From financial repression to external distress: The case of Venezuela
The document examines Venezuela's economic situation, highlighting the impact of financial repression and external debt distress from 2003 onwards. It discusses the relationship between domestic debt defaults and external defaults, emphasizing the severe currency controls and high black market exchange rate premiums. The authors analyze historical debt accumulation and financial practices to illustrate the link between financial repression and economic deterioration in Venezuela.
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From financial repression to external distress: The case of Venezuela
- 1. From financial repression to external distress: The case of Venezuela Carmen Reinhart Minos A. Zombanakis Professor of the Interna7onal Financial System Harvard Kennedy School NBER Research Associate Miguel Angel Santos Senior Research Fellow, Center for Interna7onal Development Harvard Kennedy School Adjoint Professor, Center of Finance Ins7tuto de Estudios Superiores en Administracion (IESA) [email protected] @miguelsantos12
- 2. 2 The idea and its rela.on to the literatrure • Debt-‐intolerance puzzle: Developing countries tend to default at debt to GDP ra.os much lower than developed na.ons (Reinhart & Rogoff, 2003, 2010) • The forgoTen history of domes7c debt: Underes.ma.on or plain omission of domes.c debt may account for a frac.on of that puzzle (Reinhart & Rogoff, 2011) • An overwhelming majority of external defaults are heralded by domes.c debt defaults: Real losses forced on domes.c bondholders (Reinhart & Rogoff, 2010) • Domes.c default occurs in the context of interest rate and exchange controls that force real losses on domes.c bondholders (Giovanini & de Melo, 1991; Reinhart & Sbrancia, 2013) • In this paper we explore an empirical channel connec.ng financial repression with external distress, via a broader measure of capital flight: -‐ Restricted capital flight (as presented in the literature, Diaz-‐Alejandro 1984 and Rodriguez, M. 1987) -‐ Over-‐invoice of imports
- 3. 3 The case of Venezuela • Venezuela is experiencing a prolonged episode of harsh price, exchange and interest rate controls (2003 – nowadays) • Premiums on the black exchange market are running 53% -‐ 4,020% (depending on the official exchange rate used)
- 4. 4 Huge exchange rate premiums… 0.00 50.00 100.00 150.00 200.00 250.00 300.00 Venezuela´s Mul;ple Exchange Rates Parallel Market Rate Official 1 Official 2 SICAD I SICAD II SIMADI 4,020 % 53%
- 5. 5 The case of Venezuela • Venezuela is experiencing a prolonged episode of harsh price, exchange and interest rate controls (2003 – nowadays) • Premiums on the black exchange market are running 53% -‐ 4,020% (depending on the official exchange rate used) • Between 2006-‐2013 Venezuela accumulated an astounding public debt: • Foreign debt quadrupled, from US$ 26.9 to US$104.3 billion) • Domes.c debt doubled in real terms: 1,058% nominal growth (CAGR 42%), par.ally offset by 528% accumulated infla.on (CAGR 30%) • Financial repression has been rampant, with domes.c infla.on running at a rate five .mes higher than nominal domes.c interest rates • Prac..oners in Wall Street (Rodriguez, F. 2014) have stressed that ability to service foreign debt is strictly related to the availability of foreign currency, and unrelated to the prevalence of highly nega.ve real interest rates in the domes.c market
