Friday, December 31, 2010

After a legislative coup, a sort of economy coup: massive devaluation in Venezuela

And yet you would not believe that there was such a massive devaluation if you read only the headlines of Google news.  Words like "unification" pop up to hide the fact that about half of the imports of Venezuela will now cost 65% more in USD than they did today.

The government has unusually well planned such a dramatic measure.  First, it is in the least newsy day of the year, December 30, when even the Nazional Assembly in overdrive is taking a couple of days off while Chavez goes to Brazil for Dilma swearing in.  Second, the newsy impact was the suppression of one of the exchange rates to "unify" the exchange rates around a single value.  The D word never being pronounced!

Last January we went from 2.15 to two exchange rates, one at 2.6 and one at 4.3 to the USD.  That is, the second one, 4.3, reflected crudely a 100% devaluation for common goods while the regime reserved for itself the 2.6 rate to which a few people, those involved in food or medicine production, could access to.  And yet the January devaluation did not bring any relief to the Venezuelan economy, exports kept going down, inflation remained at an official 27% and we end the year with a second consecutive year of economic drop, a bona fide recession, the LONE country in South America with negative growth!!!!  And high inflation to boot.  The Dutch disease is transmogrified into the Venezuelan gangrene!

I am not going to go back on the reasons for such a disastrous economic result: it is all political, Chavez wanting to control everything at any price, literally.  What I am going to tell you is the effect on next year, and why Chavez is willing to pay that new price.

My business was one of the lucky ones that could access to mostly 2.6 exchange because we sell most of our products to people that sell in turn at controlled food prices.  In other words, my costs will increase as of January 1 by at least 50% when everything is taken into account (without including poor services such as continuous electric outages during working hours). That is, I am OBLIGED to increase my prices by 50% because as it turns out my storeroom is almost empty (I cannot use the stock at the "old price" since I do not have it, while I will need to replenish it at 4.3, requiring an expensive bank loan to afford the new import costs).  The question is which clients will be willing to accept my new prices, the more so if the regime does not accept an increase in the price of foodstuff like chicken and pork products.

In other words I am in serious danger of bankruptcy next year as in 2010 our earnings were minimal, below inflation so we are losing capital, work capital that is!  Like most small and medium business in Venezuela, in particular those linked to medicine and agriculture, we are very low in our reserves and this 60% devaluation will be a major blow.

The food chain production of Venezuela is heavily dependent on imports (from corn to agricultural implements).  Most were at 2.6.  It is simply impossible that the cost of food in Venezuela will not rise by at least 50% when 2011 is done.  In fact, I am willing to bet right now that the cost of food will rise by at least 30% in the first semester, no matter how many subsidies the regime throw at Mercal and PDVAL and whatever other scheme it comes up with, allowing for an oil price remaining around 90 USD for that semester!

This is the recipe for an aggravated recession as the regime is not only considering increasing by two points our sales tax, but also ready to impose a banking tax of maybe 0.5% per written check!  Plus, of course, the effect on the nationalization of Agroisleña that is becoming to be felt, and miscellaneous disastrous take overs like the farms in Sur del Lago.  We are in real danger to have food riots by mid year!!!!!!  Because after the disaster of Pudreval when hundreds of thousand of tons of food were lost to sheer incompetence and unspeakable corruption for which we are still waiting for a real accounting we must observe that the people who screwed Venezuela in 2009 and 2010 are still the ones in charge in 2011 to manage the aggravated crisis.

So why is Chavez taking such an extreme measure when he could have settled for a more logical shortening of the gap between the two exchanges rate to, say, 3.2 and 4.8?  For two reasons.

First, Venezuela is getting too close of bankruptcy for comfort.  So Chavez cannot escape devaluation.  Were he to take a more moderate and rational approach he still will not take the necessary economic and political measures to avoid further decline and so  we would be facing again by the end of 2011 a new devaluation, just as the electoral year starts.  Thus he does the brutal devaluation now hoping that with an increased oil price, maybe crossing durably the 100 USD line by the end of 2011, he can wiggle his way out to 2013 and then let it all go once he is sitting securely back in Miraflores.  I do not think it will work, personally, but that is probably the calculation for these people who need desperately to hold on for at least two more years until they hope to erase the political opposition of Venezuela once and for all.

Second, what I could call the paradox of plenty in recession.  That is, recession will not be for all.  With this brutal devaluation Chavez has some political moves open, all distasteful but all almost necessary for him.  For example, he can bankrupt a further chunk of the private sector.  That is, less funding for the political opposition available.  By 2012 maybe a much weakened Polar will be all that is left and thus in 2013 he can finally eliminate the private sector except for little shopkeepers and the like.  Another example of making good use of this disaster is to finally create an apartheid system where only the faithful to Chavez will have access to ration cards for cheap food at Mercal, PDVAL and the like.  The excuse will be the fake "emergency" which required an enabling law that will allow Chavez to rule on such measures.  What will be important there is to mark the populace with the idea that their only salvation is through Chavez, as they watch the anti Chavez group go bankrupt, into exile, denied ration cards, whatever.  Or even better, chavistas offered the spectacle of the degradation of the middle class forced into food lines like they do.

