A Caracas City Shuffle

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a great source of copper and iron
a great source of copper and iron

Venezuela’s government is about to unleash the biggest economic reform set forth in the last 11 years. A currency market is about to be set in place, with far fewer restrictions than the previous systems.

This reform is a step back from the toxic policy of exchange control, and it is exactly 11 years late. The exchange controls led to not only incredible distortions in the economy, but also forced productive companies into bankruptcy. It is the main reason behind the proliferation of an importers ecosystem which added very little value. Chavista forex controls have, when all is said and done, given rise to the biggest episode of plunder of public resources in Venezuela’s history.

Many details are still to be disclosed. The government has said there will be no limits on the exchange rates nor restrictions on the participants. That banks and brokers will handle the transactions. That BCV will publish the average daily rate. We’ll see.

CADIVI and SICAD I will continue to exist, very likely for shenanigans only, but given the restrictions on profits, I don’t see why serious companies would follow all the hurdles of these two mechanisms unless price competition is what they are worried about, and they need subsidies.

This reform is so huge that in Bank of America’s own words:

To the best of our knowledge, this is the first time in more than a decade that Venezuelan authorities have tried to fix a problem by reducing instead of increasing regulation.

But is every one looking right when we ought to be looking left?

This shuffle has not been planned. This shuffle hasn’t been years in the making. It has been improvised, as a way of patching up huge balance of payments and monetary imbalances. People such as this UNT deputy have it all wrong. This isn’t a disguised devaluation. This is the Government finally succumbing to market forces and giving up its control over the currency’s value via decree.

As with all improvisations, there is no clear plan on how, with the new set of constraints, the BCV will fulfill its mission of preserving the Bolivar’s value. The only thing so far said, is that the BCV will offer $30 million per day, which is not that much. With no signs of a reasonable fiscal and monetary policy, or any policy for that matter, our hopes are dim.

Perhaps Ramirez is right. Maybe this will be the end of the parallel market. Maybe this will turn out to be the implementation of the parallel currency market to the official market. In that regard, Ramirez may have just acquired DolarToday.

Will the government’s plan to keep riots going as long as possible be enough to distract the public sphere?

I doubt it. Although this made nearly no headlines today, it will be a matter of time before people realize that, quietly, the government has dismantled Cadivi.

Shock therapy is on today’s menu again. This time the chefs are not the IMF wonks but the Bolivarian Socialist Revolution.

1 COMMENT

  1. I am struggling with the implication that the government is ready to pay the piper and woeful of the impact on the poor if indeed this does come to be.

  2. As long as there is a special 6.3 rate for plugged-in regime supporters, that will be the main mechanism to maintain the nomenklatura in power and wealth. Unless they are willing to divert dollars from that mechanism to the new Sicad II, it will be unable to deliver on its promise.

  3. 1-I’m *really* skeptical. I’ll buy it when I see it.

    2-Any discussion of this has to start with Miguel Angel Santos’s take on the issue: you have to be absolutely nuts to dismantle Forex controls without simultaneously freeing interest rates. Who on earth would keep bolivars in a bank account (or in bolivar-denominated Venezuelan government paper) earning 12-15% interest while inflation eats away at the value of savings at 55%+ per year when you can just buy dollars instead?

    As usual, they haven’t thought it through. Dismantling CADIVI in isolation is a recipe for a major bank crisis. And if the banks fold, who’s going to lend to the government? And if nobody lends to the government, how is it going to bridge its financing gap?

  4. My theory is that, because they’re dumb, they’re going to try to float the bolivar without freeing domestic interest rates. Inevitably, this will lead to a crazy freakout on the forex market. This will spook the government and empower the Giordani/Hardliner faction, which will use it as PROOF that if you don’t keep FX controls the dollar is going to spiral out of control.

    I give the whole experiment two weeks, tops.

    • Two weeks? and we all go back and sing cumbaya by the fire of the guarimba? I’m thinking the current apocalyptic sense will be amplified. Bank runs, insolvent chavismo, riots, hyperinflation…

      • Again, quico and others see this a a mistake on planners part, a indented consequence of “being “dumb”…
        Cui prodest?

        IMO all policy is geared to promote Armageddon, the easiest way out for a retreat by cubans and for the Boligarchs to flee and spend their golden exiles in wealth somewhere else.

        Who is going to have time and focus to prepare and run legal cases against them in the coming Mad Max era?

        • That could be the case.

