I have been meaning for a few days to write up a simple way for people to understand why the country seems to have been frozen the last few weeks, even though Giordani is out, Lopez still in, and Capriles remains deaf mute. You may think that it seems a lot of stuff is going on but this is not the case, no matter what glaring headline stares at you. The reason is quite simple; the country is waiting at three real questions that need answers. The first one is will the regime increase gas prices. The second one is will the regime devaluate at around 15 or at around 25 for the USD. And the third question, maybe the more important one, but that NO ONE dares to touch politically, will the regime amend the labor law of 2012, a regulation that is choking all, ALL business in the country, be they state or private owned.
As long as these questions are not answered neither chavismo can plan for its post Maduro nor the opposition find again some form of political coherence. We are all silenced by the catastrophe about to fall on us.
Fortunately Miguel tonight has criticized an article from the New York Times which I would criticize even more than he does if I were to write about. Then again I am also on record that since Simon Romero left, the NYT coverage of Venezuela this year has been overall deficient, the more so when you compare it to pieces in the WSJ like the ones of Kejal Vyas or pretty much anything from the Washington Post (except in the "World Views" section, unaccountably so). But I digress.
The first question is very simple: increasing the price of gas to semi realistic prices is the best, and maybe only way for the regime to plug its worst glaring budgetary holes. Unfortunately the political price to be paid for 15 years of reckless populism from Chavez who himself said early in his term that as long as if he was president the price of gas would not go up may be too much for a fragile regime to accept. And yet, something has to be done, with all sources of energy, gas for car, gas for cooking and electricity.
The third question is crucial because if the regime does not allow people to fire lousy workers and saboteurs, there is no way that production of food will go up, that unemployment will decrease. To make a long story short, besides the myriad of regulations that are strangling business the worse one is the inability to fire employees. The law certainly previews that if you fire without justification someone you must pay double the severance legal package for workers. The problem is that you also need the permission of the labor ministry and that one is only granted, on occasion, to state business. For private sector employees, only if you catch them red handed in some form of crime you can fire them (and still need to wait for some form of trial anyway).
I cannot describe you about the extortion industry that has surged as soon as Chavez published the new law for electoral purposes in 2012. In some cases the situation has gone so bad that companies prefer to pay repeated fines, pay the worker full salary, but bar that worker from entering the work place. Simply put, the lousy example, the low morale that such crooks create among other employees, the sabotage risks are in the end more expensive than paying the extortion fees that legally the regime can now impose. Needless to say that permanent hiring has disappeared, that the few folks that are hired are done so under contract and that no matter how good they are, they are let go when the time is up.
I can assure you that this labor law has become the major problem of Venezuelan business, far more important for us than dissertations of airline fees, or even access to raw materials. Because if we get the dollars, if we get the raw materials, labor extortion will go further up. Extortion is now a bona fide labor industry.They simply know how much a business can make and they want it all in fines, social benefits and what not, regardless of the needs the business has for investment, modernization, technology and what not. In fact, talks of state named soviets has slowed down only because the regime knows better than put them inside state enterprises at a time where there are so many rivalries inside chavismo. Those workers council could even in theory decide what is produced and to what extent and at what price...
If I have made this long meandering before reaching the core of this post, the devaluation to come, it is because you need to understand that the gigantic subsidy to energy that the regime pays, and the shackles that it has put on business production potential are the two main causes of inflation and recession. All the rest, from corruption to brutal incompetence passing through useless socio-electoral programs is one way or the other linked to the these two items that I just described. And for the nth time the regime finds only a way out, devaluation, ignoring that a new devaluation will make energy finally free for the public, 99% at the regime expense. While also wrecking perhaps even Polar, our main private food provider. But this is of no importance for the regime as long as it can keep meeting payroll for an extra 2-3 months and corruption in the higher spheres keeps actively racking in.
The true root of the problem is, again under Chavez idiotic orders, that the regime does not want to have legally more than one official exchange rate (as it was the case in pre Chavez years). So the regime has been working hard at inventing derivative systems to hide what was in fact a second exchange rate. But a dual exchange rate can only sort of work if its rules are clear but flexible. You want to avoid a run on your money but you want prices to reflect international reality. So in practice you allocate a portion of your reserves to a given rate for those items that are, shall we say, of national interest and the rest at a floating rate. In Venezuela there was a single exchange rate and diverse tamperings so today we have two other rates which are not of free access, and which are not funded directly by reserves but by the wishes of people to bring back to Venezuela their dollars at better rates. This of course failed. Why?
