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A darkening future for Venezuela's currency

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Venezuela is currently dealing with a conflagration of economic pressures and problems. One problem in particular is the drop we’ve observed in the country’s central bank’s international reserves. On November 15 Venezuela’s central bank had just under 21 million USD in its reserves, the lowest level since 2003 and a nearly 31 percent drop compared to levels at the start of the year. One of the big issues in Venezuela is that dollar income from the state-owned oil company is being diverted towards gasoline subsidies and government spending projects rather than being used to replenish the central bank’s reserves.

While Venezuela does enjoy the luxury of using petro-dollars to support state spending measures, the country is nonetheless losing the confidence of many international investors. Increasingly Venezuela is searching to import many basic products due to national shortages. The economic pressures stemming from the shortage of dollars combined with the distortions created by exchange controls have led to the creation of a parallel exchange market with a dollar conversion ratio that is ten times lower than the official rate. As of November 27, the exchange rate in the parallel market swelled to 62 bolivares per dollar, a rate that implies a 256 percent devaluation relative to the rate at the close of 2012.

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According to The Economist Big Mac index, Venezuela has the most overvalued currency in Latin America. Clearly the current rate of exchange is not sustainable. In the short term, President Nicolas Maduro has taken to blaming greedy store-owners for price gouging and has deployed soldiers to force retailers to lower prices. During a speech earlier this month he asserted “The ones who have looted Venezuela are you, bourgeois parasites.” Maduro’s rhetoric, however, fails to address the heart of the problem.

A Venezuelan businessman who asked not be identified while speaking to a foreign journalist the problems are systemic in nature. “Because they don’t allow me to buy dollars at the official rate of 6.3, I have to buy goods with black market dollars at about 60 bolivars, so how can I be expected to sell things at a loss? Can my children eat with that?,” the businessman said. Like his predecessor Hugo Chavez, Maduro is using petrodollars to turn himself into a Big Mac populist, but due to the squeeze from the currency distortion, the Venezuelan consumer might be starting to feel more like a Panini.