Latin America
The Asian Aftershocks
February 10, 2009

By Daniel Volberg & Gray Newman | New York

As Asia’s economies come under severe stress from the ongoing collapse in trade, we are concerned that the greatest impact on Latin America has yet to be felt. We suspect that the links from Asia to Latin America are underappreciated. Given the fact that exports to Asia currently represent only about 11% of total exports from Latin America, it is easy to see why some might argue that the knock-on effect from Asia’s slump late last year should be limited. However, one reason why Asian exports collapsed in 4Q was the retrenchment of developed world consumers. And the aftershocks from the downturn in developed world consumption are likely to hit Latin America with a lag. While the impact in Asia was acute and immediate – after all, it was the main producer of finished goods – we fear that Latam, which supplies the inputs for final goods often produced in Asia, is next in line. 

The downturn in export growth in Asia in 4Q08 was severe by any standard. On an annual basis, Korean exports contracted by nearly 18% on average last November and December before sliding by nearly a third in January. The decline represented a sharp break from the average 21% growth rate in January-September. And Korea is by no means an isolated case. In December, exports contracted by 42% in Taiwan, 22% in Singapore, 21% in Indonesia, 13% in Thailand, 11% in Hong Kong, the Philippines and Malaysia and nearly 3% in China. In fact, we have not seen a downturn of this magnitude – in growth, and we fear in activity – since the Asian Financial Crisis just over a decade ago.

The Asia Link

The recent collapse in Asia’s exports raises the risk of further growth pain in Latin America. While the direct trade links between the two regions may not seem overly strong, we find a much stronger relationship – with a lag – between Asia’s exports and exports and growth in Latin America. We would highlight three findings: 

First, we expect the aftershocks of the Asian downturn during 4Q to show up during the first months of 2009. We have run a series of correlations on data stretching back to 1997 to assess Latam’s exports exposure to a downturn in Asian export growth. We find that the annual growth rate of a three-month moving average of exports in Latin America tends to be most closely correlated with the three-month lag of the same in China or Korea. And this relationship is not limited to two of Asia’s biggest emerging economies: a similar relationship also holds for Hong Kong, Malaysia, the Philippines and Thailand. With Asian exports plummeting only towards the end of 2008, Latin America is likely to feel the aftershock around February or March. 

The Asia link, not surprisingly, is far from homogeneous for Latin America. The lagged effect of Asian export growth on Latam is particularly relevant for two Southern Cone countries: Brazil and Argentina.  And downside risk on the export front sets up risks of further weakness on the currency front, in our view. Accordingly, we expect both the Argentine peso and the Brazilian real to weaken substantially over the course of 2009 from current levels.

The room for disappointment, however, may be greatest in Brazil. While Argentina has been punished severely by the markets already, Brazil has so far weathered the downturn relatively well – its currency has stabilized after the initial sell-off last year, sovereign spreads have tightened dramatically from the blowout last October and the stock market has posted double-digit gains since the beginning of the year. We are concerned that the optimism about Brazil’s resilience may be tested in the months to come.

Indeed, our Brazil economist, Marcelo Carvalho, points out that a wide array of economic indicators in the December quarter showed the worst contractions on record. For example, December industrial output plunged 12.4% on the previous month (seasonally adjusted, non-annualized) and 14.5% on the previous year, the worst on record – evidence that optimism about Brazil resilience may be misguided. The December data may hint at what is in store in the coming months.

In contrast, the impact of the Asia export downturn is much less important for Mexico. As a provider largely of finished goods to the US, Mexico faces the brunt of the US downturn directly, with fewer aftershocks working through the downturn in Asia.  

Second, not only exports, but also broader economic activity in Latam is at risk. As a first pass in understanding the potential for the Asian export collapse to impact growth in the region, we ran a series of correlations on a decade of data. We find that for virtually all the major Latin economies, the correlations are high and the impact is most pronounced with a 3-6-month lag. As in the case of exports, the Southern Cone countries – Brazil and Argentina – are where the impact is most pronounced.

Skeptics may point to Brazil’s robust domestic demand growth in recent years, as well as the limited share of trade in GDP – just under 15% in recent years – to argue that the negative external shock is not likely to do substantial damage to Brazil’s growth dynamic. But our work suggests that the risks to Brazil’s relative resilience may be on the rise.  Our review of Latin America’s growth dynamics suggests that the principal drivers of better growth in Brazil during the past five years of abundance were a series of external factors reflected in favorable financial and credit conditions, strong global demand and a remarkable surge in the terms of trade (see “Latin America: Growing Disconnect, Growing Risk”, EM Economist, March 7, 2008).

