Venezuela is in crisis. Its economic activity is collapsing, its inflation rate is skyrocketing and the value of its currency is falling like a stone. People are leaving the country as soon as possible as they perceive that there is no future.
People are starving. The average weight of the population is lower year after year. According to a Survey on Living Conditions (ENCOVI), the average weight of the Venezuelans was 11 kilos lower in 2017 than in 2016 and in 2016, 8 kilos lower than in 2015. That’s a real measure of a deep crisis. According to this survey, in 2014, people out of poverty represented 51.8% of the population. In 2017 it was just 13%. In other words, 87 % of the population was considered as poor.
When the oil price is high, as it was the case before mid-2014, the situation is manageable but as soon as it falls there are no capacities to create new revenues.
The real GDP level is now 40% lower than in 2015 and the inflation rate has an hyper-inflation profile. The cup of coffee with milk, reported by Bloomberg, shows how prices are slipping. The inflation rate is already forecast at 1 000 000% this year. Continue reading
Co-authored with Zouhoure Bousbih
The dollar has been gaining ground since mid-April, with investor perception that the Fed would take stronger and swifter action than expected, and this raises a number of difficulties for emerging markets.
The greenback’s surge against all other currencies is a game changer for emerging countries for at least three reasons: expectations of a swift rate hike from the Fed generally trigger capital outflows from emerging countries, which is what we are currently witnessing; the situation also hampers economic prospects due to insufficient liquidity and the ensuing rise in interest rates; these factors combine to further push the currency down and thereby increase the cost of paying off dollar-denominated debt (read my posts here and here to find out more about this deterioration).
This situation is particularly worrying when the current account balance (which reflects a country’s external relationships) displays a deficit, as the flipside to this is high external debt and a situation that is set to deteriorate even faster than elsewhere. This raises the question of financing the current account at a time when the country is suffering capital outflows, and the country in question generally has to up its interest rates considerably, pushing its economy into a downward spiral and ultimately locking it into a crisis.
We have witnessed this situation recently in Argentina, Turkey, Indonesia, South Africa and some other countries, and there is nothing unusual about it, but it is very a costly experience for countries hit by this adjustment.
At this juncture, I feel it is interesting to identify the mechanisms involved in this type of crisis by taking the example of Turkey. The country is currently undergoing this type of adjustment in a very dramatic way and the situation is made even more complex by the prospect of early presidential elections on June 24.
The Turkish crisis Continue reading
Here is my weekly column for Forbes in France. My column is available here in French
Europe is a key factor in the presidential campaign, even though this theme gained minimal coverage during the two televised debates. Europe is a key differentiating factor for the four candidates who are leading in the polls, and so it must be the main decisive factor in the elector’s choice between the candidates.
The aim for two of them, Emmanuel Macron and François Fillon, is to intensify existing institutions although the exact ways to achieve this are not the same for them both. But neither wants to leave the Eurozone.
However, for the two other candidates in the top 4, Marine Le Pen and Jean-Luc Mélenchon, Europe marks a clear area of watershed as regards’ France’s position on the European institutions. They both intend to start negotiations with Europe to change the relationship and give France back its decision-making power. In the event of the likely breakdown of these talks (the remaining European Member States would not necessarily want to change the existing framework), both intend to take France out of Europe, backed by a referendum.
In both cases, currency would be at the very crux of the new framework that France would need to set up.
In Le Pen’s opinion, a national French currency is the key to ensuring independence for the country. Meanwhile, under Mélenchon, the euro would become a common currency and no longer a single currency, which would imply the creation of a new currency for France. As the other members of the Eurozone would probably not be favorable to this new framework for the euro, this would be tantamount to France leaving the Eurozone and creating a French currency.
Looking beyond these factors, neither program explicitly outlines the currency framework the candidates would set up. What we do know is that in both scenarios, the central bank would lose its independence and would be used as an instrument to finance state spending. In other words, the state would have the wherewithal to create its own currency to finance its own spending: economic history tells us that this type of situation triggers inflation and fuels macroeconomic, financial and monetary instability. French savers would be directly hit. Continue reading
Since mid-May emerging countries’ situation has changed dramatically. Large capital outflows and currency depreciation have weakened a lot of them. In the second half of August the focus was on India, Brazil, Turkey or Indonesia. These countries but also many others have experienced a slowdown in growth for several months now and capital outflows recently. It is the combination of these two factors that weakens them.
This situation leads to an impossible trade-off for economic policy. Continue reading