Mo' Venezuela currency

Here's a bit of extra to add to the previous post.

I've just been mailed and asked

"What do reserves have to do with the parallel rate? Why does the amount of money in circulation affect the parallel rate?".

Well we've been through this one before as well, but let's do it quickly. What follows is a real world explanation of something economists think is important, thus they normally dress it up in weird jargon and terminology that makes something pretty logical into something inaccessible (by the way, that's one of the reasons I like Krugman's blog; he's never afraid to put things into layman's terms and demystify his field).

In a country with a non-reserve currency (aka soft currency), the money circulating needs some sort of back-up. This is usually done by collecting a whole heap of dollars (or perhaps Euros, or perhaps gold) as reserves.

Imagine this: Say that one day the whole population of a country decides that it doesn't trust its currency any longer and decides to give them back to the people that made them, i.e. the Central Bank. So they form a long queue at the CenBank and the bank people swap the local currency for the reserves they have. In the case of Venezuela, the Central Bank is currently in the position to give out one dollar for every 6.82 Bolivares Fuertes (VEF) that are handed in. So, according to the equation VEF-vs-Dollar that the Central Bank operates inside Venezuela, U$1 should equal VEF6.82.

So after a while, the people waaay back in the queue get to hear that the bank is giving anyone a buck for each 6.82 VEF they hand in. So rather than wait a long long time for the five million or so people in front of them to get served, they start exchanging amongst themselves. And..errr...that's what happens in every exchange house and bank all over the world; people just cut out the hassle of turning up at the central bank and do the exchange thing between themselves.

Back to Venezuela, and this 6.82/1 rate held by the moneymasters (i.e. the CenBank, the people who collect dollars and issue VEF to the country) is currently accurately reflected in the actual permuta (parallel) rate. Normally it will fluctuate higher or lower than the theoretical line. This can be for various reasons, as there are other factors that weigh upon a currency exchange rate such as expectations of events to come, political (in)stability, macroeconomic forecasts of key industries (in the case of Venezuela, that means oil) etc etc. However in the long run the relationship of M2-Currency reserves is never that far out.

Bolivia: An impressive economy (doesn't that sound strange?)

Bolivia was pure partytime last night, as Evo declared "mission accomplished" on his three year mission to rid Bolivia of illiteracy. As IKN did a chart and a post on this nine days ago (check it out here) we're not going to dwell on this significant achievement today.

Nah, let's look at something that's just as impressive, from this financial analyst's viewpoint anyhow.

Bolivia's currency reserves now stand at U$7.608Bn (as at 30 November 2008) and quite frankly I've never seen anything quite like this chart to counter people who say that nationalizations don't work and that industrialized nations don't take rampant advantage of their poorer cousins. In the case of Bolivia, the whole ballgame changed with the social unrest known as the 'gas wars' that brought down the previous administration (admittedly that single sentence simplifies things greatly). From 2005 Bolivia began to benefit from its own hydrocarbons revenues for the first time due to the protests led by Morales and his M.A.S. party.

Once Dr. Morales' admin took official charge in 2006, things just took off. Prophets of doom have been totally and utterly silenced over the Bolivian hydrocarbons nationalization. Bolivia's GDP has grown to 6.7% in the third quarter 2008....

......and the country is well-placed to survive the pressures it will feel from the global recession coming soon to a country near you. I've said it before and I'll say it again; complain all you like about his politics, but the Morales administration has handled its country's economic affairs impeccably; I'm one of those who have grown to expect fiscal and financial irresponsibility from left wing politicians once they reach power; that just isn't so in the Bolivia of Evo Morales. It's very impressive.

It's not some panacea of perfection in Bolivia, of course. The country is very poor and it's difficult for anyone from industrialized nations that hasn't traveled through any ofthe world's poorest areas to grasp just how poor places like Bolivia really are. Inflation is running at 11.37% for the first 11 months of 2008......

..... but as with all the region the biggest hike (to 8.85%) came in the first six months of 2008 as the main pressure came in the second half of 2007 and the first half of 2008 when commodities were going batshit. The last two months in Bolivia have seen things more under control, with inflation clicking up just 0.31%. Little doubt that Bolivia's headline inflation rate will tumble in 2009.

All told, when those lists are made of "countries that will ride out the recession" Bolivia should be up there with Chile, Peru and the other usual suspects. This blog has already noted in this previous post how Bolivia in 2009 benefits from major countercyclical infrastructure projects that will keep the GDP number clicking over handily. Evo's doing right by his country's economy and has had precious little applause for his efforts. No need to wonder why.

Meanwhile, how have the economies of the world's expert financial nations been doing recently?

Pachakuti!

Exclusive: We Leak Calderon's TV Speech to Mexico tonight

Calderón: On the quiet, a talented dude

After using U$6.4Bn in international currency reserves to prop up the Mexican Peso today (and a total of U$12Bn over the week), Incakola can reveal that President Felipe Calderón will appear in a 10 minute TV address to the Nation tonight. And as a further revelation, IKN has gotten its grubby little hands on the tapescript of the speech Calderón uses to explain this drastic financial move to his electorate.

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"My fellow citizens. Today I, along with the directors of the Central Bank, decided to screw up the future for your children...NOOOO!!! I DIDN'T SAY THAT!! CUT! Start again...."

"My fellow citizens. Today the gringos up North begged us to sell our hard-earned reserves in order to save their fractured economic model ...DAMN!!! CAN'T SAY THAT!! Trying again...."

"My fellow citizens. Because we have been stupid enough to rely on the USA as destination for 85% of our exports....OHHHHHHHHH NOOOOOOOO......AGAIN.... AGAIN......"

"My fellow citizens. Today the Central Bank intervened in the foreign exchange markets and sold U$6.4Bn in international reserves in a very short space of time. I'm not going to explain why because economics and finance are very difficult subjects, and as most of you are peasants you wouldn't understand anyway. All you need to do is believe me when I, your elected President, say, "It's for the best". ¡Que Viva Mexico!

Ok, cut...I think we can go with that.....what?....this isn't a recording...................?"

Mexican Peso to US Dollar forex, five day chart

Table of the day

And this one is about Latin America. The data was put together by Merrill Lynch and displayed at economist and national columnist Miguel Olivera's smart blog about Argentine economics

Note the strong position of all countries in the reserves-vs-short-term liabilities equation (short term meaning less than one year). Even the worst ratio of Argentina is manageable.

The second chart shows just just how much the region has strengthened in the decade so far. Particularly impressive are Brazil and Uruguay (the quiet achiever). Mexico might have a recession foist upon it from its northern neighbours, but there's no Tequila Effect this time round. And if you need convincing on whether this ratio figure is significant, look at the 0.9 figure printed by Argentina in 2001, and then remember what happened to that country in late 2001 and the early months of 2002.

Bottom line: I'd rather bank with a LatAm Savings&Loan than the dubious institutions up there right now.