- 6. 6 Debt toGDP ratios @ average official exchange rate 10,5%% 12,0%% 10,1%% 12,5%% 14,9%% 11,4%% 10,4%% 8,4%% 6,8%% 9,3%% 3,3%% 9,6%% 13,5%% 12,1%% 16,7%% 9,6%% 7,6%% 7,9%% 10,3%% 13,5%% 16,2%% 18,9%% 14,7%% 11,1%% 9,2%% 7,3%% 4,5%% 7,5%% 8,9%% 11,4%% 15,6%% 15,8%% 46,7% 59,5% 45,4% 53,3% 71,7% 77,4% 68,6% 76,5% 62,9% 65,5% 57,5% 64,2% 60,0% 54,6% 58,8% 43,0% 38,7% 37,6% 32,6% 34,6% 46,0% 53,5% 39,6% 32,3% 23,7% 24,1% 20,7% 28,0% 40,7% 42,3% 43,2% 39,8% 1982% 1983% 1984% 1985% 1986% 1987% 1988% 1989% 1990% 1991% 1992% 1993% 1994% 1995% 1996% 1997% 1998% 1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% Consolidated%Public%Debt% (%%of%GDP%at%average%official%market%rates)% Domes1c%Debt% Foreign%Debt% Total%Public%Debt%
- 7. 7 Debt toGDP ratios @ average parallel exchange rate (32,0) 10,5%% 12,0%% 10,1%% 12,5%% 14,9%% 11,4%% 10,4%% 8,4%% 6,8%% 9,3%% 3,3%% 9,6%% 13,5%% 12,1%% 16,7%% 9,6%% 7,6%% 7,9%% 10,3%% 13,5%% 16,2%% 18,9%% 14,7%% 11,1%% 9,2%% 7,3%% 4,5%% 7,5%% 8,9%% 11,4%% 15,6%% 15,8%% 46,7% 109,1% 79,0% 87,0% 117,6%114,9% 110,8% 76,9% 62,6% 64,7% 56,8% 63,8% 64,5% 72,6% 62,3% 43,0% 38,6% 37,5% 32,6% 34,6% 45,9% 71,2% 52,4% 38,2% 27,1% 42,5% 38,0% 65,2% 69,7% 73,3% 87,4% 154,3% 1982% 1983% 1984% 1985% 1986% 1987% 1988% 1989% 1990% 1991% 1992% 1993% 1994% 1995% 1996% 1997% 1998% 1999% 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% Consolidated%Public%Debt% (%%of%GDP%at%average%parallel%market%rates)% Domes1c%Debt% Foreign%Debt% Total%Public%Debt%
- 8. 8 What is it that we do? • Divide the period 1983-‐2013 in years of exchange controls and years of free-‐markets • Use varia.ons of two different methodologies (Giovanini & de Melo, 1991; Reinhart & Sbrancia, 2013) to es.mate Venezuelan fiscal revenues coming from financial repression and test if they are higher in periods of exchange controls • Decomposing expected infla.on and pure (expected) financial repression • Using yields on foreign debt to calculate ex post equilibrium domes.c debt rates • Es.mate capital flight using the tradi.onal approach (Diaz-‐Alejandro, 1984) • Es.mate over-‐invoice of imports using an innova.ve methodolody, that capture differences between imports reported by Venezuelan customs and Central Bank´s • Test whether broad capital flight (capital flight + over-‐invoice of imports) tends to be higher in years of exchange controls
- 9. 9 Estimating financialrepresion vía Reinhart-Sbrancia (2013) Breaking down “unorthodox” financial components Basic equation Unexpected inflation effect Pure financial repression effect Seigniorage 1 + !! ! = !!!!!! !!!! ! !,!the!ex'ante!real!return!on!domestic!debt! Transformed equation where
