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I Will Turn You Into Powder!

March 5, 2015

Twice in one year, Venezuelan Government officials have said:

“I will turn you into powder”

referring to the parallel or black market for the exchange of Bolívars into US dollars.

Last year, it was Mr. Rafael Ramirez that said it. He is long gone. This year, it was none other than Nicolas Maduro, I am not implying anything by the similarity, other than the fact, that it has been shown how little they have understood the implications of the systems they implemented.

Last year, it was Sicad 2, a sort of glorified Sitme (The previous system)

This year, it was the creation of Simadi, a kludgy system, with little logic or connection with the reality of markets. A system so badly conceived, that I thought it would utterly fail. But I never thought it would fail so fast.

In barely two weeks, Siamdi has become Sicad 2 at a higher rate of exchange of Bs. 170 per US$ instead of Bs. 50 per US$.

Nothing more, nothing less.

And as I said, the system never was free, nor unlimited, nor market driven. All of which guaranteed its failure.

And it failed. Within a week, as shown in this plot (yes, today it was higher):

black

the parallel market dollar has soared. While the Simadi rate remains at Bs. 177 per US$, any chance that the Government had to succeed failed when: 1) They set the Simadi rate below the parallel rate. 2) They failed to supply the private system with dollars, only giving foreign currency to Government-owned banks and 3) They limited any transaction to Bs. 180 per US$.

As those who had waited for a month for Simadi got nothing, the parallel rate soared, going from 190 to 284 per $ today (That point is not in the graph, which I made up yesterday)

So by now, Simadi has become a glorified or amplified Sicad 2, exept the rate it is Bs. 177 instead of Bs. 50. And the graph above implies that Simadi is dead on arrival. You see, besides my objections before, here and here, by setting and holding the Simadi rate lower, with the parallel soaring, arbitrage becomes too much of an incentive. Go to your nearest Casa de Cambio gets US$ 300 at Bs. 177 and sell it in the “other” market at Bs. 280. The same if you go to bank or broker that gives you higher amounts. You buy it, sell it higher and you make more than a months salary for a fairly good job.

The Government simply screwed in is naive belief that anyone would like to bring their foreign currency back. That with 100% inflation (and higher soon) anyone would not buy currency and wait a few months. Instead, it created this dumb system, forcing each bank to operate with its clients, each broker with its clients and Government-owned banks to receive foreign currency to give to its clients, chosen who knows how, but creating a huge distortion in the system. But even Government-owned banks are not getting enough. And you can bet some of it filters back to the parallel market. It is too nice an opportunity to pass up.

With any normal Government, this would just require adjusting the system and trying again. But this is far from being a “normal” Government. First, they really thought they could control the market They really believed that people would bring dollars back to become rich at Bs. 177 per US$. It did not happen.

And now, it would take as long as to set up the new system, to adjust it. Consult. Check with the ideologues. Check with the President. Check with the military. But most of all, it will take understanding to convince themselves that something is wrong with their system.

After all, they were supposed to turn the black market into powder, not the other way around.

 

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The Maduro Government Has Become Totally Insensitive And Cynical

February 27, 2015

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When I began this blog, my objective was to show to those abroad how Chavismo’s claims were always exaggerated and inaccurate, how history was being changed and how Chavismo twisted the truth and the law just enough to get its own way to kidnap the State and its institutions. This objective of this message was achieved long ago, thanks to many people, blogs and institutions.

What Venezuela faces today is quite different. All institutions of Government, checks, balances and the rule of law are in the hands of the same ideological party and Government. Media is mostly controlled by Chavismo, and what little is not, is either being asphyxiated by the Government (Tal Cual is shutting down its daily edition today due to the lack of newsprint) or uses self-censorship in order to avoid confrontations with the Government.

But the level of paranoia and indolence exhibited by Government and PSUV officials has now reached levels of insensitivity that even after observing Chavismo for sixteen years simply flabbergast me.

Upon the death of a 14 year old school boy this week in the hands of a member of the national police, the Government machinery immediately began spinning the murder . The facts are clear, the kid was leaving school and was caught in the middle of a demonstration, he hid under car and a policeman pulled him out of  from under it. As the kid started telling the cop not to repress them, the cop simply shot at his head, with whatever type of gun he was using, killing him. As if this was not sufficient, the cops then tried to drag the body away with their motorcycle, but they were stopped by the friends of the kid and the protesters who simply could not believe what was happening.

