Black Hole Friday

Your daily briefing for Saturday, August 18, 2018. Translated by Javier Liendo.

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Photo: Clarín

A black hole is a finite region of space with such a high and dense mass concentration that it generates a gravitational field which no particle of matter, not even light, can escape. Nicolás’ economic announcements this Friday have the same effect on the economy, not even the most solid companies (few qualify as such) will be able to escape the debacle. Amidst a 5-year recession and rampant hyperinflation, Nicolás announced:

Dolar Today, redeemed from blame

  1. A petro is worth an oil barrel and, according to Nicolás, that’s $60, equal to Bs.S 3,600, equal to Bs.F 360 million.
  2. The official dollar price is now six million of the current bolivars, because the initial tethering base for one dollar is one petro, which is worth $60. In 1983, the year of the Black Friday, the bolivar-dollar exchange rate was depreciated by the government from Bs. 4.30 to 7.50; yesterday, the dollar officially went from Bs.F 240,000 to Bs.F 6,000,000. This represents a 2,400% depreciation: there has never been a larger depreciation of the bolivar in Venezuelan history.
  3. “A single fluctuating exchange tethered to the petro” is established, and there will be “three weekly auctions” through DICOM. Nicolás acknowledges the black market dollar with the new parity which he decided to disguise with the petro. In any case, the fluctuating dollar market could even surpass the black market dollar. In other words: Nicolás stripped the bolivar off any value and dollarized the economy.

The largest depreciation

  1. The new minimum wage will be equal to half a petro, or Bs.S 1,800 (currently, Bs.F 180 million). This represents a 3,500% increase on the current minimum wage. The effect on the prices of goods and services will be immediate, as well as in the amount of companies that will have to shut down, unable to take the costs, generating more unemployment in a sagging economy. A $30 minimum wage without lifting exchange controls and ending the issuance of monetary mass, will further ruin the economy.
  2. The government will take care of the minimum wage gap for 90 days to help small and medium companies (Pymes) mitigate the change. Except Nicolás didn’t talk about default, nor explained what his financing sources are, amidst the collapse of oil production. In other words, without dollars, without organic money to assume such a cost.

More discouraging taxes

  1. The VAT increased from 12% to 16% on all sumptuary goods. That 16% VAT will be paid by all of us when we purchase anything.
  2. Nicolás resurrected the tax on large financial transactions: 133,000 special contributors will have to pay up to a 2% rate on those transactions. This new scheme is a hard blow for companies, which won’t create neither investment nor employment, quite the opposite.
  3. There will be weekly VAT retentions.
  4. The Income Tax (ISLR) was set between 0.5% and 2% a month, as down payment. Additionally, the ISLR will establish a 1% advance payment on daily sales.
  5. The new price system is tethered to the petro, which means that prices are dollarized. Nicolás promised to announce the “Plan 50” next week, and seeks to use it to keep regulating prices and basic products.

Imposed populism

  1. The government will pay a Bs.S 600 reconversion bonus (currently Bs.F 60 million) to 10 million families. This bonus alone represents six billion sovereign bolivars injected to the monetary mass: more hyperinflation right from the start, which will reduce the reconversion’s effect to less time than expected.
  2. On Tuesday, August 21, he’ll send the tax laws “for economic recovery” to the ANC, as if the ANC had any authority to legislate.

The worst admission:

  1. As he tried to explain his new “zero fiscal deficit” policy, Nicolás blatantly admitted that, so far, he’s been financing BCV’s fiscal deficit by adding monetary mass without support and issuing bonds. The problem is that this government’s fiscal deficit has accumulated for 12 years and, in the last five, the gap was savagely widened: the deficit’s size is equal to 20 Gross Domestic Product points, so the zero deficit would require raising some $16.2 billion, double the international reserves! Nicolás is responsible for hyperinflation and he said it calmly, picking his nose.

The unresolved concern

  1. Nicolás didn’t announce the new price of gasoline, he just said it will increase and that the increase will be progressive starting on September 10, that he’ll implement it state by state, that he could start with Táchira and Zulia. They just have to adjust 8,000 gas pumps (a trifle) so they free up with the carnet de la patria, which opens the fuel black market from day one: there will be at least two prices for gas. The transport census’ figures have been so low that he extended the process until August 30.

The worst forecasts for our economy in 2018 look moderate. This Friday, Nicolás announced a black hole that intensifies our economy’s destruction and does it amidst all the uncertainty for the reconversion, in these days of disconnection, the darkest bridge. There won’t be any big protests against the announcements, because most Venezuelans will find out what’s up in the days to come (for lack of mass media and even electricity), and while we begin assimilating what this all represents and agree on how to face it, days will pass. Nicolás will break the record of the highest inflation ever recorded in the history of the world. The worst is that most Venezuelans won’t be able to pay this monstrous adjustment: Nicolás’ irresponsibility will take even more lives, other black holes will be dug.

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13 COMMENTS

  1. Anecdotally, Corn meal, flour, beans all use water, and gas/electric fuel in their preparation. Zulia , parts of Caracas, and elsewhere spent days without electric juice, meaning water pumped 2 homes grinds to a halt. Also, population centers are parasitic in nature – they consume, but do not generate life sustaining resources…. So will we see venezuela whimper and wither? U will soon find out in this long crawling series to dying from lack of meds, foods, waters. Dogs, cats are eaten daily by hungry people, will rats be next? or will they all slither across closed armed borders to healthier climes? Tune in tomorrow 4 the next batch of horrible news. 🙂
    Doris

    • Part of the marxist process: 1.urbanize, 2.impoverish, 3.enslave, 4.brutalize, 5.depopulate, then 6.reduce the remainder to tribalism.

  2. To actually dolarize the economy don’t you first have to yank your own worthless currency and put actual dollars into circulation? Simply tying the Petro to an imaginary dollar amount would only fly if those WITH dollars bought into it. Name one who has. There is still some negligible dollar value in the private sector, and Maduro is in effect trying to swap that value for the imaginary value of the Petro. After this move – if indeed he pulls it off – both he AND the private sector will be busted, which might be the point. Wonder how the folks at Polar will play this one?

    • Not really. dollarizing the economy means subsidies will go away and match their international price, which is essentially pegged by the dollar.

      As for removing the BSF from circulation and just using dollars. No, Venezuela should never do that ever.

    • A financial associate of mine says that you can dollarize without abandoning a currency. Providing you can readily exchange your currency X with dollars, and dollars with currency X at whatever that value might be.

      What Muduro wants to do is have an optimum exchange in one direction only. And of course, financial rigor would also be required of Chavismo… something Chavismo is immune to. The concept of VALUE is as foreign a concept to them as String Theory.

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