- 10. 10 We estimateexpected inflation using an ARIMA (1,1,0) approach !20$ 0$ 20$ 40$ 60$ 80$ 100$ 120$ 140$ 1960$ 1961$ 1962$ 1963$ 1964$ 1965$ 1966$ 1967$ 1968$ 1969$ 1970$ 1971$ 1972$ 1973$ 1974$ 1975$ 1976$ 1977$ 1978$ 1979$ 1980$ 1981$ 1982$ 1983$ 1984$ 1985$ 1986$ 1987$ 1988$ 1989$ 1990$ 1991$ 1992$ 1993$ 1994$ 1995$ 1996$ 1997$ 1998$ 1999$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ Infla%on'and'ARIMA'Forecasted'Infla%on' CPI$Varia4on$ ARIMA$Expected$CPI$Varia4on$
- 11. 11 Yields ondomestic debt instruments have been negative, liquidation years (inflation>yields) are more common in years of controls, but not unheard of in free-market years 11.6 11.4 11.5 28.1 29.5 84.5 40.7 34.2 31.4 38.1 60.8 59.9 99.9 50.0 35.8 23.6 16.2 12.5 22.4 31.1 19.2 14.3 16.9 22.6 32.4 28.6 27.8 27.6 19.9 56.1 13.0 13.2 12.6 12.1 13.5 14.9 17.3 20.1 27.1 31.7 41.0 54.7 53.4 49.1 25.4 47.9 31.1 21.0 22.1 38.5 32.2 15.6 12.9 7.8 9.6 14.5 12.8 15.5 17.5 16.8 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Average Nominal Domes;c Bond Yield and Infla;on Infla.on Average Yield on Domes.c Bonds
- 12. 12 VEF$Million %$GDPVEF$Million %$GDP VEF$Million %$GDP 1984 3 0.70 3 0.63 1985 -2 30.44$ 0 30.04$ 12 2.60 1986 0 0.04 0 30.05$ 9 1.89 1987 10 1.41 13 1.80 21 3.07 1988 -7 30.83$ 12 1.39 27 3.07 1989 28 1.85 66 4.38 48 3.16 1990 -50 32.21$ 17 0.75 106 4.64 1991 37 1.22 39 1.30 205 6.75 1992 3 0.08 23 0.57 131 3.17 1993 22 0.40 38 0.69 146 2.67 1994 88 1.02 209 2.41 436 5.03 1995 -166 31.21$ 194 1.42 436 3.18 1996 644 2.19 1,141 3.88 1,239 4.21 1997 -1,660 33.96$ 32 0.08 1,888 4.50 1998 513 1.03 -318 30.64$ 1,504 3.01 1999 -67 30.11$ 19 0.03 1,902 3.20 2000 111 0.14 -1,699 32.13$ 1,566 1.97 2001 195 0.22 -1,584 31.78$ 1,332 1.50 2002 1,713 1.59 493 0.46 2,410 2.23 2003 -2 30.00$ 1,980 1.47 5,400 4.02 2004 -4,384 32.06$ -3,546 31.67$ 7,065 3.32 2005 1,188 0.39 -4,814 31.58$ 8,633 2.84 2006 1,943 0.49 959 0.24 25,067 6.36 2007 945 0.19 3,612 0.73 27,608 5.58 2008 1,093 0.16 7,281 1.07 35,119 5.18 2009 -3,270 30.46$ 6,517 0.92 32,561 4.60 2010 1,111 0.11 9,224 0.91 46,711 4.59 2011 388 0.03 16,874 1.24 76,315 5.62 2012 -11,864 30.72$ 10,258 0.63 124,277 7.58 2013 93,349 3.50 131,293 4.92 272,982 10.24 Average 0.16 0.81 4.19 Average'Repression/Control'Years 0.32 1.27 *** 4.34 * Average'Free4Market'Years -0.16 -0.07 3.36 Unanticipated$Inflation$ Effect Ex3ante$Financial$ Repression$Effect Seigniorage
- 13. 13 Estimating financialrepresion vía benchmarks with yields on foreign debt (use average YTM as opposed to coupons) @Official rate 11,9$ 15,0$ 10,7$ 21,3$ 16,0$ 9,8$ 9,6$ 16,0$ 14,4$ 13,3$ 14,7$ 13,1$ 8,9$ 7,7$ 7,1$ 6,6$ 9,1$ 21,6$ 14,1$ 13,9$ 13,7$ 9,4$ 13,8$ -0,6$$ 5,6$$ -0,3$$ -13,7$$ 30,3$$ -35,0$$ 27,3$$ 11,9$$ 33,7$$ 16,8$$ 13,7$$ -23,9$$ -0,0$$ 12,7$$ 3,2$$ 10,9$$ 7,8$$ 9,5$$ 14,5$$ -36,0$$ 2,1$$ 17,5$$ -18,3$$ 1991# 1992# 1993# 1994# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# Financial$Repression:$US$$Yields$on$Foreign$and$DomesCc$Debt$(@Official$Exchange)$ Average#US$#Yield#on#Foreign#Debt# Average#US$#Yield#on#DomesAc#Bonds#@Official#