          Assuming that the government doesn’t want to mass kill the opposition, they would still have to find a way to get rid of the oppositionists anyway, and they would be very glad if the well-educated and influential that could make a difference could just pack their belongings and move to another country on their own. This is the kind of government that has as main concern not with the well-being of the inhabitants of the country, but the well-being and survival of the PARTY.

          • Correct. If they need to retreat and leave, there will impose chaos to cover their tracks.

            If the resistant numbers are driven out via exile, neutralization, they will stay over longer.

            In any case IMO the golden eggs laying goose HAS been killed, and all the easy pillage taken, no nned to keep milking the anaemic cow.

            Les queda a los Venezolanos limpiar la casa y esperemos aprender la leccion de la orgia cubana.

            However, we still have a romantic notion that VENEZUELA still exists and will survive this saqueo. Realpolitik will impose its drive, and other stronger players (Colombia, Brazil, Big Oil, China) will move in and play their interest in the EX-Pais.

            IMO this has been the main reason for the perceived non actions of these players in our tragedy! Everyone of these interests is playing long term.

            Big oil forone, did not appreciate negotiating leases and access to energy with the more professional nationalistic PDVSA of fore.

    • Why was there no banking crisis in 1983-88, when the country had a floating parallel rate and negative real interest rates?

    • Everything IS already spiraling out of control, if you haven’t realized it.

      I’m just waiting for the hyper inflationary explosion that will take this co-called government down. It’ll come soon, we hope- even if the pain will be felt by all earning bolivares.

      Don’t think this system will do anything to really solve the situation, don’t forget that $30mm a day adds up to about only $6 billion a year in an economy of supposedly $400 billion, this will get us nowhere.

  5. If you are right, the regime must really be in a box. The only part I would wonder about is the suggestion they would use the protests for cover. That is really playing with fire, no?

    Glad you are back.

  6. This is good news, and it is a step in the right direction. It is good for the government as it will receive a lot more BsF per dollar it sells to the market, thus reducing its deficit in Bs. It will help with the high liquidity as more Bs will be taken out of circulation.

    The most important question to me is how it will affect inflation. Which effect will dominate the decrease in liquidity? or the price increase from imported items? I guess the costliest item is the one you can’t find… remains to be seen.

    You also mentioned that this was improvised. It was months, years in the making. In my view, powerful groups pushed hard (and still are) for the currency controls to remain in place, as it keeps the rents going to the most powerful group within the chavismo and it is those who have access to subsidized dollars.

    From a political standpoint, it is also a recognition of the failed policies of the past 10 years.

    What is ironic is that they were trying to avoid the implosion that we are seeing by not enacting any reforms. They must think “we might aswell do it now, since the people are already on the streets”.

    Admitting the new price “equilibrium” is what must be keeping unnerving for the PSUV leaders, how will they handle their own chavistas, when they realized that it is true their Bs are worth 30,40,50,60 or 100 % less than they were told.

    Some people have said that they have funds to defend a reasonable price: $5b from the Chinese and other few billions from the Oil companies that are going into the faja… paja… just try to do a simple sum of what it is owed to Telefonica, the Airlines, the importers, etc etc you quickly realize that we will have a pure float for a few months, as the government will be UNABLE TO DEFEND A PRICE. It’s on default, otherwise why scrap the exchange controls?

    I just hope that the opposition can make this policy shift a win for economic freedom, which is (or should be) part of its agenda.

    JB

  7. Ramírez? Ramírez de los ojitos azules? The same fool who said in 2011 PDVSA would be producing 5+ million barrels of oil now?

    Free course? Again all Boligarchs’ interests?

    Hard to believe.

  8. Key to the success of the scheme is that there be enough dollars supplied by BCV, Pdvsa and related private entities to meet the demand , specially at the beginning , If the demand is not met the overflow will continue going to the paralell market .

    I am not altogether convinced that the govt and its entities have enough dollars to meet the accumulated demand for Forex .

    The requirement that private persons only access the system through local dollar bank accounts and that there might be incentives for those who keep it there is a sign that they figure people will put their savings in dollars but keep them in the country . If that were to work ( which I doubt ) then the need for a rise in interest rates might be less pressing .

    • If the demand is not met, shouldn’t the price increase, until the demand matches the offer? this is at the end the point of floating.

      • The demand for forex isnt totally shrinkable irrespective of its high price , if there is a limit to the amounts of dollars offered through SICAD II and those dont sattisfy overall demand ( whatever the price at which those dollars are sold) , the unsattisfied demand will go to the black market and pay an even higher price for the same dollars.