Before any specific facts were known, Maduro, who was in Trinidad, made statements suggesting that Colombian paramilitary groups had infiltrated the country into San Cristobal (where the murder occurred) and that the kid belonged to a right wing sect…Yes, he was the member of a Boy Scout troop. Maduro also spewed out all his usual vile about the US wanting to overthrow him, the right wing opposition and the like.

Soon after that, the General Prosecutor said the cop had been detained and would be charged, among other things, with using an illegal weapon in the control of protests. This was clearly denied by both the “People’s'” Ombudsman and the investigative police, both of which said that the kid was killed with a gun that “only” shot plastic pellets. Witnesses said that the wounds the kid had in his head were not consistent with plastic pellets, as there were deep gashes and burn marks around them.

By now the Government in its cynicism, is portraying (The Prosecutor dixit) the cop and the kid both as “victims” of the right wing. Yes, the young cop is also a victim, but it is a victim of the hatred and indoctrination of the police corps, where human rights and respect are not promoted. Instead, it is a culture of repression and hate which is promoted daily in these organizations filled with loyal members of Chavismo.

And the Governor of Tachira State, gets all worked up because people are calling for the abrogation of Decree 8610, the same one that allowed the use of guns by the armed forces in the control of protests, because the murder of the 14 year old kid “had nothing to do with that decree”. Of course it does, when the Minister of Defense calls a decree which violates Human Rights agreements “beautiful”, the murder of this kid has everything to do with the culture and the atmosphere of repression created by Chavismo in Venezuela.

And to prove this point, in the last week, six young kids, all under 23, all near protests or protesting or detained during protests, were either shot dead in the head or found later shot in the head. All were students. none ever detained before.

By now,  the Government is giving, in some cases, “alternative” explanations to these deaths…

Meanwhile, the new media purchased by unknown foreign investors (not allowed by law, but who pays attention?) does not even report the death until hours later, suggesting the students were all attacking the cops or part of the demonstrations. Meanwhile, the “Dean” of Venezuelan Journalism, who presides over one of these, Ultimas Noticias, says he does not even know who purchased the newspaper, but they want to have a “different medium” and defends the concept that some sort of weird coup was indeed staged against Nicolas Maduro.

What a sad and cynical role this supposed “Dean” of Journalism and freedom of expression is playing in the Venezuelan tragedy.

And just as you think you have heard enough, Maduro tells the world (if it was listening) that the world’s powers have to “rationalize” the use of  oil. Funny point to make, from the leader of a country which has doubled daily gasoline consumption since 2001, by giving it away for almost free. But as if this was not enough, he called for the use of clean energies and techniques. I guess he is so concerned with the environment, that this is why he eliminated the Ministry of the Environment last year.

But the beat goes on for Chavismo. The lines at supermarkets are invisible, non-existent and just part of the economic war. The protests are led by USA trained and backed 20 year old students, inflation is not a problem and God will provide. They hope.

And as the family of the 14 year old that was murdered buries him, there are no words of condolences, no expressions of compassion. Just a warning that if the opposition gets pesky and the protests over the deaths, or shortages, or inflation continue, the Government may be forced to ban the opposition, so that it can proceed to have elections in democracy and peace later this year.

Such is the cynical logic of Chavismo/Madurismo today. There is no gray area anymore, just cynicism and insensitivity for all …

 

 

Caracas Mayor Ledezma Arrested

February 20, 2015

Video of intelligence police taking Caracas Mayor Antonio Ledezma away

After two weeks of threatening to arrest him, intelligence police (SEBIN) raided the offices of Caracas Mayor Antonio Ledezama and forcibly took him away while shooting into the air as they left. The intelligence police had no arrest warrant and it was not until President Maduro later spoke on forced nationwide TV that the President confirmed that he had been arrested “on orders” from the Prosecutor.

Venezuelan media did not report the incident (other than El Nacional) for hours, as people gathered outside the SEBIN offices near Plaza Venezuela. But it was not until the early hours of the morning that it was learned that Ledezma was being held in El Helicoide.

Maduro claimed that Ledezma would be tried for his “crimes against peace”, noting in particular, that he had signed a letter which was nothing but a conspiracy against him. The letter was signed by Ledezma, Leopolodo Lopez and Maria Corina Machado and called for a “transition Government” of national unity.

