After collapsing 99.99%, Venezuela’s bolívar stabilizes

The Venezuelan bolívar, after years of relentless and excruciating declines that left it nearly worthless and plunged millions into deep poverty, appears to have finally hit rock bottom.

Over the past four months, the currency has been trading at a rate of around 4.5 to the dollar, a newfound stability that has come without much need for support from policymakers.

It is a moment that sometimes seemed like it would never come as inflation spiraled out of control, the government removed zeros from the bolivar (six were cut in October alone) and the economy sank further into chaos. But various elements have come together to stop the collapse, at least for now.

They start with oil, which generates more and more foreign currency for the country as international prices soar and local production rises after a decade of declines. Gold mining also generates dollars, as do a handful of small export industries that have sprung up in recent years but are growing (such as shrimp, rum and cocoa farming).

On the other hand, the socialist regime, to the surprise of many, has taken a largely orthodox approach to reining in fiscal spending and freeing up an economy that had long been strangled by government controls and bureaucracy. In 2021, the economy expanded for the first time in seven years.

For many Venezuelans, currency stabilization comes too late.

While millions fled the country, many more stayed and gave up the bolívar in favor of the dollar as currency. They receive their salaries and pay almost everything in dollars. But many of the poorest Venezuelans continue to be paid in bolívares, and for them, the currency’s strength has helped preserve what little purchasing power they have left.

Inflation in bolivars has slowed to an annual pace of 53% in the past three months, well below 1,000% in recent years, according to a Bloomberg index.

Even local economists, used to seeing the government of President Nicolás Maduro make one policy mistake after another, acknowledge that this time it feels a little different. Asdrubal Oliveroswho runs the financial analysis firm Ecoanalítica, puts it this way: The bolívar will start to slide against the dollar at some point, but there won’t be the kind of mega-devaluation that has hit the economy time and time again in recent years.

Given that much of the economy is now run in dollars, Oliveros finds the government’s excessive focus on the bolívar misplaced, but, he says, “I wouldn’t call it an artificial policy. It is real”.

It is real because the central bank has been able to largely orchestrate this stability without having to draw on its already depleted foreign exchange reserves. The increase in exports has provided the central institute with enough foreign exchange to meet the demand of the banks.

Last year it sold about $1.5 billion and euros on the foreign exchange market, according to government documents seen by Bloomberg. Reserves, meanwhile, remained stable at about $6 billion, after deducting IMF funds to which the government does not have access.

For now, the policy appears sustainable. State-owned companies sold about $3.3 billion to the central bank in 2021, compared with just $743 million in 2020, according to government data shared during an investor call last month and obtained by Bloomberg.

Still, risks abound. Inflows from oil production and other exports must remain high if the central bank wants to maintain sales.

And inflation, while declining, remains among the highest in the world, which will eventually put pressure on the currency.

Tamara Herrera, an economist at Síntesis Financiera based in Caracas, sees risks in trusting that the bolívar will remain stable in the long term, especially when oil prices and production fluctuate. “The probability that the exchange rate will remain stable this year is relatively high“, He said. “But that is an oversimplification of the imponderables surrounding oil activity.”.

There is another factor that helps explain the stability of the bolívar: the collapse in import demand. Today, Venezuela is too poor, and the bolívar too weak, to buy much abroad. Imports totaled less than $8 billion in 2021. Ten years earlier, that figure was $53 billion.