- 14. 14 @Official rates:Repression/control years are higher, but due to small number of observations (Venezuelan debt startied floating 1991 onwards) difference is not significant VEF$Million %$GDP Merryl$Lynch$Ave$ Yield$(US$) Change$in$official$ price$of$dollar Equilibrium$Yield$ Domestic Equilibrium$Domestic$Yield$H$ Average$Government$Yield Financial$Repression 1991 11.88 20.83 35.19 15.13 33 1.09 1992 15.00 20.43 38.49 11.35 24 0.57 1993 10.71 32.04 46.18 14.52 48 0.88 1994 21.33 63.36 98.19 57.16 486 5.60 1995 15.98 18.78 37.76 H16.97$ H240$ H1.76$ 1996 9.83 135.99 159.18 105.80 3,476 11.81 1997 9.58 17.07 28.29 H20.80$ H930$ H2.22$ 1998 16.01 12.07 30.01 4.60 180 0.36 1999 14.38 10.62 26.52 H21.36$ H908$ H1.53$ 2000 13.31 12.26 27.20 H3.92$ H254$ H0.32$ 2001 14.71 6.43 22.09 1.06 107 0.12 2002 13.08 60.43 81.42 59.30 8,728 8.09 2003 8.89 38.56 50.88 12.37 2,648 1.97 2004 7.72 17.21 26.26 H5.89$ H1,665$ H0.78$ 2005 7.13 12.00 19.98 4.41 1,430 0.47 2006 6.57 1.81 8.50 H4.43$ H1,550$ H0.39$ 2007 9.14 0.00 9.14 1.33 481 0.10 2008 21.56 0.00 21.56 12.01 3,994 0.59 2009 14.13 0.00 14.13 H0.34$ H144$ H0.02$ 2010 13.88 76.28 100.75 87.91 63,073 6.20 2011 13.73 13.17 28.71 13.18 16,105 1.19 2012 9.38 0.00 9.38 H8.12$ H16,610$ H1.01$ 2013 13.76 42.99 62.66 45.90 155,102 5.82 Average 1.60 Average'Repression/Control'Years 2.13 Average'Free'Market'Years 0.78
- 15. 15 Estimating financialrepresion vía benchmarks with yields on foreign debt (use average YTM as opposed to coupons) @Parallel rate 11,9$ 15,0$ 10,7$ 21,3$ 16,0$ 9,8$ 9,6$ 16,0$ 14,4$ 13,3$ 14,7$ 13,1$ 8,9$ 7,7$ 7,1$ 6,6$ 9,1$ 21,6$ 14,1$ 13,9$ 13,7$ 9,4$ 13,8$ -0,6$$ 5,6$$ -0,3$$ -21,4$$ 0,6$$ -14,7$$ 38,1$$ 11,9$$ 33,7$$ 16,8$$ 13,7$$ -23,9$$ -33,8$$ 12,6$$ 22,2$$ 14,8$$ -36,4$$ 10,7$$ -15,7$$ -5,9$$ -2,3$$ -9,6$$ -63,3$$ 1991# 1992# 1993# 1994# 1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# Financial$Repression:$US$$Yields$on$Foreign$and$DomesCc$Debt$(@Parallel$Exchange)$ Average#US$#Yield#on#Foreign#Debt# Realized#US$#Yield#on#DomesCc#Bonds#@Parallel##
- 16. 16 @Parallel rates:revenues from financial repression are significantly higher (95%) in years of financial repression and controls VEF$Million %$GDP Merryl$Lynch$Ave$ Yield$(US$) Change$in$parallel$ price$of$dollar Equilibrium$Yield$ Domestic Equilibrium$Domestic$Yield$H$ Average$Government$Yield Financial$Repression 1991 11.88 20.83 35.19 15.13 33 1.09 1992 15.00 20.43 38.49 11.35 24 0.57 1993 10.71 32.04 46.18 14.52 48 0.88 1994 21.33 79.50 117.78 76.75 652 7.52 1995 15.98 53.78 78.35 23.62 335 2.45 1996 9.83 79.87 97.55 44.17 1,451 4.93 1997 9.58 7.97 18.31 H30.78$ H1,376$ H3.28$ 1998 16.01 12.07 30.01 4.60 180 0.36 1999 14.38 10.62 26.52 H21.36$ H908$ H1.53$ 2000 13.31 12.26 27.20 H3.92$ H254$ H0.32$ 2001 14.71 6.43 22.09 1.06 107 0.12 2002 13.08 60.43 81.42 59.30 8,728 8.09 2003 8.89 109.35 127.96 89.45 19,153 14.27 2004 7.72 17.38 26.44 H5.71$ H1,614$ H0.76$ 2005 7.13 H5.45$ 1.29 H14.28$ H4,634$ H1.52$ 2006 6.57 H1.59$ 4.87 H8.06$ H2,818$ H0.72$ 2007 9.14 69.51 85.01 77.20 27,878 5.64 2008 21.56 H1.07$ 20.26 10.71 3,561 0.53 2009 14.13 35.86 55.05 40.58 16,986 2.40 2010 13.88 19.96 36.61 23.77 17,057 1.68 2011 13.73 18.22 34.44 18.91 23,115 1.70 2012 9.38 29.96 42.15 24.66 50,472 3.08 2013 13.76 217.85 261.58 244.82 827,209 31.03 Average 3.40 Average'Repression/Control'Years 5.16$** Average'Free'Market'Years 0.66
