A Devaluation By Any Other Name… | The Devil's Excrement

Miguel Octavio's take on the latest exchange rate regime in venezuela. 

A Devaluation By Any Other Name…

So today, the Minister of Planning and Finance, Jorge Giordani, the Minister for Energy and OIl Rafael Ramirez and the President of the Venezuelan Central Bank, announced the new “Complementary System For Foreign Currency”. If you ask me, the system is still not completely well defined and as the President of the Centarl Bank roughly said when he answered a question: “The point is not that we will all get A’s when asked how the system works, but we will learn about it as we go along”. My translation: “This is all still being worked out, please don’t ask so many details, as we are improvising as we go along.

Clearly, there were and are differences between the various members of Government. The radicals, which includes Vice-President Arreaza and Jorge Giordani, go under the Pol Potean theory that they know how much the country needs to live on in terms of imports (US$ 40 billion) and that should be it. On the other side are the pragmatists with the President of the Central Bank Nelson Merentes and the Minister of Energy and Oil, Rafael Ramirez, who want to be more pragmatic and the latter wants PDVSA to get more Bolivars for its foreign currency.

Only yesterday, Giordani was saying he was opposed to an alternative system to SITME, during the baptism of his latest book, the only Minister of Finance in the world, who has time to write books, because the economy of Venezuela does not require his constant attention, because it is doing so peachy. Today, he oversees the compliance of the system.

Somewhere in the middle is interim President Maduro, who seems to be trying not to take sides until it matters.

Well, it seems as if the pragmatists won for today. They went from no alternate system, to a system with a Vietnamese auction (previous post) which meant having a reference price, to a modified Vickrey auction, which if you put together all of the answers given today during the press conference, implies the following:

The Government will hold non-daily auctions of cash dollars. The Superior Entity for Foreign Currency (SEFC) will decide when these auctions take place and how much will be sold at each auction.

For now, to participate in the auction, you have to be registered in RUSAD, the same organism that you needed to be registered for for SITME or CADIVI if you were a company. (No individuals may apply for now)

The main difference is that for CADIVI, CADIVI looked up if what you are asking for is in the list of approved items. In the new and “improved” SICAD system, you can ask for anything you want, attach a quote and someone will decide if your request can go to the auction. You will make the request for XX US Dollars via your favorite bank and specify at what price you are willing to buy the dollars.

Once the auction is called, the SEFC will decide how much it wants to sell. The top bidders for the amount available will be able to buy the foreign currency, but rather than at the price they bid for, at the average price of all the bidders that qualify. This is what apparently means by a “modified” Vickrey auction, it is not the second best price, but the average price of all the bids accepted. (It is unclear if the average is weighted or not)

Now, when asked at what price, the President of the Venezuelan Central Bank said quite clearly: “At the price of the best bids”, implying and suggesting that there will be no cap to the price set by each auction. While we find this hard to believe, this seems to be the understanding of most analysts.

What we can gather from this, is that this is nothing but a disguised or veiled devaluation, whereby the Government introduces a “new” system where it will sell as many dollars as it wants (or not), becoming a de factolarge devaluation, where it may decide to sell as few or as many dollars as it wants.

And where do the dollars come form? Easy, there are no new dollars in this equation. As Ramirez said, there is a finite number of dollars from PDVSA and from Fonden. The Government will assign cash to CADIVI requests or cash to SICAD requests, deciding to prefer one over the other, at its convenience.

Now, given that this system will not produce results before the election. That it was not an electoral priority, I can’t help but believe that this is a veiled devaluation, whereby the Government will assign more dollars at the much higher rate (in the teens?) as needed, in order to help the economy function and ease PDVSA’s cash flow problems by having it receive more Bs. per dollars than Bs. 6.3. In fact, PDVSA will receive many more Bolívars. Like over two times more.

In fact, if my interpretation is correct, more and more requests will come via SICAD and companies will wise up to the fact that they have a better chance of going to SICAD than CADIVI. In some sense this may even open the doors to removal of the exchange controls, but at a much higher rate of exchange, keeping only a few items at the lower rate of Bs. 6.3 per US$.

This is in fact, just another dual exchange rate system, common in our history, in which the discretion of the Government will determine how much is sold at the lower rate and how much at the higher rate, at its convenience. This convenience implies heavily subsidizing basic staples and allowing inflation rates to be very high temporarily on non-essential items.

The presentation was confusing, not clear, and vague, but in the end it creates a more realistic system. It suggests that the pragmatic wing has taken over and if Maduro were to be elected, the system may be made even more pragmatic than described here, despite its political costs.

This entry was posted on March 19, 2013 at 11:22 pm and is filed under Uncategorized. 

A Devaluation By Any Other Name… | The Devil's Excrement