Maduro revealed that he had been in Cuba during the Carnival break, suggesting that this strategy was cooked up there. The strategy is likely to be to create protests, intimidate and at the same time distract the population from the numerous economic problems the country has. This is a typical strategy by Chavismo of becoming aggressive whenever its popularity goes down, looking to show that the President (Chávez then, Maduro now) is in charge and deserves the support of its sympathizers.

The concern is that what the Government wants to do is minimize the leadership of the opposition ahead of the Parliamentary elections. Polls suggest that Chavismo will lose such an election by a wide margin, but at this time Maduro is likely trying to stop the opposition from obtaining a 2/3 majority. If this were the case, the National Assembly could approve Bills before the new Assembly takes over, moving subjects, such as budgetary approval and the like, to the Executive branch. If the opposition did not obtain the 2/3 majority it would be unable to overturn such Bills.

The detention does little to help the image of Maduro internationally, but it has been clear for quite a while that he cares little about that and is behaving like an outright Dictator. The outcry so far internationally is the loudest since the detention of Leopoldo Lopez, but the immediate reaction and condemnation of the detention.

For the opposition, taking advantage of the Government’s low popularity will not be easy. The opposition lacks access to the media and has precarious financing. If its leadership were to be jailed, the battle would become even more uphill to obtain 2/3 of the Deputies in the National Assembly. Any possible Electoral discrepancies would never be investigated, Chavismo would achieve its goal of keeping power no matter what. Clearly, there seems to be no one that opposes Maduro within the Government at this time.

Going forward repression is likely to increase as the Government sets aside any pretense of being democratic.

Not pretty!

 

SIMADI May Be A System, But It Is Not A Market

February 12, 2015

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Just my luck that last night just as I pushed the Publish button, I received a copy of Foreign Exchange Agreement #33, regulating the new “market”, different than the Cencoex Bs. 6.3 per US$ system and the Bs. 12+ Sicad system. Then this afternoon I received the regulations for the securities part of SIMADI. In some sense, it is good that it happened this way, otherwise lst night’s post may have been too long, complex and boring.

To give you my punchline right away: SIMADI may be a system, but a market, it ain’t.

In fact, it an extraordinarily complex and bizarre system for buying and selling currency. It even makes you wonder why it is that way…

SIMADI has three parts:

1) The cash retail system

2) The bank cash system

3) The bank and broker securities system

Let’s look at each of them:

1) The cash retail system

This market called “menudeo” will function via foreign exchange houses and banks and be devoted only to individuals. Minimum is US$ 300 and it will be limited to US$ 300 per day, US$ 2,000 per month and US$ 10,000 per year for each individual,

How does it work? You go to your bank or exchange house and buy or sell dollars at yesterday’s exchange rate for the system. This will also be (yesterday’s rate) the referential rate for credit card transactions and custom duties.

2) The cash bank system

This is likely the weirdest one. Minimum is US$ 3,000. You also buy at yesterday’s rate, however, each bank can only buy and sell foreign currency with its own clients. That is, there is no interbank system or market. You buy and sell only with the clients of your bank and at yesterday’s price. To make it even weirder, banks can not hold positions. That is they can not buy dollars for their own account in this system, only by buying (selling) cash from clients and selling (buying) cash to other ones. If they buy too much on a given day, they have to sell any excess foreign currency to the Venezuelan Central Bank. Oh yeah! If you are a client and want to do either, you have to send the bank either the Bolívars or the US$ to the bank ahead of time. Only if they are there is the bank allowed to do the transaction.

3) The securities system

The securities system will operate in the Bolivarian Stock Exchange, where all authorized brokers and banks can operate. They can buy or sell dollar denominated securities in exchange for Bolivars at an agreed rate.

However, they can not do transactions with anyone but their clients and other brokers and banks can not be your client. i.e. You have the sellers you can find buyers among your clients. That’s it. When you sell the bonds in US$, the dollars from the transaction have to go to your Venezuelan banking system dollar based account.

In this market, brokers and banks can take positions, i.e. they can buy, for example, dollars from a client, keep it and later sell it to another client, but not to another broker or bank.

Oh yeah! The Central Bank does have to approve the transactions you close.

Thus, this is no market.  This is just a bizarre system. Why do you need to do this via an exchange is a mystery, except that the Government wants to keep tabs of transactions, but there are no bids or asks, the clients of your institution (to use the language of the regulations) agree on a price and you do the transaction at that price. But you don’t talk to other market players. You only look at previous transactions and try to have your clients agree on a price.

