SHI Update 1/25/17: Steady as She Goes
January 25, 2017SHI Update 2/1/17: “You’re FIRED!”
February 1, 2017
Once the richest country in South America, Venezuela is now its poorest. Last year, inflation was about 800%. The IMF estimates 2017 inflation will be 2,200%. Thus, in two years, 3,000%
Let me put this into perspective. Let’s say a loaf of bread cost the equivalent of $2 in 2015. By the end of 2016 that same loaf of bread cost $16. And by the end of 2017, the price will be $352.
And this is on top of an already dreadfully weakened currency. During the presidency of Hugo Chavez, between 1999 and 2013 the cost of the USD in bolivares had already increased 10X. Meaning that $2 loaf of bread really costs about $3,520 in 2017.
In 1937, the ‘official’ exchange rate was one US dollar for 3.18 boilvares. Until 1983, it was the most stable currency in South America. Not any more. Today, according the Economist magazine, a 100-bolivar note is worth 3 cents on the black market.
Venezuela’s problems kicked into high gear in 2003, after a failed coup attempt in 2002 to boost Caesar Chavez . The resulting destabilization triggered a massive flight of capital out of the country. Using its massive currency reserves, the government attempted to stabilize the bolivar but failed. At the same time, the government imposed stringent currency exchange controls. Venezuelan citizens and businesses have faced limits on the amount of foreign currency they can acquired at the heavily subsidised official rate. Of course, the “well-connected” made fortunes exploiting the system.
Capital flight continued, the currency devalued, and inflation soared. The chart above, again from the Economist, tells the story.
Fast forward to 2017. Chavez’s successor, Venezuela President Maduro, tenuously clings to power. His approval rating toward the end of last year was near 20% – higher than I would have thought, frankly. In December of 2016, the country elected a parliament dominated by his opposition, Democratic Unity. The legislature and Supreme Court are in political disarray. The citizens face massive shortages of almost all essential goods. The country is a tinderbox.
$100 oil might save the day for Maduro and Venezuela. But I suspect we’ll see a lit match before $100 oil.
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