My second post is about Rodrigo Cabezas. When he was named Minister of Finance I certainly was in agreement that he was a much better choice than Mathematician Nelson Merentes, at least Cabezas is an economist, even if he invented the strange concept of excess international reserves which will come one day to haunt the Government and I certainly hope Cabezas is the Minister when it happens.
But the more I hear Cabezas speak, the more I get concerned about the future direction of the Venezuelan economy under his helm. About the only think I like of what he has done is stop that vicious circle of corruption involving the discretionary sale of Argentinean bonds and structured notes to local banks, as a way of intervening the parallel market.
Unfortunately he has done little else. For the first month in office he did essentially nothing. For the second, very little. Then they issued the Bono del Sur 2, which he hailed as a smashing success, for which Quico gave him the Chutzpa of the young year award. (Still time to beat this!)
And now comes monetary reform also known as monetary reconversion, under which the new currency will be known as the “Bolivar Fuerte” or the strong Bolivar.
Unfortunately, other than taking three digits off the currency, almost nothing has been done in terms of trying to help the Bolivar be strong. This has generated lots of criticism and today Cabezas blasted the critics. Let’s see what he had as ammunition:
—“Those that predict a devaluation are lying. The new monetary exchange will generate equilibrium when it is established at Bs. 2.15 (per US$), thus there would be no devaluation because there will not be a need for it. We will not give in to the pressure of economic groups that cartelize the foreign exchange market”
Wow! Where do I begin. If taking three digits off the currency “generates equilibrium”, why not take four, five or six? The more digits you take off, the more equilibrium it should generate. Or not? Am I missing something in his explanation?
As to the strength, the equilibrium and devaluation. If the currency is so strong, why did he sell his smashing success bonds at an implicit rate of Bs. 2800, a full 30.2% higher than the “official”, “equilibrium” rate. And why are these cretin, cartelized, economic groups willing to buy dollars at Bs. 4,000 to the dollar in the parallel market, a full 86% above the official exchange rate? Do they really expect to make money if Cabezas devalue let’s say to bs. 2,800 to mimic the Chutzpah bond?
By the way, did you notice the paralell rate did nothing when the bonds were sold? Shouldn’t this be telling them something? Apparently not.
As for the “need” for a devaluation, has Cabezas added up the Government’s income this year and compared it to the budget? Let’s see, last year there was a fiscal deficit of about US$ 1 billion in a budget of US$ 53 billion. The new budget started at US$ 60 billion. They need US$ 7 billion. Oil is about 10% lower so far in 2007. They need another US$ 3 billion, we are up to US$ 10 billion. Uups, they cut the Value Added Tax, for some US$ 6.5 billion more, we are down US$ 16.5 billion. We need to adjust salaries by at least inflation add another US$ 4-5 billion, for a grand total of some US$ 20 billion plus or minus 2 billion. Scary, no? And this does not take into account the income tax reduction decreed by the Supreme Court if it gets applied this year.
Let’s move on.
—The Minister explained that there are two modes that force a devaluation: Capital Flight or a lack of foreign currency. “None of that is happening, thus it is a stupidity to say there will be a devaluation”
Well, I left the word stupidity in bold, so that when the devaluation occurs I will be able to remind you who is the stupid person here.
Somehow Cabezas forgot a third mode: Spending too much. Last year imports were US$ 31 billion, this year shoudl go higher at the current pace. It is not whether your income is sufficient, it is a matter of the balance between income and spending.
—“We have to get used to living without inflation”
We would love to!
—“Those that say this is a cosmetic change in the streets are wrong…there is a systematic policy for reducing inflation: An increase in production, a flow of imports, controlled liquidity and a macro policy to lower inflation to a single digit”
Here he sounds like he was in Sweden. Inflation in two months is already close to 4%, 12 month inflation is at 20% and has been moving higher.
As for systematic, the term implies a system, many steps, many measures. As far as I know, of all the steps taken, only one really helps in curtailing inflation, that of having PDVSA hand over the foreign currency to the Treasury. Unfortunately, like the VAT cut, the effect will only be temporary as when “equilibrium” is reached, to use the Minister’s words, it ceases to have an effect. And the the 1.5 billion removed in liquidity by the Bono del Sur, is equal to the increase in liquidity in the last six weeks. So the systematics appear to be an empty set, in new math terminology.
As for the rest of the sentence, some parts are missing: Production has been decreasing in the face of cheaper imports and liquidity has been out of control…
See why I am worried?