- 17. 17 Summary of findings on financial repression • Regardless of the methodology, government revenues coming from financial repression thrive on periods of interest-‐rate ceilings, exchange and price controls (1.3% -‐ 5.2% of GDP), and come close to zero when none of these restric.ons prevail • Large misalignments across these indicators on a year-‐to-‐year basis mirror similar disequilibria across domes.c government bond-‐returns, foreign yields, infla.on, and exchange rate movements • Since es.mates based on dollar-‐yields of sovereign bonds are consistently higher, one could infer that foreign and domes.c debt instruments are not perfect subs.tutes -‐ Domes.c regula.ons different from price, exchange and interest rate controls, seems to drive domes.c investors to hold domes.c debt in spite of its yields being significantly lower in dollars -‐ We can see this set of regula.ons as a more subtle way to impose financial repression
- 18. 18 Estimating capitalflight (Diaz-Alejandro, 1984) ü To the balance of interna.onal reserves at the beginning of the year, add the current account balance, direct investment, pornolio investment and other (net) varia.on in net public assets (including debt service payments), and subtract the ending balance of interna.onal reserves ü It is the equivalent of calcula.ng what would have been the accumula;on of interna;onal reserves in the absence of changes in the net accumula;on of private assets abroad and errors and omissions • To gauge the importance of capital flight we es.mated the figure as: -‐ % of GDP at the official exchange rate -‐ % of GDP at the parallel exchange rate -‐ Constant US$ dollars -‐ % of exports
- 19. 19 US$ Million% GDP - @ Official % GDP - @ Parallel Constant 2013 US$ Million % of Exports 1984 2,162 1985 1,028 1986 709 1987 )403, 1988 )1,205, 1989 2,768 1990 3,014 1991 2,450 1992 1,001 1993 )907, 1994 3,293 1995 3,386 1996 2,466 1997 5,757 1998 6,098 1999 4,083 2000 6,118 2001 9,403 2002 9,841 2003 3,783 2004 8,797 2005 11,738 2006 7,364 2007 17,948 2008 20,569 2009 23,505 2010 20,255 2011 19,261 2012 11,968 2013 8,612 Average Average'Repression/Control'Years Average'Free'Market'Years 3.5 1.7 1.6 )1.0, )2.7, 7.1 6.3 4.6 1.7 )1.5, 5.7 4.4 3.5 6.7 6.7 4.2 5.2 7.7 10.6 4.5 7.8 8.2 4.0 7.8 6.5 7.1 7.5 6.1 3.1 2.0 4.7 4.4 5.2 6.8 3.1 2.9 )1.6, )4.7, 7.2 6.3 4.6 1.7 )1.5, 6.2 6.2 3.8 6.7 6.7 4.2 5.2 7.7 10.6 6.8 11.8 10.4 5.0 16.3 13.5 20.1 14.5 12.2 8.1 11.4 7.1 8.0,* 5.2 4,950 13.6 2,263 7.2 1,532 8.3 )840, )3.9, )2,414, )12.0, 5,291 21.4 5,466 17.3 4,264 16.4 1,691 7.2 )1,488, )6.2, 5,266 20.4 5,267 17.7 3,728 10.4 8,507 24.3 8,869 34.7 5,783 19.6 8,381 18.2 12,685 35.3 12,967 36.7 4,893 13.9 11,019 22.2 14,217 21.1 8,698 11.2 20,369 25.6 22,801 21.6 25,366 40.8 21,536 30.8 19,890 20.8 12,148 12.3 8,612 9.7 8,723.9 17.2 9,729.6,* 15.7 6,712.5 20.3 Capital Flight ü Capital flight is higher in periods of exchange controls when calculated as a % of GDP at the parallel market rate, or in constant US$ 2013 ü As a % of GDP or as a % of exports, capital flights seems to be higher in free market years, but the difference is not significant