What does this mean?

-The price has a strange way of being constructed.

-There is no market per se

-If you are a bank or a broker, you can only sell however many dollars your own clients sell to you.

-I suspect that Government-owned banks will have a huge advantage as the Government, the largest generator, provider, holder of foreign currency, will likely give its own banks bonds or foreign currency to trade. They will have a gigantic advantage over private banks. Once again, leave the private sector out of it as much as possible, maybe the word “marginal” refers to the role of the private sector in all this.

-The parallel market still exists. Moreover, there will be arbitrage now not only between Cencoex and Sicad and the parallel rate, but there will also be arbitrage between SIMADI and the parallel rate. And a privileged few will make a lot of easy money.

-Market it is not, just a bizarre and complex system to exchange foreign currency.

Par for the course from Chavismo…

 

Venezuela: Another Marginal fx System?

February 11, 2015

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I waited until today to write about yesterday’s announcements about the “new” fx system, because we were promised for today some decrees relating to the rules that would oversee these supposedly new fx system.  But much like everything that has happened so far in 2015, there are new delays and who knows when these new rules will come out. And in any case, they may be irrelevant anyway, or to use a word that is en vogue, the details of the rule may be marginal to the whole subject and its future.

Maduro took three weeks in January traveling around the world begging for money. Then he took four days after coming back to give a speech in which he announced that “in the next few days” we would know the details about this newfangled, state of the art new system for doing what people have been doing for centuries: Exchanging one currency for another. But the few days for this complex task, took three weeks and it was not until yesterday that we heard some details details.

The new system has three parts. The first two are a rate for Cencoex (same name) of Bs. 6.3 (same number) per US$ and a rate for Sicad (same name) which will start at Bs. 12 (same number again) per US$. Thus, so far 66% of the “new” three part system is identical to what has been in place since April 2014.  In fact, it is so identical that even the percentages of foreign currency indicated by the Minister that will be sold in each market are practically the same as estimates of how foreign currency was distributed last year in the two systems.

And then there is the new and marginal third fx system, which will be called the Sistema Marginal de Divisas (SIMADI) (Marginal system for Foreign currency)

Really, you can’t make this stuff up.

Now, about the only thing we know about this “new” system for real is that it will have a price higher than the old Sicad 2 system and that it will be called SIMADI, which is the subject of numerous jokes including SIstema de MAduro y DIosdado.

The rest, is having to take at face value what the Minister of Finance and the President of the Central Bank said about it:

i) It will be a system subject to “market” forces. Free Floating.

ii) It will have no limitations or restrictions.

iii) It will operate via banks, brokers and exchange companies, but there will be a limit in the latter.

However, to participate in the “market”, the rules will be the same as for Sicad 2: You have to register, open an account in US$ in a bank in Venezuela and provide your last Venezuelan tax return.

Now, according to Maduro today, from 3-5% of all foreign currency will flow through this system. At today’s oil prices that is about US$ 1.5 billion at the top range of 5%. Of course, Merentes and Torres talked about “anyone” can sell in this market and that it would start “near” the parallel market rate and then go down. Yeah, everyone is waiting to sell…

Well, pardon me for being so skeptical. Let’s assume that the parallel rate is Bs. 200 (it has never reached that, but makes calculations easier). If the Government plans to sell only US$ 1.5 billion in this market during the whole year, that would take barely Bs. 300 billion out of the monetary liquidity which stands at Bs. 2 trillion today. That means, that only 15% of the monetary liquidity has to go to the SIMADI, in order to wipe out the US$ 1.5 billion. That is peanuts, more so, when M2 has been growing steadily at a rate of 65% per year, which means that another Bs. 300 billion would go into the system in just one quarter and a lot of it will also be looking to leave the country.

Why?

Easy, let’s look at the other side of the equation: Demand. There is lots of pent up demand, because essentially the parallel market has been illegal for the last four years. Many corporations refuse to participate if it is illegal, but now they have a way of doing it if its is legal, free-floating and unlimited. Additionally, given the shortages in the country, companies, people, will use this new market to obtain foreign currency, either to import, to complete supplies or raw materials to produce stuff in Venezuela or buy widgets to sell locally. Finally, the market has been dry lately,  savers, companies,  everyone with any sense of self-protection will look to take its savings abroad via this market at a a time of increasing political instability and uncertianity.

