Wednesday, February 27, 2013

The devaluation is retroactive: the great chavista robbery

There is all sorts of economists pontificating about the devaluation and all sorts of politicians talking of "paquetazo rojo" and how minimum wage has lost X% of its purchasing power.  But I do not hear many talking on how the regime is actively bankrupting the private sector of the country by making the devaluation retroactive. And certainly no one in the MUD would be caught dead defending these filthy capitalists which are going to go belly up in a few weeks if the regime does not change its post devaluation robbery scheme. To bad for the workers about to be laid off I suppose....


What is happening is that people who contracted debt at 4,3 bolivares for a dollar in 2012 are now going to be paid at 6,3 bolivares, or else. You may say, "tough luck" but hold on a little bit longer and allow me to explain what this means for a small company like the one I work at.

Let's look at a typical case of the agribusiness world where I operate. Through 2012 we did several importations for certain supplies which details matter little. We did import, say, 20 tons of X for an amount of 150,000 USD, at 4,3, in February 2012. That would be 645,000 VBF. We processed it, sold it, pay expenses, paid wages, paid administrative costs, sales tax and what not. It is important to note that most customers in agribusiness do sell their final product (chicken, pork, corn meal) under a price control system so I cannot overprice anything because simply put there is no way my customers would/could pay for it. No possibility of speculation in this field.

By March 2012 we had filled up all the legal paperwork with CADIVI and in early April 2012 we were pre approved for "liquidación", the final administrative act when CADIVI will approve the transfer of funds. When that final decision comes, we have about two weeks to put in the bank 645,000 VBF so our foreign providers will be paid through a transfer processed by CADIVI, the governmental agency that processes ALL legal foreign currency in Venezuela. If in two weeks we have not paid, we lose the favored CADIVI dollars and need to go to the black market, or default.

That final "liquidación" decision should have come normally sometime in April 2012. It never came until two days ago and at 6,3. What does this mean?

1) Already our business had 645,000 VBF in the bank (150,000 X 4.30) without any interest paid on it, without being able to do anything with it since we had to wait for the good will of the regime. That is, by April 2012 I had already processed most of the February import, sold it, and cashed it, as further shipments were coming. We were ready to pay.

2) When all the costs and sales were involved, out rate of return was around 20%, before taxes. This is low in a country where inflation is above 20% at the official numbers, more likely close to 30% in real world. That is, our company was not going to get rich out of that thing, just staying alive, providing us with a pay check and upkeep money at  best.

3) Our provider, of course, has been waiting since last April and later this year announced us that they would start charging interest. This was already bad news because the products we sold were calculated at 4,3. Since they were already sold there was no way we could incorporate that, say, 3% interest for late payment in our cost structure. Again, not out fault since we have already put the money away for the government to pay whenever this one pleases. Also, note that the interests are not recognized by CADIVI so we would have to pay them either through the black market dollars or ask them to increase their prices for future imports we may make and keep the difference. In  other words, assuming that indeed we made a 20% pre tax profit on that February import you can already shave off a good 5%, down to 15%. Inflation at 20% means that we have started losing money, or at least capital.

4) This scenario was repeated several times through 2012. We are a small company where our annual imports do not pass 3-4 million USD. Just imagine what happens for  bigger agribusiness that import grain in boatloads, litterally.....

5) Comes this week when we are told that the final "liquidación" is finally approved for April 2012 BUT at 6,3.  Now, instead of paying 645,000 VBF for the 150,000 USD we imported in February 2102 we need to pay 945,000 VBF. That is, we have a 300,000 VBF additional bill! 48,000 USD at the new 6,3 rate! Where are we going to find that money? Let's assume that indeed we made a 20% benefit from the February importation: that would be 129,000 VBF from that 645,000 importation then. As you can see for yourself, is does not even cover half of what CADIVI is asking us to fork extra this week

6) Multiply this by several other importation incidents and this small business I co-preside is faced with paying an extra 3,000,000 VBF at the very least if CADIVI does not correct this abuse soon (476,000 USD at the new 6,3 rate). We do not have the money, we cannot get it fast enough, banks are not going to lend it to us because the goods involved have already been consumed so we cannot offer any guarantee that we will be able to pay, no matter how good our reputation is...... In short, to pay for this, owners need to liquidate their assets, business or personal, in order to save the company. That would require to sell at least somebody's home. Or accept bankruptcy, lay off everyone, close shop.