        By way of example If you go to the supermarkets to buy harina pan package and they hike the price at which it can be bought to the highest level and yet there is a component of untractable demand which cannot be met going to the supermarket then people will go buy their harina pan at extortionate prices from the local street vendor .

        The problem with the SICAD II market is that the supply of FOREX ,,maybe more limited than the supply of FOREX to the black market so that once the SICAD II market reaches that limit , then the overflow of demand will simply move to another market and keep buying.

        • “…if there is a limit to the amounts of dollars offered through SICAD II and those dont sattisfy overall demand”.. then the price should increase until demand matches the offer. This is what should happen if the government does not cap the price, but caps the amount (for example the $30 MM mentioned). They can’t set both, IF (BIG IF) this is a true auction, like Ramirez has been making us believe.

  9. It is all a desperate reaction to the fact that the government is running out of dollars to pay its bills. Foreign reserves were over 30 billions last year and they are now at 20 billions. They owe about 9 billions to importers and 3 to the airlines, By this time next year (if not sooner) we will be an economic nightmare never seen before; a finance case study for the ages.

    • Operating reserves at the BCV were only $2.3 billion as of Jan. I don’t think people are appreciating how broke the government actually is. SICAD II is just a bad sequel of SICAD I. Don’t get your hopes up. This will not be a free market because they will never allow price$ to rise to counter demand and they can’t sell more dollars because they simply don’t have them.

      I agree with Fidelio, this is going to the dogs.

  10. Mmm lets see. We just took another slice of debt equal to 7billion$ from the Chinese and Russian cake. Now supposing that the Government will inject 30million$ a day on Sicadi-2.0 thats around 8billion$ from whats left of March 2014 through the middle of December 2014 (if we survive). Just connecting Ramirez’s dots.

    • But $30 million a day is nowhere near enough to keep the exchange rate at anything like a sane level. If you float and sell only $30 million a day you’re looking at a 3 figure exchange rate amid massive capital flight. What this does to the banking system, to the fiscal picture and to the inflation picture doesn’t bear thinking of.

      How many banks have to collapse before they freak out and do a U-turn? 1? 2?

      • “How many banks have to collapse before they freak out and do a U-turn? 1? 2?”
        It seems to be they want to scrap every bank that’s not controlled by them.

        • All, banks are controlled by the state, whether directly or indirectly. All they have to do is take the government’s deposits out, stop paying the salaries through them, etc. And the “private” banks go under in a NY second. Let’s see how long Banesco, BOD, etc last under a Scenario like this. At least you can be sure they’ve stolen enough money to finance their polo playing…

        • If I remember well, Miguel Octavio has said the government might be tempted to nationalise completely banks for 2015 in order to pay all those bonds due then.
          Perhaps that shall happen earlier.

  11. The main issue is how the demand for USD has been projected within this SICAD 2 system. The government seems to be projecting a ‘normal use’ USD requirement (i.e., for people to really be wanting to buy USD only for a specific purpose like travel, etc.) but, as one Francisco Toro stated above, unless one doesn’t free interest rates in the same wave, it is pointless as this will lead to a rush to buy USD to be used as a savings reserve / capital protection mechanism and not necessarily as a needed commodity for a specific spending need. The difference in demand for USD between these two pools (reserve need vs. actual spending need) is at least an order of magnitude at this point, if not larger. This inherent contradiction, in the absence of interest rate liberalization, will collapse the system; particularly, if one considers USD liquidity to be only $30m per day. That’s peanuts. At that level of funding, you might even basically see an 80 VEF/USD rate – only that, for what it’s worth from a ‘patria’ standpoint, this rate is now determined in Caracas and not in Cucuta.

  12. Super article. Dead center hit on all important aspects having to do with the hasty decision here; out of sheer necessity rather than any conviction or deep thought. That is for sure. A conversation I had with my Credit card processing agent today illustrates the point you make very vividly.
    When he found out we are Venezuelan, he said why don’t you order a few points of sale devices and accounts and do what many other financially savvy [sic] “Venezuelan’s” are doing ? According to him hoards of countrymen are setting up POS devices to rake in the CADIVI funds by having mirror sites for these devices in Venezuela (easily set up according to the rep). He further divulged that most of these gentlemen ( aka swindlers / shysters , known as heroes to our REP) are clearing an average of $100 K /month. Moreover, according to him the going rate for the middle men in this business (the guy with the terminal between your CADIVI dollars and you in this case) ask for 15% of the funds off the top.
    So yes, obviously the 21 century capitalist bosses in Caracas must leave a functioning CADIVI if they wish to continue on to become Billionaires and improve their millionaire status without breaking a sweat. As for the myriad middlemen, well their lot will probably shrink and be limited to the immediate family and friends of the top echelons of the PSUV gang.

