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DEVALUATION | Alejandro Grisanti, analyst with Barclays Capital

"Devaluation will be unavoidable as long as there is inflation"

"Non-official dollar has reached economically unreasonable levels"

Alejandro Grisanti feels that because of the access to the domestic and foreign markets, the Venezuelan Government can sustain a deficit of 19.6% of the GDP (File photo)
EL UNIVERSAL
Saturday February 16, 2013  12:00 AM
One day before the announcement by the Venezuelan government of an economic adjustment package, Alejandro Grisanti, an analyst with Barclays Capital for Latin America, warned that insofar as inflation in Venezuela cannot be curbed, the country will be doomed to continued monetary devaluation.

Devaluation "is the outcome of the poor economic practice that has been applied and inflation is the main evidence of it. As long as Venezuela faces inflation rates higher than that of its trade partners, it will have to devaluate the currency."

In a recent report by Barclays, it is said that during all these 10 years of exchange control, USD 150 billion have left the country. How come if there is control and the State has the monopoly of foreign currency?

The wealthy have bought the bonds in US dollars issued by the own government that has get into debt for USD 80 billion to finance the capital flight. Remember Venezuelan President Hugo Chávez advertising a huge issue of Pdvsa (state-run oil holding Petróleos de Venezuela) bonds. This is the first time I see a president fueling an attack on the (local) currency by making an appeal to buy US dollars.

Yet there is the need to elaborate on USD 70 billion to complete USD 150 billion on account of capital flight.

Import over-invoicing should be added, plus the errors and omissions recorded by the Central Bank.  We include such things as capital flight.

Exchange control has been helpful only to give the powerful more power. Government friends receive dollars; the wealthy get richer; astounding fortunes have been amassed in the shadow of exchange control.

Vice-President Nicolás Maduro contends that exchange control has attained its goals. I wonder which. In addition to the tremendous outflow of foreign currency, it has been useless at cutting inflation. Based on the strategy of anchoring exchange control, inflation in Venezuela is the highest in Latin America.

Barclays pointed out in its reports that the government has a deficit of 19.6% of the Gross Domestic Product (GDP); twofold higher than that of Greece.  Does the government really need to fully bridge such gap?

It does not need to bridge it because it has access to the domestic and foreign markets.  The government has learned to use financial repression. The Central Bank finances Pdvsa by printing bolivars unable to leave the economy due to the restrictions to buy foreign currency.  Next, a big pool of bolivars is created, where issuing debt will be always cheap for the government.  The government reintroduces the bolivars received from indebtedness through public expenditure.

Is such a policy where the Central Bank prints bolivars costless?

That allows it to have a large deficit. However, the cost is that there are more current bolivars and the same goods and that pressurizes the prices of goods and services. Also, the price of the free dollar has smashed record levels.

The price of the US dollar in the non-official market of foreign currency has reached economically unreasonable levels, and this is precisely due to a large amount of bolivars able to pay any price to become dollars."

Over the past 12 months, liquidity has grown 30% in real terms. However, the resulting inflation has not been consistent with such increase in the amount of cash. Why?

The government has to a certain extent succeeded in keeping the price of priority goods frozen. You can do that for six months or one year only, yet the accumulated, repressed inflation will surface. Inflation in December hit 3.5%.

Can the government contain inflation this year, like in 2012, as long as it does not have for certain the possibility of an election?

Bringing soon the amount of items in short supply to supply your market is harder. The only means to provide the remaining items is by bringing 500 or 600 products.

How do you reckon the growth prospects? For the government, in an election scenario, economic growth is of the essence.

In last year's growth, public spending was among the driving forces through Mission Housing. However, it seems that spending is lessening and there is a situation where no decisions are made; there is no government. Such a situation will lead to a significant economic slowdown.

The government can keep growth in the black, but clearly lower than that of last year. It could grow at 2% or 3% until a potential election. The government has virtually come to a halt with the issue of the president's illness. In addition to a decline of the main spending drivers, the effect of the excesses committed in 2012 can be felt.

Translated by Conchita Delgado
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