Finally, while Asia’s market share of Latin exports has been limited, Asia accounts for nearly one-fifth of the growth in Latin American exports during 2008. While we estimate that Asia represented only around 11% of the region’s total exports last year, we calculate that it contributed 17% of the total growth. Again, the impact is heterogeneous.  In Brazil’s case, Asia represents just 14% of exports but accounted for 21% of total growth.  Similarly, shipments to Asia contributed 27% of export growth from Peru, well in excess of Asia’s 19% share. The deterioration in the external backdrop has already caused a meaningful downgrade to the growth outlook in Latin America. Increasingly, evidence out of Asia suggests that we may see another bout of weakness in the months ahead. 

The Case for Mexico

While the mood of many Latin watchers towards Mexico has deteriorated in recent months, our findings might suggest that what is being seen in Mexico today will soon be felt throughout the region. Part of the Mexican peso’s latest sell-off in early February may be attributed to a policy mix that long favored a rules-based intervention when intervention in currency markets was absolutely necessary. The decision on February 4 to complement the US$400 million sales (triggered by a 2% move in the currency) with discretionary dollar sales may help the peso recover in the near term. The authorities have introduced a level of uncertainty that may limit Mexico’s critics from expressing their concerns via the currency market. 

But the recent weakness in Mexican CDS − now trading outside Brazil − suggests that the weakness in Mexico’s economy is still attracting critics. We expect Mexico’s economy to contract by at least 1.5% in 2009: our only caution in the region about singling out Mexico is that the downturn from the US to Asia and to the rest of the region is likely to intensify in the coming months.  We suspect that part of the weakness in Mexico seen today simply reflects the fact that it is usually the first to get hit. 

Bottom Line

The retrenchment of developed world consumers, which poses downside risks to emerging markets, may be far from over. So far, the downturn in the consumer – mostly in the US, but also in the Eurozone and Japan – has hit Asia’s export complex the hardest; this is not entirely surprising, given Asia’s prominent role as a final goods producer. But we would warn that Latin America may be next, given its role as supplier of inputs for the final goods that Asia produces. And the duration of the downturn in emerging markets could extend beyond the expected 2H09 recovery as US consumers continue to rebuild their balance sheets. According to our US economist, Richard Berner, the personal savings rate is set to double from 2.9% of disposable income in 4Q to 5.9% in 2Q09 before stabilizing near 5% over the following 18 months. If that were to happen, it would be a significant headwind to both Asia and, with a lag, Latin America.

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United States
Review and Preview
February 10, 2009

By Ted Wieseman | New York

Treasuries continued to sell off in the latest week ahead of another heavy week of supply at the upcoming refunding auctions, but the most recent move was far calmer than the violent long end-led sell-offs of the prior couple weeks.  The refunding itself was on the small side relative to expectations, with the 3-year boosted another US$2 billion to a record US$32 billion as expected, but the US$1 billion increase in the 10-year to US$21 billion and US$4 billion increase in the 30-year to US$14 billion both less than anticipated.  This was small comfort to the market, however, as future coupon supply was boosted quite a bit more than expected.  We had looked for a return of the 7-year but didn’t think it would be on a monthly basis, and we hadn’t expected yet the introduction of regular reopenings of the bond in the months following the refunding auctions plus an indication that a move to monthly issuance with a second reopening of each new issue would probably be announced in May.  Overall gross coupon supply in the current fiscal year now looks like it will be close to US$1.8 trillion – more than US$1 trillion more than the prior record in F2008.  And with the weak employment report expected to spur quick action on the ‘stimulus’ bill, supply is likely to remain extreme into 2010, when much more of this poorly timed bill should actually be spent compared to 2009.  With market focus largely on supply, reaction to the initial run of key economic data for January was limited.  In absolute terms, all of these figures remained horrendous, but relative to expectations and looking at the second derivative of the deterioration results were more mixed.  On the negative side, the employment report was terrible across the board, the worst yet of this downturn.  On a slightly more positive note, both ISM indices remained deeply in recessionary territory but at least improved somewhat from December.  Meanwhile, early indications for consumer spending in January were terrible but mixed relative to expectations, with motor vehicle sales collapsing to another new low since 1982 but chain store sales not falling quite as much as feared.  Retail sales will likely be weak again in January and 1Q is on pace for a third straight sharp decline in real consumption, but at least January spending looks to have held up better than the December collapse. 