  13. I don’t know what makes all people think that you will be able to transfer dollars out of the bank in Venezuela. Also, if you only have 30 M a day, that’s not dollars for everybody, that’s just dollars for Ramirez friends. Am I the only one cynic enough to not believe a word they are saying?

      • I think the idea is to reduce the deficit, then borrow more dollars at better conditions (lower interest rates) and with those dollars be equally irresponsible in terms of public spending, and in a couple of years we shall have another macroadjustment.

        • They are thinking that, at $30M/day, they will mitigate the inflationary impact of disbursing far and wide dollars into the economy. Moreover, I believe they are assuming that demand is finite and that initially those with the most need will pay the highest price and that it will come down with time.

          The problem is that 1) inflation is driven by the lack of dollars resulting in shortages of goods and 2) that demand is finite, which it is not, since it renews itself as goods are consumed.

          This, of course, is predicated on the normal functioning of an economy and we certainly aren’t seeing that. The whole thing seems ad hoc and like a few other people, I don’t believe it is sustainable, if for no other reason than they simply can’t afford to pay for it without other modifications.

          Had they thought it through a bit more, they would have probably indexed interest rates with at least some correlation to inflation; otherwise, this too will continue to drive up demand for dollars as one of those fabulous functions of money: store of value, along with the demand for medium of exchange.

          • inflation is driven by the lack of dollars resulting in shortages of goods

            Let’s keep our wits about us. Inflation is driven by monetary expansion, which in turn is driven by an OOC fiscal deficit, which this reform does nothing to address.

          • Yes and no. I agree, inflation is largely an issue of the printing presses at the CB. However, I would hold that, in this instance, there may be cost-push inflation occurring from rampant shortages which contributes to the mess.

            I know Friedman and company would disagree with this vis-à-vis the oil crisis in the 1970s-80s in El Norte. However, this may be a different kind of cost-push inflation; where as the oil crisis aspect of cost-push was tied wholly to the pervasive use of oil in the economy and a shortage of that good, in this instance, I would hold that the lack of dollars reducing imports is resulting in an increase in inflation due to supply/demand dynamics at work.

            Monetarist theory would argue that as one item increases in bolivar price due to scarcity, other items would decline, due to stable monetary supply if the BCV was not actually printing bolivars. But, we aren’t seeing one product, or two…but several. Dozens, actually. So the supply of bolivars increases relevant to all available goods rather than one, resulting in the cost-push side of things which are purchased in dollars.

            This also supports the assertion of the dollar/store of value thing competing with purchase of actual goods for imports skewing the parallel valuation.

            Just my $.02/1.563 bolis. I probably should have been a bit clearer in my assertion; but I’m working on brevity skills which run counter to my nature. I also could easily be wrong here.

            I would pose a question, though: what would happen to price levels if the BCV weren’t creating millions of bolivars a day?

          • It sort of address it indirectly. If they float the currency, the connection between the monetary expansion and the forex rate becomes visible (it already happens through the black market). Thus, they will have to deal with it, if their objective is ‘stabilize’ the forex rate.

            To assume that they don’t know what you know is naive. But perhaps you are right, Giordani’s crew is aware of this and they want to see the rate explode, so that they go back and say ‘el monje’ tenia razon.

          • Let’s not oversimplify: monetary expansion does not always lead to an inflationary state, nor is it the only thing that does. Remember, printing money merely devalues the currency, while redistributing its value. But what devaluation leads to is a different matter, and other things affect those matters, too.

  14. The positive thing about SICAD II is the signals it sends – this is the first sign of openness to rational economic thinking we’ve seen from these stooges. The fact that it’s all-powerful Rafael Ramírez pushing this gives it a ton of credibility than if this were freakin’ my-last-name-is-a-first-name Rodolfo Marco Torres.