That is why I also call today's devaluation an economic coup because Chavez is going to use the new circumstances to screw as many people as he can.  Even the banks are a sure target now because, you know, the people need cash.  Doubt me?  Watch on cable TV those weird official ads running in channels that are seeing in non Venezuelan countries.  One of these ads would have you believe that the mass of Venezuelans never had access to banks before Chavez, that it was Chavez who finally forced the banks to allow the middle class to open at least a saving account.  Who is that propaganda destined to?  Venezuelans that have no access to cable TV?  Or opinion makers outside of Venezuela?


  1. Anonymous7:36 AM

    Chavez is stripping down the country so that he can rebuild it the way he sees fit which will not be much. Just like a new recuit at boot camp. How military and he has been doing this since the start. It's the only training he has ever had. Its all he knows. Simple minded but effective with simple minds.

  2. Another example of making good use of this disaster is to finally create an apartheid system where only the faithful to Chavez will have access to ration cards for cheap food at Mercal, PDVAL and the like.

    Daniel, FYI, this is already happening. I have been told that families affected by the recent floods have been issued something called "la tarjeta del buen vivir" from Banco de Venezuela (oh the irony of the name...). Every month 1223.90 are paid into such accounts, and the cards (1 x family) can only be used in Mercal and Bicentenario.

  3. Lemmy Caution2:24 PM

    Thank you for not getting tired to report about this rotten haunted house that is Economic Policy rojo rojito.
    It did cease to amaze me.
    They are just not getting tired to dig up new holes to let the productive forces of your country stumble into.
    I wish you good luck. Guess you will need it. And its not your fault.

  4. Daniel´s loss is my gain, although I don´t say this with pride, since it will be cheaper to buy them next time I need to do so.

    For any Chavez apologist who claims that US networks are as biased as the state owned media in Vzla, I was watching a show on VTV the other day about new hospital technology that showed the random patient thanking Chavez for the equipment. Such shameless propoganda wouldn´t even make in on any US network. I don´t remember a random interview ever thanking Bush on Fox News for some product.

  5. Anonymous9:46 PM

    En su galeria de malucos, deberia incluir a este horroroso Giordani quién es uno de los peores destructores del país.La Maga Lee

  6. 1979 Boat People11:23 PM

    After this CURRENT private sector disappeared and the economy collapsed, Chavez will later reopen the market again and allow a NEW private sector to growth. However this NEW private sector are controlled by his gang members.

  7. Roger2:32 AM

    Rebuild Venezuela after he wrecks it? Look at PdVSA to see how that would turn out. The Chinese are interested in buying Venezuelan investments. Seriously, Daniel you might want to look into it and stop the importers who are looking for more commissions at the expense of Venezuelan Workers. Have a good Jour de L'An

  8. Anonymous6:07 AM

    Hola dear riends: I am a Policeman in Maracaibo. There is many of us in Police and other work in Government that not corrupted. We cannot talk, other wise our life is in danger and the life of our Families and Friends. I have to secret everything I believe in what not supports President H. Chavez and his peoples. We do not want to leave Venezuela! This is our land that we love and are proud defending from chaos of the Presidente. Life is sad now in our land and getting badder every day. Many venezuelans are leaving, that is not good, it will not repair politics. We must stand together and fight for peace, freedom from tyranny and keep up hopes for better future.

    We can not do it alone; we are needing your help and that of all venezuelans in other countrys. If all you can do, please pray for us.

    Many wishes for you Daniel to have a good 2011 and wish it will be happy and calm. Signed C.R.

    Note: I send this via my cousin in Canada who knows who I am.

  9. 1979 Boat People8:07 AM

    Please do not blame it on the foreigners like the Russian, Chinese, ...or even Cuban. Blame it on Thugo Chavez who is selling Venezuela to the foreigners for his own greed. If Thugo does not want to sell then no foreigners can buy.

  10. Wow, Anonymous Policeman .Good for you ! This is to you and Daniel

    What comes to mind is a certain
    brawn,and radiant boldness
    that defies the boundaries of can't do
    or won't make it happen
    Some of us look askance
    but others have a single eye focused
    in the strut through the garbage and refuse
    all the heaps of discouragements
    that hinder others, excite their passions
    for justice, for freedom
    to move mountains,
    and defy house rules
    or pave roads arising
    from such unlikely origins
    as this fierce pioneer, or anonymous
    who never says "no"
    Who breaks himself on rocks
    tastes dirt,
    and breathes out starlight
    into the cold dark night

    I wish you a very Happy New Year,

    and to all other readers as well

  11. Anonymous4:01 PM

    Think of this in a more positive light.

    Your $ 100 bills just doubled in value.

    Venezuela is on the fast track to hell.


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