Returning to México may be important for prices stability

Leonardo Vera. Informe Especial de Coyuntura Carpe Diem

By the end of last year, the consensus that was emerging among analysts of the Venezuelan economy was that economic growth in 2023 could stand in a narrow range between 5 and 6.5%. For instance, the panel of analysts and private research centers consulted by LatinFocus Consensus Forecast foresaw a growth of 5.3% for Venezuela in 2023, while the IMF’s World Economic Outlook estimated a growth of 6.5% and the Economic Commission for Latin America and the Caribbean (ECLAC) outlook was 5%.

These forecasts are now subject to revision. The IMF’s updated World Economic Outlook report now estimates a growth for Venezuela of 5% instead of 6.5%.

The strong depreciation experienced in the exchange rate in November, December and January (44.7%, 41.9% and 23.3% respectively) and the resulting increase in the inflation rate caused a significant drop in the purchasing power of all those who continue to receive income in bolivars, with contractionary effects on consumption and sales volume.

The Greater Caracas commercial sales volume index prepared by the consulting firm @ecoanalitica has reported a contraction of 14.6% in the first quarter of 2023 compared to the same period of 2022. Tiziana Polesel, president of the National Council of Commerce and Services (Consecomercio), has said that according to reports from the different chambers affiliated to Consecomercio, consumption has marked a downward trend, resulting in an average between 25% and 35% less in sales in the first two months of 2023 (vs. 2022).

The behavior of the inflation rate in February and March certainly shows a downward trend. According to the Venezuelan Finance Observatory, price variation was 15.4% in February and 4.2% in March. Thus, the economy enters the second quarter of the year amid lower inflation. What happens with consumption depends on what happens with income and especially with salary income. In this case, it will be difficult to estimate if the government of Nicolás Maduro will decide to continue applying its policy of freezing salaries, or if it decides to increase salaries and pensions.

If the Maduro government opts for the formula of increasing wages, it will immediately result in the second problem of how to prevent such increase from leading to pressures on the exchange market and a spike in the inflation rate. Looking forward to the half of the year, only by avoiding these sudden turns in the trend of the exchange rate and inflation we can expect a better performance of consumption, demand and the pace of economic activity.

Here it is worth noting that the trend of inflation in Venezuela is closely related to exchange rate depreciations. For the last 27 months (from January 2021 to March of this year) the correlation index between the monthly inflation rate and the depreciation of the exchange rate in the black market is 0.71. This positive correlation is shown more clearly in Figure 1.

Figure 1 clearly shows that the last two inflationary mini-cycles have occurred right after two sharp depreciations in the exchange rate.

The good news for the moment is that the official exchange rate has stood in a range between 24 and 25 bolivars per dollar throughout the last 9 weeks. However, the market has seen how these relative periods of stability are easily disrupted either by sudden changes in domestic macroeconomic variables or by expectations. 

The formula that the government seems to have found to steady the foreign exchange market is to continue to allow companies such as Chevron to join the market as suppliers of foreign currency. In perspective, this is a good reason (but not the only one) that would push the Maduro government to stop hindering the negotiating table in Mexico and to start signaling with facts its willingness to deliver democratic guarantees in exchange for broader commercial and oil licenses.

In the meantime, the international conference on Venezuela announced by Colombian President Gustavo Petro is taking shape. Several media outlets have noted that the meeting to promote dialogue between the government of Nicolás Maduro and the opposition would take place during the last week of April. According to information obtained by El Espectador, the event will take place more precisely on April 24.

Artículos destacados

Para el debate