- 20. 20 Es.ma.ng the over-‐invoice of imports • We departed from tradi.onal FOB-‐CIF mirror trade sta.s.cs that focus on over-‐invoicing “on the route” to es.ma.ng over-‐invoicing within Venezuela • We contrast Central Bank imports (CIF), with the sum of imports registered by Venezuelan customs (UNcomtrade) • The difference was subject to two different tests: -‐ Ver.cal: Whether import over-‐invoices as es.mated in this way is higher in periods of exchange controls (high black market premiums) as measured by: -‐ % of GDP at the official exchange rate -‐ % of GDP at the parallel exchange rate -‐ Constant US$ dollars -‐ % of exports -‐ % of imports -‐ Horizontal: Whether errors registered in Venezuela each year are significant within the distribu.on of that error worldwide for each year
- 21. 21 Current'US$'Million Overinvoicing*of*Imports % GDP- @ Official Overinvoicing*of*Imports % GDP - @ Parallel Overinvoicing*of*Imports Constant 2011 US$ Million % of Exports Overinvoicing*of*Imports % of Imports Overinvoicing*of*Imports 1984 *** 1,210 1985 *** 908 1986 *** 1,180 1987 *** 1,240 1988 *** 1,670 1989 *** 1,020 1990 ** 787 1991 - 1,210 1992 ** 1,520 1993 - 1,370 1994 *** 1,250 1995 *** 2,000 1996 *** 1,070 1997 * 1,610 1998 *** 1,740 1999 - 659 2000 - 1,770 2001 - 2,030 2002 - 1,380 2003 - 962 2004 - 2,170 2005 - 2,380 2006 *** 9,420 2007 *** 15,500 2008 - 3,550 2009 - 3,440 2010 *** 7,020 2011 *** 11,900 Average Average*Repression/Control*Years Average*Free*Market*Years 2.0 1.5 2.7 3.2 3.7 2.6 1.6 2.3 2.5 2.3 2.1 2.6 1.5 1.9 1.9 0.7 1.5 1.7 1.5 1.2 1.9 1.7 5.1 6.7 1.1 1.0 2.6 3.8 2.3 2.6'** 1.8 3.8 2.7 4.8 5.0 6.5 2.6 1.6 2.3 2.5 2.3 2.4 3.7 1.6 1.9 1.9 0.7 1.5 1.7 1.5 1.7 2.9 2.1 6.3 14.1 2.3 2.9 5.0 7.5 3.4 4.3'*** 1.8 2,629 7.6 1,936 6.4 2,469 13.8 2,502 11.9 3,240 16.6 1,888 7.9 1,382 4.5 2,039 8.1 2,487 10.9 2,176 9.4 1,936 7.8 3,012 10.5 1,566 4.5 2,304 6.8 2,451 9.9 904 3.2 2,348 5.3 2,652 7.6 1,761 5.2 1,205 3.5 2,632 5.5 2,791 4.3 10,775 14.4 17,034 22.1 3,811 3.7 3,595 6.0 7,228 10.7 11,900 12.8 3,666.1 8.6 4,563.8'** 9.4'* 2,050.4 7.1 16.7% 12.1% 15.0% 14.0% 13.8% 14.0% 11.6% 11.9% 12.0% 12.0% 14.7% 16.6% 10.8% 11.8% 11.5% 5.0% 10.5% 10.6% 10.3% 9.2% 12.7% 9.9% 28.0% 32.8% 6.9% 8.4% 18.2% 25.4% 13.8 15.5%'** 10.7 Over-‐Invoice of Imports Ver;cal test ü Over-‐invoice of imports as es.mated by our method is higher in years of exchange controls by any criteria: -‐ % of GDP (Official): 95% -‐ % of GDP (Parallel): 99% -‐ Constant US$: 95% -‐ % of exports: 90% -‐ % of imports: 95% ü There seems to be a posi.ve bias in Venezuelan sta.s.cs, but controls years exhibit an excess of 2.5 billion constant 2011 US$ per year with respect to free-‐ market years ü Look at 2007 and 2011!
