Wednesday, April 23, 2008

The Bolivar Fuerte ain't so strong anymore: a devaluation under any name in Venezuela

[Updated with predictions]

[Warning: reading this post might constitute a violation of the Venezuelan law if you are a Venezuelan citizen.]

For the past few months there has been a recuperation of sorts of the "alternative" market currency in Venezuela. We closed the year with a 5.6 BS to the USD (on November 1 it was at 6.55!). Today it closed at a rather amazing 3.25. What happened?

The high exchange rates of late last year were due to several factors: uncontrolled budget spending due to the need of Chavez to win the referendum; the serious concerns as to the consequences of a Yes vote on the referendum; the Christmas shopping spree that was not sponsored by CADIVI (the currency exchange agency) and thus coming out of the parallel exchange rate; a quickening inflation rate; and more.

But January started with somewhat better conditions. The shopping spree of the last quarter was over, inflation traditionally is supposed to drop in the first quarter. The referendum vote was lost by Chavez. The government thus decided, too late anyway, to try controlling inflation by injection large sums of dollars to decrease artificially the parallel value of the dollar. A parallel value that another law made it illegal to discuss in public (article 14). I do not know how long it will take to see any effect on the inflation rate, but after spending (sinking?) a few billions, the government decided to move on to the next and last step before officially devaluing the currency: the dual exchange rate.

This is not such a crazy idea if you really need to do a currency control for valid economic reasons. But in Venezuela CADIVI is an instrument of control imposed much more on political reasons than economical. That is, CADIVI controls currency expenditure to sectors that oppose chavismo while sectors that support chavismo have no problem in getting all the dollars they need, in CASH, as the Antonini affair so well illustrates. In short, what the government could have done long ago, if it were a serious government, would have been to institute a controlled rate reserved for some specific imports in specific amounts and a free market rate for such stuff as credit cards, travels, imports of luxury cars and stuff like that. But no.... Instead a stubborn resistance at making CADIVI work, it created an impressive body of slimy opportunists such as our friend Oligarca Burguesito.

But creating an official dual system would have a high political cost. Not only it would admit the governmental failure in the objective to establish a durable exchange control system, but it would be a throwback to the somber era of RECADI during the Lusinchi presidency. Then again the corruption of these years now look like children play compared to what happens inside the bolivarian revolution who in one year probably steals more than what the "4th republic" stole in a couple of decades.....

So chavismo decided to try something else: the emission of special bonds designed in such a way that the most likely beneficiaries will be enterprises that have a hard time to reach CADIVI funds. I am not going to delve into the details of the bonds, our friend Miguel at Devil's Poop will return soon enough to enlighten us. However as a small importer fighting daily with CADIVI I can already give you the practical consequences of this governmental maneuver.

The value of sale/resale of these 3.5 billion bonds is expected to yield the "real" value of the bolivar fuerte: something between 3 and 3.2. I will pass on the fact that this rate is already too low, subsidized and circumstantial: from my recent trip to Mexico and the US, basing on eating lunch on the run, the real value is around 4 for an USD. But let's buy that 3-3.2 figure: by itself it means a devaluation of about 50%. Period. (1)

Through this new artifact, CADIVI is now going to send a lot of people to the new bond exchange system. Unfortunately for those who imported at 2.15 and that will now have to import at 3, it means that they will need to increase their prices by 50% or more. Add to this the upcoming minimum wage increase of at least 20% next May and you can see that the revised inflation rate, revised to a higher number a few days ago, will need to be revised up once again. There is simply no way that the inflation this year is going to be any less than 25%, no matter what the government pulls in measuring tricks.

But there are other consequences not as immediately obvious but very much present. The first one is new ways to effect corruption. Now all sorts of people will tempted to "sell" or "buy" access to the 2.15 exchange rate. Imagine that you need to import 1 million dollars of goods and to get the 2.15 rate you need the services of a "gestor" (negotiator? facilitator? the word is so rich and layered in meaning...). Well, the "gestor" could ask you for 200 000 BsF (about 100 000 USD). Your real exchange rate would be higher than 2.15 (about 2.4 to 2.5) but still below the 3.2 of the bond market. The "gestor" will get enough for a new car for the graduating son and everyone is happy except the final customer which pays everything through inflation and the tax payer who foots the bill of subsidizing exchange rates.

And there are other ways that inflation will be promoted through legal governmental robbery. Look at this possible situation. You imported last year for X-mas 1 million in video games at 2.15. CADIVI approved it but has not payed you yet the dollars you need for your providers. Still, you sold all your stuff based on the 2.15 purchase price. Now CADIVI could tell you that you need to get those dollars through the bonds. What choice do you have? To pay your providers you will need to shell out 50% more than what you were planning which implies that 1) you lose your probably 10 to 20% benefit margin but 2) you also lose 20 to 30% of your capital. If you can afford this through your reserves, you will pay but next import you will not calculate your prices at 3-3.2, you will do so at 3.5 or more to start recovering what the state stole from you through a devaluation. Who pays in the end? As it is always the case, the basic consumer who sees price going up and up and up...

UPDATE: I forgot to include my predictions. For the next 2-3 months the government will try, at great cost, to maintain the bolivar below 3.5. By June-July the polls will show that Chavez popularity is not increasing, in part due tot he slowing down of the import economy as chavismo is forced to make an unnamed neo liberal adjustment to its fiscal policies. These will be even more necessary as payment for the cement and steel nationalizations must start.

The June inflation will be above 1% anyway and the government will decide to go for it and try to buy the election: new and old social spending will grow as early as late June. By October we might be back at 4-5 Bs. per USD, an inflation again at a monthly 2%. After the election, no matter what the resutl is, the 2.15 exchange will die once and for all and the devaluation might give us a bolivar at 3.5 at the least. How high will the devaluation be will depend on two things: how oil production keeps up and how well the opposition did in November.

If income does not drop (a good combination of production and oil prices) and if the opposition wins less than 8 state houses, the government will try to keep currency at 3.5 until the legislative elections (3.5 representing the average of new special bond editions if the government persists in this latest strategy).

If oil revenue drops in any way and if the opposition wins more than 8 state houses then the devaluation will reach as much as 4-4.5 as the government might decide to put the devaluation behind it and cut its losses, so to speak.

The parallel market itself by December should be back at 6 or much more if the government tries desperately to hold the "official" rate at 3.5. But I sense that we might be back at 6 by early fall.

Update 2: Ooops! I forgot to mention the real beneficiary of all thsi mish-mash. They are the government favored traders and their friendly officials, the ones that issue and resell these bonds near instantly for a tidy profit. The profit they make is of course at tax payer expense since a normal government would put any bond directly at auction for the highest bidder. But of course I forgot to mention that because simply this has become such a common corruption practice in Venezuela that I am, in a sick way, starting to find it normal.

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1) the chavista record: in 1998 the bolivar was o.5 to a USD. As of today it is officially above 3. Draw your own conclusions.

-The end-

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