Given all this, I expect much more than 15% of the monetary liquidity to go to this market and at this time, it does not seem the Government is making an effort to have more foreign currency (by devaluing the other two rates), nor to reduce the deficit which is financed by money printing.

Thus, I can only conclude that this market is unlikely to be free, unlimited and market driven, for the simple reason that the Government does not want the rate to rise without control. And if it tries, it will eventually shut down the market, much like it did in 2010, as the parallel rate will drive inflation, no matter how marginal the Government wants you to believe it is.

As we say in Venezuela, we have seen this movie before, which means there will be limits, regulations, etc. and in the end the system will look a lot like Sicad 2, but at a higher price. Making it the same as that in place in most of 2014, but at a higher and controlled price.

And thus, truly marginal.

P.D. PDVSA issued a 2022 bond without telling the market, which it can use to supply the system. It is a US$ 3 billion issue, but its price will be around 34% at current levels, so that it could contribute US$ one billion to this market. I still think its not enough.

Venezuelan Government Flip Flops Between Pragmatism And Radicalism, But…

February 8, 2015

biceLines at a Government owned supermarket in the middle of Caracas, almost daily now

Some people have written to me, asking why I have been so quiet, when so much has been going on in Venezuela with the takeover of Farmatodo and Dia Dia and the jailing of its owners.The reason is simple, yes, there is a lot going on, but to me what happened to Farmatodo and Dia Dia is more of the same, going back to the takeover of the Coca Cola warehouse way back in 2003 and going thru the nationalization (and destruction) of Agroisleña, or the Dakazo, or so many takeovers, nationalizations and jailings that have taken place under the Chavismo Dictatorship.

After all, Chavismo took over Dia Dia, a company founded in 2005 only to serve the lower strata of the population, the sort of project the Government should back and promote and not destroy, which is all it is doing by taking it over. After all, it is merging it with the Abastos Bicentenario (and stealing its inventory) , which was created when the Government forcefully took a majority stake in Cativen and its Exito hypermarkets.

They have not been the same since and have lines as long or longer than those of the private sector.

Thus, there is really nothing much different happening with the events of the last few days or weeks. What is puzzling, and I don’t have the answer for it, is why Chavismo (or Maduro) takes this self-destruction route. If I knew, I would have written a post about it.

Because what the Government is doing is sending very mixed signals. On the one hand, it dollarizes airline tickets, airline cargo and talks about a new “market” (I doubt it!) for foreign currency at a higher price than Sicad 2, but on the other, Maduro keeps confronting, threatening and acting like a Dictator, despite the fact that his popularity is in the low teens, according to the latest polls.

So, what gives?

I don’t know. The Comandante Eterno used to do the same thing when things got tough, but he was Chávez and Maduro ain’t. So, either Maduro is getting bad advice or he is full of himself. Personally, I don’t think Maduro can last this way until the Parliamentary elections. He can last, but he will have to repress a lot of people in order to survive.

But we don’t even know whether Maduro is completely in charge or whether others are telling him what to do, including his wife Cilia.

But I am sorry to tell you, the Government is not acting as stupidly as many lead you to believe. To start, they got US 1.9 billion from the Dominican Republic, which purchased  its Petrocaribe debt at less than half price. Then Citgo sold US$ 1.5 billion in a 2022 bond at a yield to maturity with a coupon of 11.5% and borrowed an additional US$1 billion from banks by pledging terminals and its shares. Not bad, US$ 4.5 billion at the blink of an eye in Maduro’s coffers. Jamaica could do the same and then Maduro may decide to close his eyes and send the gold to London and problem solved for 2015. Yeap, just like that, we are thinking 2016 and not 2015.

Oil is a many splendored thing indeed! Except Venezuelans are in charge…

My guess is that Maduro is betting (hoping?) that oil bounces from here and PSUV can keep control of the National Assembly. A tough and balancing act, given that the country will only feel the under-50 oil prices in March and April. Lines could indeed be long by the time Easter week comes around.

Yes, they are likely to become longer…

But things are really paralyzed right now, as the private sector awaits a foreign exchange system that I don’t believe will be functioning before Easter. Yeap! Think about it. You need to change the Illicit Controls Bill to allow the new market to function. This is at least two weeks from the time of he proposal, since it has to be approved by the National Assembly. Then, you need to issue the new foreign exchange agreement between the Government and the Central Bank, which is just a decree, but it has to follow the the Bill approved by the Assembly. After that, you need to issue the regulations for the market to function. Given that in one week Venezuela and its Government will be paralyzed by the Carnival holidays, even Easter may seem optimistic for this indecisive Government.