On the week, benchmark Treasury yields rose 2-14bp, with the 10-year leading the way down and the long bond holding in relatively well after getting crushed over the prior couple of weeks.  The 2-year yield rose 2bp to 0.98%, 3-year 6bp to 1.41%, 5-year 7bp to 1.95%, 10-year 14bp to 2.98%, and 30-year 7bp to 3.68%.  TIPS performed very well, particularly at the shorter end, even as oil prices pulled back slightly on the week, with the 5-year yield down 25bp to 1.17%, 10-year up 6bp to 1.78%, and 20-year down 3bp to 2.40%.  We expect the non-seasonally adjusted CPI to be up about 0.5% in January after plummeting at more than a 10% annual rate in the five months through December, so TIPS are likely to soon see a significant positive swing in their inflation carry as retail gasoline prices have rebounded.  Mortgage prices were mostly not much changed on the week (with 4% MBS underperforming and seeing some additional weakness), which was decent in relative terms but still left MBS yields near two-month highs as heavy Fed buying continues to have a limited impact because of the ongoing backup in Treasury yields.  Agencies, on the other hand, performed quite well on the week, partly on media reports that their operations might be fully incorporated into the federal budget (as CBO has argued recently they should be).  It’s not clear that this would have any immediate implications for how the agencies operate, but the talk apparently led investors to believe that the move might be accompanied by a more explicit government backing of agency debt. 

Trends in interbank rates were mixed on the week, as Libor continued moving higher, but renewed speculation that the Fed might consider guaranteeing interbank trades led to a big Friday move lower in forward Libor/OIS spreads that reversed some of the recent substantial widening trend.  3-month Libor rose another 6bp on the week to a four-week high of 1.24%, lifting the spot 3-month/Libor OIS spread 6bp to 98bp.  Through Thursday, futures markets were pricing minimal improvement in this spread this year, but the 2009 eurodollar futures contracts posted good gains Friday that led to a decent narrowing in forward spreads to close the week.  With almost all of the improvement coming Friday, the forward Libor/OIS spread to March fell about 13bp on the week to near 82bp, June 12bp to 78bp, September 12bp to 76bp, and December 9bp to 80bp. 

Risk markets were mixed, with stocks doing very well but other key markets not.  The S&P 500 gained 5.2%, with financials for a change performing pretty much in line with the broader market.  Credit gains were much more muted.  In late trading Friday, the investment grade CDX index was 6bp tighter on the week at 192bp, while the recently lagging high yield index after widening 68bp to 1488bp through Thursday’s close was moving back to trade slightly worse on the week after a 3/4 of a point rally Friday.  The leverage loan LCDX index was back to underperforming the HY CDX index after a brief recent better run, trading about 140bp wider on the week at around 1,615bp late Friday.  A horrendous performance by the commercial mortgage CMBX market was a major factor weighing on credit markets against the upside support provided by rallying equities.  With Moody’s putting the majority of the CMBS market under review for possible downgrade, which it said was unlikely for AAA rated issues but likely for junior AAA and lower-rated deals, CMBX spreads rose dramatically across all indices, with the AAA index widening 73bp to 667bp, junior AAA 216bp to 1,716bp, AA 356bp to 2,452bp, A 339bp to 2,975bp, BBB 356bp to 3,895bp, BBB- 429bp to 4,167bp, and BB 671bp to 5,338bp.  These were all-time wides except for the AAA (where the worst close was 848bp on November 20) and junior AAA (1,979bp on November 20).  The subprime ABX market also traded off again, though not nearly to this extent, with the AAA index losing 0.42 point to 33.71.  Progress on mortgage cram-down legislation continues to weigh on this market.

