As you may have guessed, I have been away, biking in a very nice area of the world, which together with sightseeing and resting from the exercise, gave me little time to post. Which does not mean that I did not follow the news, despite spotty internet coverage in many places. And I am very happy that I avoided the Snowden drama, which I will post about at some point, but consider it to be mostly a distraction. What I found more interesting, was that after only three months, the incompetent Venezuelan Government finally will start selling dollars into a new, and they claim, improved, SICAD system. It took only three months to create rules, limitations, allocations, quotas and the like, attempting to include almost everyone. I have been somewhat surprised at the positive reaction to this new system by many analysts, suggesting is a step forward and that the unmentionable rate will somehow go down.
But I am not impressed.
To begin with, the Government will sell US$ 200 million every two weeks in this new revitalized SICAD system. This comes out to about US$ 20 million per day, well below the US$ 40 million that used to be regularly sold per day in the old SITME system. The difference is that now there are some quotas and individuals will be allowed to participate (and more Bolivars in the system). Sitme was good about oiling the system in providing dollars to importers and in emergencies, but I really don’t think it eased the pressure in the black market very much.
As if this were not enough, there will be more participants. And I think this is the weak point of the system. With the control the Government will exert on the rate at which dollars are sold, the arbitrage between the SICAD rate and the black rate will be large and more and more individuals will register to participate and that number, much like what happened in the Bolivar/dollar bond system, will balloon in time as individuals try to take advantage of the system. If a family of four, for example, plans to travel, having each member participate creates a subsidy for the trip that can even be partially funded selling dollars in the other market.
The rules reportedly will be different for each auction, which simply creates too much guesswork for importers who really need the foreign currency to function. In the first auction Margarita and Paraguana will receive a quota, if this is not permanent, it may not do the job desired. But more importantly, companies have lots of pent up demand and now that a mechanism in which they can get what they need is available, they will all go to Sicad to complement their needs. Massively. Access to Sitme had more rules than the new Sicad does, so the demand side will be stronger.
The good news is that exporters will be able to sell their foreign currency in Sicad, which is definitely a very positive development. But one needs to be careful in estimating how much this will bring to Sicad, as exporters can keep part of their dollars, so that not all of their foreign currency will flow back. What is positive is that it increases the competitiveness of these exporters, a sector that has been affected severely by exchange controls and the overvaluation of the currency.
I think the unmentionable rate may slow down its increase with the expectations of the first of auction, but I really don’t think it will have a significant impact in bringing it down. The new Venezuelan foreign exchange market, under Sicad, will not be a true market. There are billions of Bolivars that will be chasing for those few dollars. With monetary liquidity about Bs. 851 billion, at Bs. 20, for example, there are US$ 42 billion in the system. Pent up demand is large, as for over six months, the only game in town has been Cadivi and to a lesser extent that other market. Thus, you have lots of demand with little supply comparatively speaking. The only way that other rate would go down, would be if the Government did not impose any limit on the price of the Sicad dollars, but as long as this is under control, it just will not happen.
So, a new era in foreign exchange games begins in Venezuela this week. The Government is likely to increase rules as it goes along (there are rules even at what times you may access the system depending on your cedula or tax number), they simply like to do this too much. And the players will all be ready to adapt, change course and develop strategies in order to get their foreign currency. We have seen this movie too many times in the last few years. Moreover, all of this will be done with no transparency, as to who gets the dollars and at what price, allowing once again for favoritism and graft.
As usual, some will make a lot of money, others will be frustrated and then the Government will reintroduce a new and improved Sicad again, as the problems are noted. They are just too predictable.