Which in the end is the biggest handicap of the Maduro administration. It is not only indecisive, but it has no clear view that a really free floating fx system will be any better. Except someone has told them to stick with it. And they want to try it out, but not everyone agrees.

So, we enter a very uncertain period, with many surprises possible. It is truly uncertain territory with a very indecisive and flip flopping Government. But it is clear there is a short term strategy in place, hoping for the best in the long term. And it will likely fail, leading to uncertainty, chaos and social unrest.

Not a pretty picture…

 

 

The Maduro Dictatorship “Legalizes” Military Repression

January 29, 2015

Venezuela’s Constitution has an article that is very explicit and clear:

Artículo 68. Los ciudadanos y ciudadanas tienen derecho a manifestar, pacíficamente y sin armas, sin otros requisitos que los que establezca la ley.

Se prohíbe el uso de armas de fuego y sustancias tóxicas en el control de manifestaciones pacíficas. La ley regulará la actuación de los cuerpos policiales y de seguridad en el control del orden público.

Translated

Article 68: The citizens have the right to protest peacefully and without weapons, without any other requirements than those established by law.

The use of firearms and toxic substances in the control of peaceful demonstrations is forbidden. The law will regulate the conduct of police and security bodies in the control of public order.

The bold in the translation is mine. What the article says is very clear: People can protest and there are laws that limitwhat the police bad security bodies can do.

But the armed forces are not a security body and a law can only be approved by the National.

Despite this, the Minister of Defense Padrino Lopez (Yes, we have Godfather Lopez and Godgiven Cabello, go figure!) issued today this “resolution” (page 6):

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from the comfort of his office, entitled “Regulations for the behavior of the Bolivarian National Armed Forces acting in order to control public order, social peace and the coexistence of citizens in public meetings and protests”

These regulations clearly violate the Constitution, it is not a law, because the Minister of Defense does not approve laws, even if his name is Godfather and because according to the Venezuelan Constitution, the Armed Forces are not part of the security forces.

And it gets worse…

The Interamerican Commission on Human Rights has explicitly banned the use of the Armed Forces on matters of internal security, explicitly stating that the military should only participate when national security matters are involved.

And it gets even worse:

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The first part says: “The acting unit will warn the people that participate in a public meeting or protest about the progressive and differentiated use of force..

So, this “resolution” allows the use of force (!!) and explicitly violates the Constitution, allowing the Armed Forces to participate in the control of precisely what the Constitution bans them from doing…

And then it states that the armed forces should go to “extremes” not to use force against pregnant women, boys, girls, adolescents, older people,  people with special needs or other “vulnerable” people… Note it does not say they can not use force against them, just go to extremes not do so…after the extremes, repress…

But, hey! If you have to, you have to, use the force, that is what Dictatorships do after all…

Should I go on…the fascism goes on too…

ffaa3“The Armed Forces will have methods and means that will allow the equipment and permanent training of the military personnel for the progressive and differentiated use of force…and the use of force as situational punishment .

You have to love how clueless these guys are about what human rights are…or how fascist they are.,,

I could go on, but I would throw up. The Maduro Government just created the “legal” instrument to keep using the same force in repressing protests. Because once the Government begins getting less than US$ 50 per barrel, the “people” are going to be very pissed and force (no limits! It’s legal!) will be used..

There is nothing “disguised” about this Dictatorship…now that oil does not guarantee their survival, repression will. Or might?

Maduro Government Sends Wrong Signals To Investors

January 28, 2015

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It has now been a week since Maduro’s “announcements” and we have heard little about the supposed details of the new foreign exchange regime. It is as if the Government had no sense of the crisis that is coming, taking its time, Maduro traveling and not a single positive sign in the horizon.

This morning, I heard a conference call by a small country, in which its Minister of Finance and some representatives of its Central Bank participated. The presentation was concise, to the point, using numbers and then the whole thing was open to discussion. Very professional, very informative, it certainly improved my opinion about that country’s bonds.

This is in contrast with the attitude of the Venezuelan Government. Even when it had professionals handling the Government finances, Giordani set the tone that the Government would not meet with investors and markets should be surprised, not informed.

But now that the Government is in a crisis (and has no economics professionals), it continues with its attitude, not only not talking to investors, but sending the worst possible signals to them, at a time that the Government should be trying to reach out to markets.