This, my friends, is simply a naked gun point robbery by the regime on all the gains of the private sector of Venezuela of 2012 and more. It is a robbery because we have no where to go for redress, because if we do not pay at 6,3 right now they will not pay our providers anything and to pay them we would then have to go to the black market rate, at 25 today. The consequences are dear since it is anyone's guess how many will close down shop. The devaluation was bad and forced us into a recession, but if this is carried through by the regime without correction or some form of alleviation, its is deep depression we are staring at. too bad for the workers the regime is claiming to protect.

Now, the question is why the regime is daring to take this damnation step, something that will lead the country into major social upheaval as there will be no jobs to have, no real income for the working class?  Not that it is important for me as I may be out of a job in a few weeks from now, but we might as well address the subject even if it is of no comfort.

The first reason is that the country is indeed bankrupt and a retroactive devaluation  even if outright robbery, is about the only way the regime can gain a few weeks of life time. The regime is clever on that as it is unlikely that Capriles is going to come out to defend the business owners in electoral time  prisoner himself of his leftist light language.

But there are other dark reasons behind that move.

One, people on the verge of bankruptcy may be willing to pay off CADIVI corrupt operators to get something lower than 6,3. For example, "I will liquidate your debt at 4,3 but you need to pay me off in cash in a dark alley X, so that in the end your liquidación will look like a 5,3".  Or some equivalent scheme. I can assure you that this is already going on because some of my business clients with huge importation bills were already offered last November a "liquidación" at 5,5, and they should take it because it would get worse. Of course, the difference between 4,3 and 5,5 is to be paid cash to X, usually a military.

Another one is the need to launder tainted money, which abounds in Venezuela. That is, since Giordani, the economy director of the regime has for goal to squeeze out of existence the private sector of the economy, the situation offers opportunity to launder a lot, be it from drug trafficking or plain robbery to the state coffers. See, even with access to power not all the money can be taken outside of the country and there are people with a few extra millions floating around. Now, courtesy of Giordani, there will be soon plenty of business for sale at rock bottom prices. Buy one, liquidate its assets, go into bankruptcy and whatever you receive, even if less than what you put in, will be now "clean". Amen that once this business in the hands of a proper corrupt chavista, CADIVI may decide to pay at 4,3 after all.....

Now, the real question: will the MUD do its opposition job and denounce what will be a catastrophe for the country?  Will economists go down to this gritty stuff and stop pontificating on generalities? Of course  the business associations are already trying to do something about it but with little open support. And yet, when the private sector is diminished to almost nothing, how are the opposition and chavismo planning to rebuild the country? Because I suspect that inside chavismo there are a few that understand the gravity of the situation and yet do nothing...

24 comments:

  1. Anonymous4:11 PM

    Just One more step in the Zimbabwization of Venezuela. As you can see its not just the president that is brain dead, the whole government is as well...

    ReplyDelete
  2. Hmmm...too bad this 'brain-dead' government can't be unplugged also! What to make of this tweet? MM

    Guillermo A. Cochez‏@willycochez

    El Pres.Chavez ha muerto hace 4 días. Estuvo con muerte cerebral desde 30 0 31 de diciembre. Sus hijos habrían decidido desconectarlo.

    ReplyDelete
    Replies
    1. CNN is reporting that...

      http://www.cnnchile.com/noticia/2013/02/27/ex-embajador-de-panama-en-la-oea-hugo-chavez-esta-muerto#.US6j6iZ-QfI.twitter

      Delete
  3. Island Canuck5:38 PM

    Daniel,
    You used Lechugaverde.com as a reference to today's rate.
    You may not be aware that the owners of this website have defrauded hundreds of people by offering to change $$ at Bs.13 during the final quarter of 2012 & then not giving them the $$.

    You can see more info here:
    http://www.facebook.com/pages/Lechuga-Verde-Estafa-Cuidado/425179714218167

    For future reference perhaps dollartoday.com or dolarparaleloeconomiavenezuela.blogspot.com/ would be better sites to use although I know nothing about the people behind those sites.

    Your case & that of many others is just the tip of the iceberg of what is happening in Venezuela today.

    Hopefully you will find some help in overcoming this.

    ReplyDelete
    Replies
    1. I know nothing of lechuga verde except to check out the rate on occasion. Do you mean to tell us their info is not true?

