do a handful of small but growing export industries — shrimp farming, rum, and cocoa — that have popped up in recent years. And the socialist regime, to the surprise of many, has adopted a largely orthodox approach to reining in tax spending and freeing an economy long constrained by government controls and bureaucracy. The economy expanded in 2021 for the first time in seven years.

For many Venezuelans, the stabilization of the currency comes too late.

Millions have fled the country and millions of those left behind have abandoned the bolivar and adopted the dollar as their currency. They get their salaries and pay almost everything in dollars. But many of the poorest Venezuelans continue to be paid in bolivars, and for them the currency’s strength has helped preserve what little purchasing power they have left. According to a Bloomberg index, Bolivar inflation has slowed to an annual pace of 53% over the past three months, from well over 1,000% in recent years.

Even local economists, used to President Nicolas Maduro’s administration making policy blunder after policy blunder, concede that this time feels a little different. Asdrubal Oliveros, who runs financial analytics firm Ecoanalitica, puts it this way: The bolivar will eventually slide against the dollar, but it won’t result in the mega-depreciation that has plagued the economy time and time again in recent years.

Given how much of the economy is now done in dollars, Oliveros finds the undue attention the government is giving to the bolivar inappropriate, but he says: “I wouldn’t call it an artificial policy. It is real.”

It’s real because the central bank has been able to largely orchestrate this stability without having to draw on its already depleted foreign exchange reserves. The surge in exports has provided the bank with enough hard currency to meet bank demand. Last year it sold about $1.5 billion in dollars and euros on the foreign exchange market, according to government documents viewed by Bloomberg. Meanwhile, reserves have held steady at around $6 billion after withdrawing IMF funds that the government has no access to.

For now, the policy appears to be sustainable. State-owned companies sold about $3.3 billion to the central bank in 2021, compared to just $743 million in 2020, according to government data shared during a call with investors last month and obtained by Bloomberg .

Still, there are many risks. Inflows from oil exploration and other exports need to stay high if the central bank is to sustain selling. And inflation, while easing, remains one of the highest in the world, which will eventually put pressure on the currency.

Tamara Herrera, a Caracas-based economist at Sintesis Financiera, sees risks in trusting the bolivar to remain stable over the long term, especially when oil prices and production fluctuate.

“The probability that the exchange rate will remain stable this year is relatively high,” she said. “But that’s an oversimplification of unforeseen events.”

There is another factor that explains the bolivar’s stability: the collapse in import demand. Today Venezuela is too poor – and the bolivar is too weak – to buy much abroad. Imports totaled less than $8 billion in 2021. Ten years earlier, it was $53 billion.

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