But Chavismo thinks it is beyond that and that the market owes it something. Case in point is two transactions “revealed” this week by PDVSA and Citgo:

1) The stealth PDVSA 2022 bond

PDVSA has to publish before the 15th. of January a report on its consolidated debt. It did so this year and surprise, surprise, it turns out that PDVSA issued a new bond three months ago, without telling anyone about it…until now.

Yeap, in page 12 of the report, it says that on Oct. 28th. it issued US$ 3 billion of a bond with a 6% coupon and a maturity in the year 2022. The bond has not hit the markets yet, but the company’s debt did increase and investors took three months to find out about it. Not precisely a friendly gesture. In fact, it looks like this transaction was made in order to pay the maturity of the PDVSA 2014 issue. That is, PDVSA did not have all the money it needed to pay that issue.

Not a nice thing to do to investors.

2) The “fool old investors” Citgo issue and loan

Citgo Petroleum issued last year  a bond in the amount of US$ 650 million with a  coupon of 6.25% and at 100% of its face value. This bond had covenants (conditions) that limited that the company could issue more debt.

But last week we learned that Citgo is not only issuing new debt, but also issuing a loan. Except it is not Citgo Petroleum that is doing so, but Citgo Holdings, a newly  created (Did not exist on Dec. 31st) affiliate that now owns the shares of Citgo and some property that was transferred to it. The new bond and loan will be guaranteed with this property as well as 49% of the shares of Citgo.

Well, those holding the old Citgo bonds issued in 2014, found themselves losing close to ten points overnight when this was announced. The new notes are expected to yield more than the old ones. Investors must not be happy, they were essentially blindsided.

Thus, rather than trying to improve relations with investors at a time that the Government may need them, when and if there is a default, the Government takes the opposite road. It does not tell them what it is doing and it makes them lose money.

I would really like to listen in to these talks Maduro had in China, Saudi Arabia and the like in his last trip. I just wonder what is their attitude when they talk to those investors. If it is anything like the entitlement attitude they have with current bond investors, I don’t believe for a minute that Maduro got much in his trip.

And then they go and criticize capitalism…

Maduro’s Announcements: The Devil Sees Few Details

January 24, 2015

maduro

After postponing his “announcements” for a while due to his Magical Mystery Tour, President Maduro finally had time to come back to Venezuela and give his also twice postponed State of the Union address, where we were supposed to hear his new “program” for the economy. In the end, there were few details on what he plans to do with the foreign exchange, while very specific plans to spend even more.

Maduro announced that he would keep a three tier foreign exchange system (Four if you include the black market, which will not necessarily disappear). This is clearly a negative, as it has failed over and over again, but Chavismo is stuck in this model. Here are the three parts of the new system:

-Food and medicines will be kept at Bs. 6.3 per US$. This is obviously a #FAIL, as the implicit exchange rate stands at Bs. 97 per US$ and the Government will devalue the other two rates to factors of even more than ten times this level, which opens up for corruption, arbitrage and smuggling to Colombia everything imported to Venezuela at this price.

-A second rate, lets call it Sicad, will merge the old Sicad 1 (Around Bs. 12 per US$) and Sicad 2 (Around Bs. 50 per US$) into a single auction mechanism. This is impossible to judge at this time. First, we don’t know the level, it could be Bs. 12, it could be Bs. 40 or whatever. Somehow, I think it will be closer to Bs. 12 than to Bs. 40, as President Maduro said yesterday that the oligarchy thought he was going to devalue to Bs. 40, but “he was driving them crazy”. Well, he is also driving himself deeply into a hole with his ignorance about these matters. In the end, for this rate, anything below Bs. 30-40 per US$ will do nothing to help in having more currency available overall, which should be the point of any new policy. Seems like a #FAIL, but until the Devil knows the details he will hold judgement and give the Government the benefit of the doubt.

-The final one, which got everyone excited is that the Government plans to have a legal parallel system in which the price will somewhat determined by the laws of supply and demand in which people, companies, brokers, the Public Bolsa can participate and supervised by the Governemnt.

Ummm, Where have I heard this before? Ahh! Yes! This is how Sicad 2 started, in the words of Rafael Ramirez, exactly one year ago and when implementation came around, it all became a Sitme-like system at a rate of Bs. 50 per US$ and subject to arbitrary criteria, unknown forces and preferential treatment. A waste of foreign currency in the end.

