Friday, November 16, 2012

The GREAT devaluation robbery coming to Venezuela

Devaluation of currency is acknowledged to be in general a way that governments have to pay their debts at the expense of the working people, from the big entrepreneur to the common man. Through a devaluation the government depreciates the holdings (savings, properties, etc,) of the people and use that depreciation to pay back the debt the government made due to its bad to irresponsible economic decisions. In the best of cases the government makes one single devaluation and pays as much of the debt as possible while it takes measures to make sure it does not happen again. But in the worst cases, like the Chavez regime, a devaluation is simply a stop gap measure to be used again and again so that the Venezuelan people, from the barrios to the Country Club pay the mismanagement and the corruption of the country.

As usual the ones who pay the most are the lower classes because the wealthier classes, those who have property, in general have the means to wait long enough until their property reevaluates and returns to its international prices. For example if you have a nice condo worth 100 units and is devaluated to 80 units, maybe in a couple of years you are back to 100 units or even more. But if you are the one renting the condo the only thing that will go up is your rent.

This time around the Chavez regime is introducing a new modality that we can only call a pre-devaluation procedure where it extortionates people who have significant amounts in "debts" overseas.  This has been looming in a rather terrifying way over most Venezuelan business in recent weeks.

First I need to remind folks what it is  like to import in a country that not only relies on imports for almost everything (food mostly) but that also has a rigid currency exchange control system.

To import anything to Venezuela if you want to do it legally at the official currency exchange rate you need to obtain at least a dozen permits (the final number depending on what is it that you import). Only then you can go to CADIVI, the currency stranglehold, to ask for your currency needs. These days obtaining this dozen or so permits requires at least 3 months and costs several thousand dollars.

CADIVI only allows for favored dollars for products placed in certain "priority" lists, others must rely on a more expensive dollar through SITME (with less permits required but also lower amounts granted); or go outright through the street value as long as you have adequate contacts in the regime that allow you to traffic illegally with USD or Euros. But for this discussion we are not going to enter into these corrupt practices and stick to what real serious business do, like the one where yours truly works.

Until early this year CADIVI would reply reasonably fast to your currency request as long as all the other permits were OK. Then you could import your stuff, and after a lengthy process at customs that took around a month you could submit all the clearance papers again to CADIVI. If all was clear it was CADIVI itself who did the transfer into foreign currency to whomever your provider was. Admittedly this could take on occasion a while but in general within three months of reception of your goods you could pay your provider. Note: during all the proceedings you had to have already in a specific account the money you owed because CADIVI itself would do the transfer. That is, you had to deposit the amount in bolivares to be able to pay the sum in USD at the official exchange rate, currently since 2010 4,3 for a USD. During the waiting time you could do nothing with that money, letting it depreciate slowly without interests of any type.

But this already deficient system went further down early this year. As local production went down and the needs for the presidential campaigns became priority CADIVI simply has stopped paying. That is, the regime kept getting all the dollars it wanted to import free goods for the campaign as well as supplies for Mision Vivienda while the productive sector of the country not only was subjected to expensive and unaccountable delays at harbors, but was obliged to keep purveying CADIVI while CADIVI simply stopped paying providers. For example my small business has made 6 importations this year and only one has been "liquidada", that is, CADIVI has payed our provider. It is so bad that we have processed all of our imports  sold them, got our payments, went through all the legal loops and yet since last April not a single one of our bills has been payed by CADIVI. We are not alone of course, as it is basically the situation for all people who need to import raw materials and finished goods: we all owe fortunes to our providers who are getting restless and threaten to stop all exports to Venezuela. El Universal reported yesterday that 83% of Venezuelan business experience problems to work and produce due to the increasing difficulty to obtain raw materials and supplies.

Of course  we get tired to explain to our providers how crazy and corrupt CADIVI has become, we show them our bank statement to prove that indeed we have all the money in the bank ready to pay them, that we have all the permits approved but CADIVI simply is not paying. PERIOD.

The organized mafias inside the government have noticed that too many business are threatened with problems with providers if we do not pay. So they are offering "deals". From some of my clients who have large amounts of debt pending, I have learned that meetings are held where government folks are offering to obtain from CADIVI that it does its job of transferring funds but not at 4,3. The real exchange is to be fixed during negotiation. But the beauty of it is that CADIVI will pay at 4,3 but that the person "helping" you will get the difference. Say, you "owe" 1 million dollars at 4,3, your contact will have that approved at, say, 5,5. Which in practice means that your debt in VBF will increase by 20% and be paid directly to the intermediate. And preferably without any receipt for tax purposes.

Why would a honest business man who worked as per the imposed rules of the regime consider such a scheme?

