This blog is a summary of a more detailed article, which you can download here: Venezuelan Economic Policy Announcements.pdf.
Current conditions in Venezuela
The DevTech Debt Restructuring Team recently visited Caracas and witnessed conditions on the ground. Everyday life is becoming impossible for the lower strata of the income distribution. The National Survey of Living Conditions (Encuesta Nacional de Condicionnes de Vida, or ENCOVI) reported an average of weight loss of 11 kilograms (22 pounds) in 2017, following an average loss of eight kilograms (16 pounds) in 2016.
Basic services like banking, electronic payments, electricity, fixed and mobile telephony, water, and transportation present significant deficiencies, ranging from rationing to the complete suspension of supply, negatively affecting the quality of life of citizens. The availability of products in the market is higher compared to previous years, partly due to the increasing flow of remittances following massive migration, mixed remuneration strategies of some companies (for example paying a portion of wages in USD), and an implicit relaxation of the price controls policy. However, given the current policy mix, the situation will soon worsen.
Real GDP has contracted by 35 percent since Hugo Chávez’s death in 2013. During this period, hyperinflation has set in, with accelerating annual inflation rates that regularly reach three digits.
Against this backdrop, the President of Venezuela has dictated a set of new policy measures:
Beginning in August 2018, Venezuelan President Nicolás Maduro has made a series of announcements introducing new economic policies. The new policies attempt to create a policy framework which supports economic recovery.
Currency Conversion
In August, the “sovereign bolivar” replaced “strong bolivar.” One sovereign bolivar is equal to 100,000 strong bolivars, effectively devaluing the currency by 96 percent. The sovereign bolivar is anchored to the “petro” cryptocurrency, a cryptocurrency developed by the Venezuelan government. The Venezuelan government claims the petro is backed by reserves of natural resources, mainly oil, as an alternative to circumvent the sanctions imposed by the US government since August 2017. Its base price is the equivalent of the price of a single Venezuelan oil barrel, which is defined by the Venezuelan Ministry of Petroleum and Mining. This cryptocurrency is meant to be the fluctuating unit of account that will serve to fix the value of labour and that of the prices of consumer goods and services.
The potential for the petro to be a real cryptocurrency relies on its liquidity in the market, but so far, the government has not been able to increase the demand for the instrument. A “conversion bonus” of 600 sovereign bolivars will be paid via the national identity card “el Carnet de la Patria.” This is a direct transfer associated with the currency conversion and is estimated to benefit some 10 million inhabitants.
Minimum Wage
A new salary system will establish the minimum wage at 1,800 sovereign bolivars for public and private sector employees, and 1,350 for adolescents, effective September 1, 2018. This is the ninth minimum wage increase carried out by the Venezuelan government since 2017. The Venezuelan government will assign direct subsidies to the payroll of the small and medium-sized Venezuelan companies with the objective of minimizing the inflationary impact on the purchasing power of the workers. This represents significant implementation difficulties and will impose significant risks to the private sector, since for employees to receive payments they will need to register with the government and provide detailed information about the company.
In addition, the complementary food voucher (Cestaticket) was adjusted up to 180 sovereign bolivars , which is equivalent to 10 percent of the minimum wage[1].
Fiscal Deficit
Head of State Maduro also announced a fiscal plan called “fiscal deficit equal to zero”, which will consist of increases in Value Added Tax and increases in income tax rates and the frequency of required payments.
Currency Auctions
The government will restore inter-bank foreign exchange currency auctions, last used in 2002, where the Central Bank auctions foreign reserves to the banking sector. On September 3, President Maduro announced that the petro will be part of the auctions of the DICOM Currency Allocation System starting in October. It is expected that auctions will be carried out daily, with the objective of stabilizing the economy with a market exchange rate, thus displacing the parallel market.
Gasoline Prices
President Maduro announced a plan to reduce fuel subsidies in order to curb smuggling of inexpensive Venezuelan gasoline to neighbouring countries. It is estimated that around $10 billion is lost annually from the smuggling of gasoline to Colombia.
Venezuelans who hold the national identity card, el Carnet de la Patria, will continue to receive direct subsidies for two years. For those without a national identity card, the price will rise to international levels. The final price has not been determined.
Gold Savings Plan
A national savings plan was launched: certificates backed by gold ingots of 1.5 and 2.5 grams respectively are available to all Venezuelans. The gold will be held by the Central Bank of Venezuela. The plan is also available in petros.
Restructuring of Minerven
Faced with the complaints of corruption, President Maduro also announced the total restructuring of the General Mining Company of Venezuela (Minerven), attached to the Corporación Venezolana de Guayana (CVG), with the objective of increasing gold production in the country.
Ministry of Internal Trade
A Ministry of Internal Trade was created to govern the domestic market.
International Road Show
Executive Vice President Delcy Rodríguez embarked on an international business tour with the purpose of presenting investment opportunities in Venezuela. At the same time, President Maduro invited Shell International to carry out its operations in Venezuela.
Special Reserves
A new requirement for financial entities to maintain additional reserves aims to prevent the financial system from granting credits which would be used to buy dollars in the parallel market, using the money that the Venezuelan State deposits for the payment of salaries. Nevertheless, this measure will force banks to use all their surplus reserves, which will lead to an expansion of domestic credit, which in turn implies an increase in monetary liquidity in the economy, accelerating inflation even more.
Exchange Regime
On September 7, the Minister of Economy and Finance, Simón Zerpa, and the president of the Central Bank of Venezuela, Calixto Ortega Sánchez, announced that a floating exchange rate and free convertibility of the currency scheme will be adopted throughout the national territory.
The Central Bank of Venezuela will be in charge of governing and administering the new exchange regime, and authorities claim that they will allow the purchase and sale of dollars “without any restrictions,” where the price of the American currency fluctuates freely “according to supply and demand.”
Conclusions
These policy announcements fail to outline a clear path towards stabilization. Revenues will be insufficient and quickly eroded by hyperinflation, while expenditures are expected to continue to rise (financed by the Central Bank). The private sector will be unable to afford the wage increase, as there are neither increases in productivity nor external resources, like foreign currency inflows in the form of loans or aid, to support the increase. The Central Bank will continue to print money to finance the fiscal deficit, further accelerating Venezuela’s economic decline. The International Monetary Fund forecasts an economic decline of 15 percent and inflation of 1,000,000 (one million) percent are expected this year.
Note
[1] This implies that the food bonus experienced an increase of 820 percent with respect to the value on July 1, 2018. In addition, this increase ignores the indexation that the supplement to wages used to have with respect to the unit of account for tax purposes (“Unidad Tributaria”), and instead it became a fixed value whose fixation will depend exclusively on what the Venezuelan Head of State announces.