But let’s assume and suppose that it will be almost free, the Government will impose lots of rules and regulations. It will impose daily limits etc. Then, the current parallel market will not disappear, there will be four rates of exchange with the “Dolar Today” rate surviving. This would be a #FAIL.

Let us then assume that it will really be free, supply and demand, market forces and all of that. Will the current parallel exchange rate increase or decrease?

Here is what I think: Initially, just like when Sicad 2 was announced the rate will  go down. Because people truly think (and argue) that in a free market it will go down.

First of all, it will take a while to set up this system. From what the Government has said, it will be a swap (permuta)-like system involving bonds . (What is this fixation with involving bonds, whatever happened to currency trading using currencies?) But it so happens that currently local brokers can not hold dollar denominated bonds. Thus, the Securities Law needs to be changed. Then, the Government has to decide how the market will function, hours, the like. This could take at least two or three months to be implemented. The parallel exchange rate is likely to move up as people lose patience.

Then the market starts and this is where I have a few doubts that it will go down. How much money does the Government have to supply this “free” market? Given the shortage of currency, I don’t believe it has much. Additionally, there are many multinationals, that have not purchased a single dollar in the illegal market since May 2010. There were others that were not even buying then in the innocent belief that they would get their dollars at Bs. 4.3 per US$. Most of them in the face of a free and legal exchange will decide to repatriate at least some of the Monopoly money they have in Venezuela today. That is a lot of Monopoly money even at Bs. 200 per US$.

People argue that the cash held by some companies becomes peanuts at Bs. 200. It may be so. But the cash held by many people and many companies, which have found it impossible to get their money out of the country for almost five years, can become a lot of money.

Let me give you an example: Suppose the Government decides to sell US$ 2 billion at Bs. 150 (They will surely try to push the parallel rate down) right off the bat to “cool” off the market. At that price, this only suctions out of the system only 15% of M2 (Monetary Liquidity which is 2 trillion Bolivars today). Will the Government have or want to use another US$ 2 billion to keep it down at that time?

I doubt it.

Thus, the rate will go up.

Thus, I am skeptical of how well it will work, more so since the Government has to provide lots of foreign currency at the other two lower rates. But, while this legal and free system may not help solving the problem of fewer dollars and may exacerbate other problems like inflation, I would welcome and approve this system. That’s the way it should always be. Ask the Swiss.

If they do implement it would be an incredible irony and inconsistency that Chavismo destroyed Venezuela’s Capital markets in 2010, blaming them for the rate being at Bs. 8 per US in May 2010 and will now try to replicate that system, when the parallel rate is now over TWENTY times higher. Of course, there is no remorse or apology to those whose lives were destroyed, those that were jailed and those that lost their jobs. For Chavismo, it is always somebody else’s fault

But Maduro still thinks that there is something “modern” about the system he is planning to implement and that there is nothing less modern than controls. I actually wonder if he has realized that if there is legal and free system, then anyone importing at that rate can increase prices proportionately. What ever happened to controlling prices too?

But multinationals are likely worrying already about taking the loss from Bs. 50 to the new parallel market. Ouch!

The rest of the announcements did have specifics: Maduro plans to spend like a bandit and gave many specifics of new programs that add up to a significant fraction (6-7%?) of GDP. Go figure.

Maduro did not mention a single number of all the funding that he claims he obtained in the trip.

And given that 90 days ago Venezuela’s oil basket was close to US$ 80 per barrel, I wonder if a new economic plan will be needed at the time, since today’s cash flow is coming from those barrels sold three months ago. In April, it will be at a price below US$ 40 per barrel. And appealing to Maduro’s own speech: If God does not provide, who will he call upon to help? The pajarito*?

*Little bird

Hyperinflated Arepa Index part III

January 21, 2015

arepa

I was not planning to eat an arepa early in my visit to Caracas, but last night things did not work out and had a couple of arepas. Here is the record so far for the price of an arepa with queso de mano at my favorite arepera:

Nov. 17th. Bs 120

Dec. 7th. Bs. 156 Increase of 30% in three weeks

Jan. 21st. Bs. 178.6 increase of 14.7% in six weeks

Total increase 49.1% in nine weeks, I don’t even want to annualize it!

The optimists would say inflation is slowing down. I imagine a Government official would even make a plot and show it. For now I keep measuring it and it does not look pretty.

But, they are still delicious!

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