Chart of the week: a sobering thought about Venezuela

Chart of the week 18/4/2019

Source: dolartoday, IMF, Refinitiv Datastream, Bloomberg, Aberdeen Standard Investments (as of April 16, 2019)

 

While media coverage over recent months has mainly focused on Trump, Brexit, Giles Jaunes protests in France, and populist movements in Italy, Venezuela is experiencing a far more severe political crisis.

In January 2019, Juan Guaidó, leader of Venezuela’s National Assembly, declared himself president of Venezuela, claiming the government of Nicolas Maduro illegitimate. As a result, there is currently a dual-power system in effect, with both men claiming presidential power.

This is not insignificant for the global economy, as Venezuela has the largest proven oil reserves in the world. The chart above illustrates that Venezuelan economic data mimics the political instability. (All data is plotted on a logarithmic scale.)

Although official inflation data hasn’t been published since December 2015, when consumer prices were increasing a mere 160% annually, the International Monetary Fund (IMF) estimates that last year’s inflation rate was in excess of 1,500,000%. The current Bloomberg estimate (based on the price of a cup of coffee served at a Caracas bakery) comes in just shy of 220,000%.

It’s no surprise then, that the devaluation of the bolivar has been extreme. The above chart even plots the currency after last August’s redenomination, which had knocked off six zeroes. Cash is losing its value by the day, so local investors have ploughed money into the stock market in an attempt to at least partially preserve their capital.

This precarious situation may get worse before it gets better. The IMF projects that inflation may reach 10,000,000% by the end of this year. If we assume that the exchange rate is driven by inflation-rate differentials, then the bolivar per USD rate of 4,982.7 (at the time of writing) will blow out to 373,707,907.82.

While this projection may raise eyebrows, only time will tell how inflation, currency and the market ultimately react to this political disquiet. In a world of lower numbers (e.g., interest rates, bond yields, expected equity returns), there will inevitably be pockets of madness. And some may argue that the IMF’s 10,000,000% assumption is madness in itself, given the institution’s past performance when it comes to forecasting.

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

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