- 22. 22 Horizontal test: Measures whether the error registered in Venezuela (Imports BCV / Sum of Imports at customs) is significant within the context of the distribu.ons of errors worldwide that year -‐ 2007 01234 Density 1.00 1.20 1.40 1.60 imp_errord Source: WDI2014 and Comtrade database Distribution of import discrepancies: merchandise imports (WDI vs imp_comtrade) in 2007
- 23. 23 Horizontal test: Measures whether the error registered in Venezuela (Imports BCV / Sum of Imports at customs) is significant within the context of the distribu.ons of errors worldwide that year -‐ 2011 01234 Density 1.00 1.10 1.20 1.30 1.40 1.50 imp_errord Source: WDI2014 and Comtrade database Distribution of import discrepancies: merchandise imports (WDI vs imp_comtrade) in 2011
- 24. 24 On the over-‐invoice of imports: Horizontal tests • Out of the eighteen years where Venezuela had exchange rate controls, in thirteen (72%) the error registered was significantly higher than the world´s average, in all cases at a 99% confidence level • Only four out of the ten (40%) years where exchange controls did not prevail the Venezuelan error turned significantly higher than the world´s average • There seems to be a posi.ve bias in the error difference in Venezuela • The fact that we observe the expected result (errors significantly higher in years of controls, no discernible difference in the others) in 68% of the years; and within Venezuela, across all of our indicators, the over-‐invoice of imports resulted significantly higher in years of financial repression, seems to indicate that our es.mator was able to pickup some of the differences in incen.ves to over-‐invoice imports in years of exchange controls
- 25. 25 Capital'Flight 'Over/Invoicing'of' Imports' US$$Million US$$MillionUS$$Million 1984 2,162 1,210 3,372 1985 1,028 908 1,936 1986 709 1,180 1,889 1987 3403$ 1,240 837 1988 31,205$ 1,670 465 1989 2,768 1,020 3,788 1990 3,014 787 3,801 1991 2,450 1,210 3,660 1992 1,001 1,520 2,521 1993 3907$ 1,370 463 1994 3,293 1,250 4,543 1995 3,386 2,000 5,386 1996 2,466 1,070 3,536 1997 5,757 1,610 7,367 1998 6,098 1,740 7,838 1999 4,083 659 4,742 2000 6,118 1,770 7,888 2001 9,403 2,030 11,433 2002 9,841 1,380 11,221 2003 3,783 962 4,745 2004 8,797 2,170 10,967 2005 11,738 2,380 14,118 2006 7,364 9,420 16,784 2007 17,948 15,500 33,448 2008 20,569 3,550 24,119 2009 23,505 3,440 26,945 2010 20,255 7,020 27,275 2011 19,261 11,900 31,161 Average Average'Repression/Control'Years Average'Free'Market'Years 'Broad'Capital'Flight' % GDP - @ Official 5.4 3.2 4.3 2.2 1.0 9.8 7.9 6.9 4.2 0.8 7.8 7.0 5.0 8.6 8.6 4.8 6.7 9.3 12.1 5.7 9.7 9.8 9.2 14.5 7.7 8.2 10.2 9.8 7.2 7.2 7.0 'Broad'Capital'Flight' % GDP - @ Parallel 10.6 5.8 7.7 3.4 1.8 9.8 7.9 6.9 4.2 0.8 8.6 9.9 5.4 8.6 8.6 4.8 6.7 9.3 12.1 8.6 14.7 12.5 11.3 30.4 15.8 23.0 19.5 19.7 10.3 12.2$** 7.0 'Broad'Capital'Flight' Constant 2011 US$ Million % of Exports 7,325.3 21.2 4,127.3 13.6 3,952.0 22.1 1,688.6 8.0 902.0 4.6 7,011.7 29.3 6,675.3 21.8 6,168.6 24.5 4,125.2 18.0 735.6 3.2 7,034.4 28.2 8,112.6 28.2 5,175.9 14.9 10,541.3 31.1 11,038.6 44.6 6,503.7 22.8 10,464.1 23.5 14,935.1 42.9 14,317.8 41.9 5,942.9 17.4 13,302.5 27.6 16,558.8 25.3 19,197.9 25.6 36,758.5 47.8 25,890.7 25.4 28,158.1 46.8 28,082.9 41.5 31,161.0 33.6 11,996.0 26.3 13,910.4$* 25.6 8,550.5 27.4 'Broad'Capital'Flight'
- 26. 26 Conclusions • Significant evidence sugges.ng a link between domes.c disequilibria and a weakening of external accounts via capital flight • Fiscal revenues coming from financial repression are similar in size to others reported in the literature for countries with domes.c debt-‐to-‐GDP ra.os six .mes larger • Large infla.on tax derived from deficit mone.za.on, coupled with financial repression, has spurred a significant wave of capital flight in spit of the risks and penal.es .picaly embedded in exchange control enforcement legisla.on • In spite of high transac.on costs and large penal.es involved, exchange controls have proved to be inefficient in putng a halt to capital flight: there is no evidence of lower capital flight in years of controls, and by some of our indicators it is even higher • Domes.c disequilibria might play a significant role in external distress dynamics