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Venezuela's inflation is slowing down. Don't laugh. It actually is

Bloomberg's Cafe con Leche Index

Venezuela's inflation loses speed

- Forecasts of 10,000,000% look wildly off -- for now, at least
- But Maduro is sacrificing an economy already in tatters

By Patricia Laya / Bloomberg

Petroleumworld 05 31 2019

When Venezuela suddenly dumped years of unpublished economic data onto its central bank's website late Tuesday night, the most glaring trend that emerged was a slowdown in hyperinflation this year.

Venezuelans immediately scoffed at such a notion, and the skepticism is understood, of course, given how little credibility the embattled Nicolas Maduro regime has at this point.

But the odd thing is that the central bank report actually appears to be right in broad brush strokes: Inflation is slowing. Not only does the Bloomberg Cafe Con Leche Index show this -- the annual rate is down to 99,900% from 224,900% at the end of last year -- but so does the currency market, where the pace of the bolivar's plunge against the dollar has eased markedly.

Local economists who study inflation closely say the Maduro regime has largely engineered this slowdown by forcing banks to park huge quantities of their cash at the central bank . This has prevented them from lending the money out to people who typically use it to buy dollars in the black market and, in the process, add to the hyper-inflationary spiral.

“Brutal monetary restriction has in fact moderated inflation," said Omar Zambrano, a Caracas economist who offers consulting services.

Read more - What Broke Venezuela's Economy and What Could Fix It: QuickTake

Almost no one had been predicting such a thing in Venezuela this year. Most forecasts were actually for a spectacular surge in inflation as the socialist country careened into its sixth year of economic collapse. The International Monetary Fund, for instance, has been calling for the rate to reach 10,000,000% by the end of the year. So too has Fitch Ratings.

To be sure, few seem to believe that this current slowing trend has much staying power. In a country already living through a humanitarian crisis, the economic pain induced by the central bank's new policy is too extreme to keep in place for long, analysts say. Besides, they note, the underlying cause of hyperinflation -- the printing of bolivars to finance a massive budget deficit -- remains untouched.

“The government continues to print money because they're out of options to legitimately finance the deficit," Zambrano said.

What caused the government to suddenly release years of data on Tuesday is something of a mystery. There are theories -- like the idea that the move is an attempt by officials to ward off sanctions from the IMF -- but the government hasn't said a word on the subject. Years ago, Maduro had gradually halted data publication when the economy plunged into free-fall following the collapse of oil, the country's dominant export.

The new government data puts the monthly inflation rate at 34% in April, down from a high of 197% in January. It also shows the economy has shrunk for 19 straight quarters. In the third quarter of last year, the most recent period reported, output fell a staggering 23%, a trend that has likely only worsened since.

“They achieved their goal of containing the collapse of the bolivar at the expense of a smaller economy and more precariousness," said Henkel Garcia, director of the Caracas-based consultancy Econometrica.

— With assistance by Alex Vasquez

Story by Patricia Laya from Bloomberg. 05 30 2019


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