      Delete
  4. Island Canuck6:20 PM

    Daniel, the only reason I referred to this was because the site was used to defraud people. The rate they quote is higher than the other 2 sites that I indicated.

    ReplyDelete
  5. This must've been a tough post to write.

    Your situation will certainly not be unique. Many companies will be hit hard. Small-medium sized importers above all.

    Many business that provide goods to PDVSA and other state companies will also get hit hard. State owned companies take a looong time to pay. Even if suppliers "speculated", it is unlikely that could have anticipated the 2.2x increase in x/r.

    I think you are right. We are at the beginning of what will become a significant number of bankruptcies.

    Take care.

    ReplyDelete
    Replies
    1. Well, this is a ground zero blog, of someone that tries to make a living in the middle of the beast.

      Delete
    2. Anonymous3:03 AM

      "belly" of the beast.

      Delete
  6. Daniel,

    Now, April 2012 is an old CADIVI process. But, hadn't they specified that processes were within within X number of months (I think 6) would liquidate at 4.3?

    ReplyDelete
  7. Dr. Faustus8:32 PM

    I am simply stunned at what was written above. My God, has it gone this far?

    ReplyDelete
  8. How long can they keep his body on ice?

    ReplyDelete
  9. Jacques12:31 AM

    Looks to me like an excellent way of getting rid of privately-owned means or production. From "rojo rojito" to "rojo rojón".

    Which brings to my mind the song in Jacques Offenbach's "La Périchole", "il grandira car il est espagnol". And indeed, wee Rojito has now grown into big Rojón.

    ReplyDelete
  10. Anonymous1:38 AM

    That they devalue the money only on the supply side is insane. Such a devaluation is more than the profit margin of most businesses and unless sale prices go up or the government provides subsidies impossible. If they have some great 5 year Marxist plan or something besides spending non existant oil revenues, I fail to see it.
    The only thing I see is a crash and the other Mercorsur countries buying up Venezuelan businesses and making the government abide by the treaty. Very soon, if your company is a Brazilian company, the rules are very different. I think.
    Roger

    ReplyDelete
    Replies
    1. NorskeDiv2:41 AM

      That's probably the best possible outcome, simply let Venezuela be bought up and run by Brazil and China while one of Chavez's successors continues running the dog and pony show. At least Venezuela would then be constrained by more levelheaded people.

      Delete
    2. Would they be exempt from the labor law?

      Delete
  11. Hi Daniel, this is unbelievable but I too work in agribusiness and have tried to grow sales in Venezuela for almost a decade (having lived there for many years pre Chavez.) It puts many many companies in distinct danger but one thing gives me hope: your last sentence "Because I suspect that inside chavismo there are a few that understand the gravity of the situation and yet do nothing...", this is true, but there are more than a few, there must be hundreds or thousands that are in business with families/friends/partners/contacts. This is economic craziness and has no logic at all.

    ReplyDelete
  12. Daneiel, not that you were doing anything wrong but the problem is your company's balance sheet was dollar-short at the moment of devaluation. You are indebted in foreign currency in a very risky FX environment. In financial terms, you were completeley unhedged or uninsured against devauation.

    To avoid this risk, many companies in Venezuela are not acquiring debt in US dollars. They just import the merchandise when Cadivi pays out the dollars. And in the other hand, many foreign providers are not issuing credit to Venezuelan clients.

    I know this is terrible for the continuity of yours or any business -it's one of the key reasons why there's so much shortage of goods- but it is at least a safe move and one which will prevent important balance sheet losses like the one you will have to account for.

    ReplyDelete
    Replies
    1. Spoken like a banker or stock trader. And why am I supposed to do with my workers if I have nothing to do for them? Fire them? And what about my customers? "Sorry, I have no stuff for you, too bad your animals are going to die". And what about the competition, should I just leave them alone in the market?

      I am sorry, but I am no reaganite.

      Delete
    2. I know it sucks, but it´s that or being exposed to considerable risks.

      I'm amazed companies abroad still provide credit to clients in Venezuela. Besides, trade finance for Venezuelan companies literally doesn't exist so that makes it even harder to seek credit from providers.

      As I'm sure you imagine, it's very likely your provider -who is already charging you interests- will become fed up with the delays in payments and ask you in future orders to wire the money before dispatching the merchandise.

      Delete
    3. If more business owners/managers thought the way I do maybe there would be less chavista workers, less indignados, less wall street assaulter.

      Delete

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