Non-farm payrolls plunged 598,000 in January, while normal monthly revisions plus new seasonal factors and extrapolation of the annual benchmark resulted in the level of payrolls in December being revised down by 311,000 in seasonally adjusted terms.  Weakness in January remained very broadly based, but with particularly large declines again in manufacturing, construction and business services.  A negative surprise also came from retail, which showed another sizable decline.  With much less seasonal temporary holiday hiring this year, we had expected that the seasonal factors might artificially boost retail payrolls this month as fewer of these temporary workers left their jobs.  Other details of the report were also very weak.  With the household measure of employment plummeting 832,000 after adjusting for annual population adjustments, the unemployment rate rose to 7.6% from 7.2%, just below the peak of 7.8% hit in 1993 after the 1990-91 recession.  We expect the unemployment rate to approach 10% by year-end.  The average workweek was unchanged at a record low 33.3 hours, resulting in aggregate hours plunging another 0.7% on top of the huge collapse in 4Q.  Even with average hourly earning up 0.3%, this resulted in aggregate payrolls (a proxy for total wage and salary income) falling 0.3%, which with prices turning higher in January on rebounding gasoline prices will be extremely weak in real terms. 

The two ISM surveys for January remained terrible in absolute terms, but at least they were less bad than December.  The composite manufacturing ISM index remained at a severely depressed level of 35.6 in January, but rose a few points from the nearly 30-year low of 32.9 hit in December.  The key orders (33.2 versus 23.1) and production (32.1 versus 26.3) gauges posted good-sized upticks from record lows hit in December but remained deeply in recessionary territory, while the employment index (29.9) was unchanged at almost an all-time low.  The weakness in January remained very broadly based, with only two industries reporting growth.  Meanwhile, the non-manufacturing ISM composite index rose to 42.9 in January from 40.1 in December, still deeply in recessionary territory but at least a decent improvement from the record low of 37.4 hit in November.  The business conditions (44.2 versus 38.9) and orders (41.6 versus 38.9) posted less negative readings in January, but, similar to the manufacturing survey, employment (34.4 versus 35.5) remained severely depressed.  By sector, weakness was very broadly based, with only two industries reporting growth (healthcare and somehow finance) and 16 contraction. 

Early indications for January retail sales were weak, but mixed relative to expectations.  Motor vehicle sales collapsed to a 9.5 million unit annual rate from 10.3 million in December, the worst and first sub-10 reading since 1982.  Sales of domestically produced vehicles were particularly weak and severe further cutbacks in assemblies are likely in the coming months, which will have knock-on effects across a range of manufacturing sectors.  On the other hand, while chain store sales results taken as a whole were very weak again, they weren’t quite as bad as expected, suggesting that non-auto retail sales likely won’t be nearly as bad as the December collapse.

Looking back to 4Q, data released over the past week pointed to a downward revision to the advance GDP estimate.  Construction spending fell 1.4% in December on top of downward revisions to November (-1.2% versus -0.6%) and October (-0.7% versus -0.4%).  Overall private sector activity fell 1.7%.  Residential spending plunged 3.2%, but underlying details were actually much worse, with new homebuilding collapsing by a record 7.0%, partially offset by a 2.2% gain in the unreliable home improvements component.  Private non-residential activity fell 0.4%, a fifth decline in the past six months, as business construction activity continues to deteriorate after holding up surprisingly well in 1H08.  Severe pressure on state and local government budgets also appears to be starting to impact public construction, which fell 0.8% in December.  These results were worse than BEA assumed in preparing the 4Q GDP forecast and pointed to a downward revision concentrated in business investment in structures.  Meanwhile, the factory orders report showed a much larger-than-expected decline in manufacturing inventories in December than BEA assumed, suggesting that some of the surprising upside in 4Q inventories will be revised away at month-end.  Combining the construction spending and manufacturing inventory figures, we see 4Q GDP growth being revised down to -4.5% from -3.8%. 

The main focus in the Treasury market in the coming week will be on the refunding auctions, US$32 billion 3-year Tuesday, US$21 billion 10-year Wednesday and US$14 billion 30-year Thursday.  Earlier in the week, Treasury Secretary Geithner is expected to outline the bad bank/bank loss backstop plan on Monday, and Fed Chairman Bernanke will testify to Congress on Tuesday.  It’s a fairly light week for economic data, with focus on retail sales Thursday.  Note that it was confirmed on Wednesday that there will be an early close as usual Friday ahead of the holiday weekend as, so far at least, SIFMA has ignored the Treasury’s request to end this long-standing tradition.  Other data releases due out include the trade balance and Treasury budget Wednesday:

* We look for the trade gap to plunge another US$8 billion to a seven-year low of US$32.5 billion, with exports down 0.1% and imports off 4.4%.  On the export side, a huge surge in aircraft as Boeing shipments recovered from strike disruptions should be offset by price-related weakness in industrial materials and food.  On the import side, plunging oil prices point to another sharp decline in petroleum products.  Data on inbound container volumes through the major West Coast ports also continue to show major weakness, pointing to more downside in non-oil goods imports.  Note that our forecast is somewhat more optimistic than BEA’s assumptions in the advance GDP report.