  15. Dont know that they can do it but the regime maybe starting on a Plan to survive the threatening financial situation they are facing .
    1st They are starting to get serious about stopping declining oil production and refinery outputs and make alliances with competent and well funded international operators and investors which can allow for the possibiliy of crude and oil product production to rise
    2nd. raise the price of gasoline gradually and use the released money to slowdown the printing of Bs
    3rd. Clean up the mess of uncontrolled kleptocracy within govt and by govt connected boligurgueses .
    4th Improve the system for distributing food and other stapples to their main constituincy and to the population in general ( rationing cards are part of this) .
    5th.Rationalize the supply of oil to clientelar govts in Argentina and the Caribbean to reduce it to manageable limits. .
    6th. Create new venues such as SICAD II to bring in fresh dollars to be sold in Venezuela and to help the govt sell part of its US Dollars at a better price giving it a higher revenue allowing it to stop slow down the printing of dollars.
    7th Create more trusting relationship with certain key private companies so as to have them help with the production of the services and stapples the govt needs to have in order to keep things operational.

    These measures have three problems , one the entrenched clique of corrupt and fanatic officials ( and their outside clientelar associates) within the regime which will oppose and sabotage these efforts, second the threat that the impopular effects of these measures will be used by the oppo forces to gain a foothold on public opinion that will threaten their popular support,and third the dearth of competent people they can count on from the inside that can implement these measures succesfully . . .

    • That is the bottom line. I think they purposefully named it SICAD II. You know, like this secondary thing that you don’t have to worry about. But in all, it is the dismantling of this huge bad policy behemoth.

  16. Please help me get my head around this Rube Goldberg stuff. Since there aren’t any purchase limits, is there anything preventing people with enough BsF on their hands from taking that $30M daily supply and selling it on the parallel market as long as the SICAD 2 rate is lower than the parallel one?

    They’ve been claiming that this would bring the parallel market down but given that measly supply couldn’t they just end up with a rate above the parallel one? That would defeat the purpose of having this bureau (besides providing another paragraph in our long book of tragicomedic failures).

    • From what they have said, it seems like that would be totally doable.

      It would be a lot easier that what Soros pulled on England.

    • One, unfortunately fortunes have been made by going to CADIVI, SITME, SICAD and any combination of the alphabet at subsidized rates then turning to the parallel market. So nothing new if this happens.

      Two, if this new market truly has no cap on price but has a cap on daily supply, the price should converge.

      Why would you buy in the parallel market, if you can get buy from SICAD2?

      Maybe the friction of needing a local bank account in USD, being Venezuelan in order to participate (you can sell USDs as foreigner or nonlocal Venezuelan, however you cannot buy USDs if non-Venezuelan) plus dealing with the bureaucracy could keep the spread from collapsing all together.

      Even in countries with strong fixed rates like the oil rich gulf countries, there is a small spread when buying in the street vs going to the bank.

      • “why would you buy in the paralell market if you get buy from SICAD 2 ?”
        answer : If the amount of dollars offered for sale through SICAD 2 are insufficient to meet the demand for those dollars.
        In such case what would the price of the SICAD 2 Dollars be vs the price of the dollars sold through the paralell market ?? Is it likely that they would be the same , or is it likely that the latter would be higher ??

        • wait WHAT?

          There are some serious misunderstandings about how markets work at play here.

          If they TRULY let the price be determined by market forces, the price of dollars will just rise until it attracts private dollar sellers to the market. $30 million is not the TOTAL level of supply, just what the government will contribute. If they really do allow it to float, the rate will go as high as it needs to go to bring the amount supplied matches the amount demanded.

          • I just read your two comments. You actually pointed out what I was missing. Thanks for that.

            Like I said before, I was completely missing the fact that the govt. isn’t going to be the only seller around, probably because that’s how things have been so far and because the information about how this whole thing works is scant (also no one wants to buy BsF right now, lol).

            So, in the end, is this just a typical market with sellers licensed by the govt. and a floating rate that the govt. expects to keep under control by contributing a fixed amount to the supply?

            This is going to be either unimpressive or completely disastrous.

  17. Thanks for the response, I appreciate it. I get what you’re saying, but I’m still scratching my head.

    >Why would you buy in the parallel market, if you can get buy from SICAD2?

    Availability? If you’re pressed for $ and can’t find them on SICAD2, you’d want to go to the parallel market. Isn’t that a possibility given the cap on supply + lack of a cap on purchase qty?

    Actually, I was unintentionally assuming that you can’t sell on SICAD2, but why would anyone if it was possible? You probably need a license and all that bureaucracy that you mention keeping a spread between both rates would make it preferable to sell on the parallel market.

    I guess we’ll have to wait and see.

    • I think you’re misunderstanding the point of the float. The reason you float – and it’s still an open question for me if they’re REALLY going to let the exchange rate float, once they see it start up above 50 – is to bring new dollar sellers into the market.

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