Will the dollar stop rising any time soon?

On Thursday afternoon, Venezuelans found out how their foreign purchasing power evaporated – quite literally – by the minute, as the US dollar surpassed the 400 bolívares (BsF) mark. This was according to the “coup-plotters/saboteurs” from “Dolar today,” the most widely used web page for Venezuela’s black market exchange rate. Other web pages, such as Lechuga verde or Aguacate verde, are not showing it to be quite so high.

To give some perspective to this nasty affair, about a year ago the black market value for a dollar was almost BsF65. By December 2014, it was BsF175. Exactly three months ago, the greenback hit the BsF200 bar. Just a couple of days ago, it was at 350.

The only remaining question is whether the dollar will reach the BsF1,000 milestone by the end of this year or sooner.

So … is this really a conspiracy? Is it speculation? Or is it just plain economics? Let’s dig beneath the surface.

We’ve been writing about the paucity of official data and intel on key economic figures, and the dollar value is no exception. This great article by economist Ronald Balza written a couple of months ago in Prodavinci helps shed some light on this mystery.

In it, Balza explains what Dolartoday does. Dolartoday tracks the exchange rate of trading agents between the Colombian city of Cúcuta and San Cristobal. Although Colombia is not Venezuela’s only trading partner, what happens in Cúcuta is a sign of our exchange rate value vis-a-vis the dollar, given that is one of the very few places in which you can swap bolívares for Colombian pesos and, from there, for US dollars.

But if you’re still skeptical about those Colombian dealings, then look at what has happened to the ratio of local money (M2) to foreign reserves, the dollars backing it. In plain English, this ratio represents how many bolívares we have as a proportion of the amount of US dollars in our reserves. Back in April 2005, there were almost BsF2 per every $. Ten years later, 1$ in our FX reserves accounts to almost BsF118. What is telling about this other reference is not the value itseflf, but how much it has increased.

Yet another way of looking at it is by checking Venezuela’s balance of payments. In plain vanilla, the balance of payment represents the balance of transactions Venezuela has with the rest of the world. The net result of the balance of payments in a year represents the change in our FX reserves – if more money comes in than goes out, our reserves grow, and vice versa.

According to the Central Bank’s own figures, from the first quarter of 2009 until the 3rd quarter of 2014 (latest published statistics) there has been a decline of almost $29 billion in reserves, meaning that Venezuela has faced an annual balance of payment deficit for the past 6 years.

If the numbers freaks you out, also bear in mind that in late 2015, 2016 and beyond, Venezuela must meet payments of its foreign debt (both sovereign and PDVSA’s) and possible adverse arbitrage rulings, which account for billions of dollars more. Add to this a steep decline in oil prices and we’re in for a real treat of a macro-beating.

So the problem is not about ill-intended agents of a meretricious “economic war”. It’s just that our fundamentals are completely screwed up, and this is making people flee our local currency. It’s an all-out collapse in people’s willingness to hold bolívares.

Ultimately, what the government calls “speculation” is just a mean-sounding name for something people are desperately trying to do: hold on to their purchasing power by whatever means necessary. This is typical of economies in a hyper-inflationary environment, as our friend Francisco Monaldi reminded us a few months ago.

The worst part about this story is that it is nowhere close to being over. If all of the above becomes the norm, we will continue to be fundamentally screwed, and the dollar will scale new heights.