* We expect the federal government to report an US$85 billion budget deficit in January, a sharp swing from the modest US$18 billion surplus recorded in the same month a year ago.  A small portion of that difference reflects a calendar shift that accelerated some payments normally made in February.  Outlays related to the TARP totaled a little more than US$40 billion during the month and thus represent a major swing factor relative to a year ago.  The remainder of the deterioration reflects the slowing economy, which held down tax revenues and boosted outlays for social insurance.  We continue to look for a cash flow budget deficit of close to US$2 trillion in the current fiscal year, although the degree of uncertainty is obviously a good deal greater than usual and is partly dependent on the outcome of policy measures now under consideration in Washington.

* We forecast a 0.2% decline in total retail sales in January and 0.3% fall excluding autos.  A price-related rebound in gas stations sales should provide some support for the overall headline result.  However, discretionary activity appeared to remain quite subdued, and thus we look for further declines in sectors such as apparel, home electronics and restaurants.  Indeed, sales excluding auto dealers and gas stations are expected to be down 0.7%, which is about in line with the trend seen over the prior four months.  We currently see real consumption falling about 3% in 1Q.

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Venezuela
Crunch Time
February 10, 2009

By Boris Segura | New York

The market appears to be increasingly concerned about Venezuela’s creditworthiness, particularly after the correction in oil prices that began last July. This concern has been reflected in rising levels of 5-year CDS.

Significant macro adjustments may be urgently needed. While we believe that Venezuela can weather the current oil price downturn this year, meaningful macroeconomic adjustment may be necessary if oil prices don’t bounce back next year. The country’s stock of public sector liquid assets abroad runs the risk of being depleted this year; thus, its stock of international reserves could face severe pressures in 2010.

Fiscal Policy: More Adjustment Needed

Primary expenditure rose in 2008 according to our expectations (see “Venezuela: Party Over?” EM Economist, October 17, 2008). In real terms, it rose by almost 20%, closing 2008 at 29% of GDP. Although we cannot rule out some acceleration in public spending in the run-up to the constitutional referendum of February 15, the authorities should be able to bring the pace of spending down again during the remainder of the year.

Our scenario analysis highlights the risk of significant deterioration of the public finances. Using the new base scenario of our commodities team’s oil price forecast of US$35 per barrel for WTI (see Global Oil Outlook – 2009: The Global Engine, Stalled and Flooded, February 2, 2009), which would mean that the Venezuelan oil basket averages US$30 per barrel, we present our projection for Venezuela’s central government accounts. As expected, oil-related revenues would collapse this year to 3.3% of GDP from 13.6% in 2008. Assuming flat public primary expenditure in real terms, the fiscal deficit would balloon to 11.4% of GDP in 2009, from a fiscal surplus last year of 0.5%. This projection would herald a major deterioration of public finances.

Our oil exports assumption is well below that of the authorities. From a level of 2.2 million barrels per day (MBPD), we subtract oil that is exported but not paid for in cash – exports under the Petrocaribe arrangement and forward sales to China and Japan – as well as production cuts under the OPEC agreements. We come up with an oil export estimate of 1.6 MBPD for our fiscal and balance-of-payments forecasts.

For our fiscal forecasts, we also assume a discrete devaluation of the Bolivar Fuerte to 2.85 from the current 2.15. With 60% of government revenues – namely oil revenues, tariffs and VAT on imports – linked to the exchange rate, a sharply appreciating real exchange rate is undermining US dollar revenues in bolivares. As such, this devaluation is likely to help the fiscal accounts, as long as the authorities keep a lid on expenditure.

The authorities could take additional revenue measures to reduce the fiscal gap. For example, according to calculations by the Ministry of Finance, if the value added tax rate is raised by 100bp, revenues would go up by VEF 5.4 billion (0.6% of GDP); in the case of imposing a 0.5% bank debit tax, revenues would increase by VEF 6.5 billion (0.7% of GDP).