Firstly, there is no court of justice where you could go with a tape of your extortion negotiations. If you dared to do so, or if you found a media outlet willing to expose your case, the regime would promptly exert its revenge with any of the myriad tools in its administrative package, including outright expropriation. You would be a criminal by inducing honest bureaucrats to a life time of crime and corruption.

Thus you have to negotiate a deal. Why negotiate anyway? After all you did nothing illegal, and you could wait for CADIVI to execute its duty, merely paying your providers with the money that is already under CADIVI supervision. But there are two problems looming over you.

The first problem is your angry provider that threatens to stop supplies. Without those supplies you may have to close shop, or at least restrain a lot of your activities  After all you cannot find a new supplier that easily. More and more potential suppliers only accept now pre-payment or guarantees though bank credit lines. These are expensive and can increase your costs significantly, ruining any competitive advantage you may enjoy, amen of reducing your earnings in a market where earnings are eaten up by inflation. Without any guarantee that CADIVI will come up to pay your credit anyway.

The second problem is that rumors are getting stronger that the regime will devaluate the VBF around Christmas and make the devaluation retroactive. This is of course illegal but that has never stopped South American bankrupt governments. Cases languish for years in courts and in the end even if you win, what you get back is an amount so affected by inflation that it is useless for you to restart your business.

I do not know whether the regime of Chavez will dare make devaluation retroactive but it certainly allows its internal mafias use that threat to extort all sorts of people. To understand why people would allow themselves to be the subject to such extortion let me guide you through a very simplified calculation.

Say that you have through CADIVI 1 million USD in debt. Which means that you have in bank 4,3 million of VBF blocked. Since April you have not touched that money which means that you have cashed no interests on it while inflation east happily at its value (at least 10% since April).

That 1 million USD you have processed it when you received it in April. Let's say that the cost of processing it and selling it was 20%. Let's say that you limited yourself to a 10% of earnings (note that 10% of earnings in a country where the official inflation is above 20% is tantamount to recognized a 10% net loss on your capital, but to describe how business try to deal with that is altogether another lengthy post). In other words you sold that 1 million for 1.3 million or in VBF 5,6 million at the official exchange rate.

Now let's say that the "retroactive" devaluation is at 6. Suddenly CADIVI asks you to add 6-4,3= 1,7 million of VBF in order to process payment of your debt. You need to pay now 6 million VBF instead of the 4,3 that you negotiated 6 months ago.

Where are you going to find that money?

Since you sold your imported material for a total of 5,6 million VBF, you already start with a net loss of 0,4 million VBF. But you need to add the 0,1 million USD in honest earnings you made which are now lost. and you also need to add the 0,2 million in USD that you spent to process the goods that are now also lost.  Even if we ignore your earnings, the amount you lost is at the very least:

  1. processing: 0,2 USD at the old currency rate is 0,86 million VBF
  2. devaluation: 6-4,3 = 1,7 million VBF

TOTAL losses: 2,56 million VBF at the old rate which represents 2,56/4,3 = 59% of your initial investment.

Now, tell me how many business can tolerate a 59% net loss? Mine certainly cannot.

And thus many people are negotiating with the corrupt sharks inside the regime because they see it as the only way to limit losses at no more than a 10-20% range while keeping your business alive, if damaged.

Welcome to the bolivarian way of doing business where no matter how hard you try the winner in the end is a corrupt regime agent. A text book case on what happens when a mafia reaches power under any political excuse.



2 comments:

  1. Shocking and incredibly sad.

    And I am fuming.

    Tonight I spoke with a dear friend in Margarita, and when I asked her how she was doing and how she was feeling after the elections.Her reply was: "Everybody was very sad for about 3 days, but you can't keep letting it bother you.Life goes on and we have to be happy.We cannot let Chavez's negativity get to us because that is what he wants" Now people are mostly just " blah" about everything and trying to ignore all the problems."

    I can't tell you how angry that makes me, and it is outside of my emotional makeup to be happy under those kinds of circumstances, and quite frankly I think it is a sign of some form of insanity to do so.firepigette

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  2. I take exception to the :"But for this discussion we are not going to enter into these corrupt practices and stick to what real serious business do". Every time you enter into a shopping center however small it is, you will run into one of those so called "boutiques" those small area in the middle of the open space where you can buy everything and nothing, generally copies of trademarks. None of it is fabricated locally, all is imported at the unspeakable exchange rate. How many people make a living out of this trade? A lot! Corrupt practices? Or survival? In addition they sabotage the very existence of the parasitic socialismo del siglo XXI. And on top I hope they screw SENIAT in a big way. We need more of these corrupt practices, not less. You want a state that festers so much with corruption that it will fall by itself like a woodcock who has been hung from the neck for too long and is ready for the feast once picked up from the floor (an old French hunters recipe).

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