If the regime has accepted reality last year, say in December 15, it could have devaluated from 6,3 to, say, 9. And it would have allocated, say, 10% of its reserves to a "free" rate starting at 15 which would have been at first for travel, luxury items, booze imports, etc. That 10% would have been funded directly by the reserves. And then, month by month that initial 15 would have slid toward a 20+ while more and more items would have been added to that exchange such as clothing, personal hygiene, etc. The slower the slide the freer the access. By now we would have that "free" exchange above 20, representing at least 30% of our imports and the pressure on the 9 rate would have been much alleviated, with the added benefit that the inflation effects would have been absorbed. With better budgetary polices why not imagine that in December 2014 the 9 goes to 11 and the 20 reaches a now stable and free 25 for 50% of our imports, allowing sometimes in 2015 the final step to a free currency again.
But the government chose the worst options.
One, it stuck at an untenable 6,3, so afraid it was of inflation, so unable it was to prorate the budget and liquidity cuts necessary to slow down the inflation rate.
Second, it created a SICAD 1 which was woefully underfunded and at a 10 rate that made no sense.
Third, bowing the the reality of a black market, it created a SICAD 2 at around 50, controlled, with limited access, that was supposedly going to finance itself by returning dollars from abroad. It did not happen because not only the restrictions scared possible investors, but the government failed to understand that people who took great pains to bring their meager savings to international markets have ZERO trust in the regime. Apparently there are some in the regime amazed that folks did not flock to buy bolivares at 50! They are truly clueless...
As I predicted somewhere early this year, the June black market value remained in the 70ies... Confirming the failure of SICAD 2.
What should the government do now? Besides its obvious need to change its social and subsidy policies, it MUST devaluate, and not anymore at 9. With an inflation that is not even published anymore, my guess is that the regime needs to go straight to a 12 rate, STRICTLY for raw material and food sold at MERCAL only. SICAD 1 should become a second fixed rate for other food and medicine and clothing, say, at 20. That new rate should be official and should already dispose of 30% of incoming dollars and should be transparent. And finally SICAD 2 should be a daily open bidding process, no questions asked, for 10 million dollars to the highest bidder and may the Lord have mercy on us. That SICAD 2 would rocket to 80 or higher at first but within weeks could go down to as low as 60. Finally a SICAD 3 should be created indirectly by completely decriminalizing exchange. That is, you can negotiate on your own with particulars at what price you wish to buy your dollars.
NOTE: I am not advocating the solution above, I am just offering it as a transition measure while the regime modifies its energy prices and labor laws, at the very least.
Why, may you ask, do I offer such numbers since I am no economist, no financial expert? Well, I manage a business and I can assure you that any devaluation above these numbers is certain to send belly up at least half of the remaining private sector. It is that simple, it is the numbers that we may be able to manage if we know that the regime is making other changes that will allow in 2015 to recover some. One thing is to dissect exchange rates in think tank groups, another for the local producer to sum up its plus and liabilities.
But what is the government planning? The worst! A "unficacion cambiaria" which is Orwellian code to bring in together under a single fixed exchange rate that they will control in full of 6,3, SICAD 1 and SICAD 2 at 25 or maybe even more.
If this happen, the inflation for the second half of 2014 alone will go above 100%, and half of the remaining private sector will close shop. American airlines will be able to shut down operations completely, it will be the least of our concerns as we make your way on foot toward the Colombian border.
I can only assume that the regime has decided that devaluation has the lowest political cost, and a big devaluation may not be that bad: after all we have had several devaluations in recent years and as long as the chavista lumpen keeps getting its free bag of MERCAL of sub par products they tend to remain quiet. Heck! they have even learned to stand in lines for hours already! The folks that would start protesting, well, they are already protesting and Capriles is telling them to stay put. Some more tear gas and order should come back fast. There will be always time to take less popular measures like gas prices.
But times have changed and a harsh devaluation will find the private sector at its weakest since Chavez was elected in 1998. Has the regime a clue? Is the regime aware that this time around a devaluation without care, without accompanying real measures might just be what will light up the fuse of massive social unrest?