Default Risk Looks Limited…

Under most probable scenarios, we believe that Venezuela is unlikely to default in 2009. If oil prices continue to slide and converge to our commodities team’s bear case of US$25 per barrel WTI, which is equivalent to a Venezuelan basket price of US$22 per barrel, the fiscal deficit then would widen to 12.4% of GDP. But even this level is financeable out of the current stock of liquid assets held by the government. And don’t underestimate the ability of the authorities to cut spending in real terms when faced with a major drop in oil prices.

It helps that public sector debt amortizations in 2009 are modest. At only 1% of GDP this year, they limit gross financing needs which, even if sizeable, are financeable by holdings of liquid assets in the public sector’s hands, estimated at almost US$45 billion, on top of international reserves of US$28 billion.

There is room to borrow domestically. The domestic banking system is squeezing credit, due to higher regulatory risks, deteriorating asset quality and a more cautious view of future economic conditions. Holdings of government securities in banking sector assets are at a recent low; add to this a reluctance by banks to lend and a zero risk weight for their government securities holdings, and the government might find some room to issue domestically.

The balance-of-payments outlook, while challenging, is still manageable this year. With the Venezuelan basket oil price at US$30 per barrel, Venezuela’s external accounts would suffer. Versus our departure point in 2008, the current account surplus would turn into a deficit, and the central bank would lose around US$18 billion in international reserves, ending 2009 at US$24.5 billion. We assume that the authorities will be able to run down their liquid assets in dollars (estimated at US$18 billion – including the recent transfer of US$12 billion out of the international reserves and into Fonden) – and offset private capital outflows, but those assets would be depleted this year.

We also suspect that devaluation may be given consideration by the authorities to address the increasing misalignment of the Bolivar Fuerte.  Almost four years with a fixed exchange rate and double-digit inflation have caused a serious misalignment of the real effective exchange rate (REER). High oil prices obscured this trend, but obviously the oil factor has changed materially. In addition, regional currencies are depreciating in real terms, which puts additional pressure on Venezuela’s REER. And this currency misalignment hinders the production of tradables, while it subsidizes imports, which could jeopardize an orderly macroeconomic adjustment.

And pressures are likely to mount on the permuta foreign exchange market. The authorities are progressively switching transactions out of the CADIVI (the entity in charge of managing the exchange controls) market and into the permuta FX market.  Given that Venezuela can no longer issue dollar-denominated paper payable in local currency or have access to ‘surplus’ dollars from PDVSA, the differential between the permuta and official exchange rates is likely to widen going forward. This is almost certain to have an adverse effect on inflation, irrespective of whether the authorities devalue the Bolivar Fuerte or not.

…but Situation Could Become Critical in 2010

The balance of payments outlook gets more complicated next year. With oil prices at US$48 per barrel (the base case for next year in our commodities team’s forecast), the current account balance reverts back to surplus. However, the availability of liquid public sector assets abroad is likely to vanish this year, and continued capital flight by the private sector could put additional stress on international reserves.  At US$17.5 billion, the stock of international reserves by the end of 2010 would not be comfortable, and the authorities would need to alter their macroeconomic policy mix.

We could see an additional discrete devaluation. Given ongoing pressures on the balance-of-payments position, we now expect a further discrete devaluation of the Bolivar Fuerte to 4.00 in 2010, from 2.85 this year. The need to put a lid on imports growth is also likely to lead to a weak recovery of economic activity (0%) in 2010, from our previous 2% forecast. And we now expect inflation to reach 40% in 2009 and remain there next year. Policies such as tapping into international reserves to finance public expenditure (i.e., transfers to Fonden) are likely to put pressure on inflation, offsetting to a certain extent the disinflationary forces brought about by ongoing weakness in economic activity.

Bottom Line

Venezuela enters 2009 in a position of relative strength – even if one disagrees with the direction that economic policy has taken. With US$45 billion in liquid assets, the public sector is likely to be able to plug its financing needs and still be left with some proceeds to engage in counter-cyclical fiscal policy next year.

However, the balance-of-payments position in 2010 looks precarious. The authorities may not be left with liquid assets in foreign currency to offset private capital outflows; they may be forced to continue tapping into international reserves at a rapid pace. And this could prompt a reconsideration of Venezuela’s policy mix.

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