The Devil's Excrement

The revolution never ceases to amaze. Today mid-morning, more like late morning, Reuters reported (The Central Bank leaked?) that the Central Bank was ready to sell US$ 50 million today as part of its effort to lower the swap rate. Not ten minutes later, the same source says they want the swap rate to go to Bs. 5 per dollar and the Central Bank will “auction” three-month zero coupon bonds.

So far, so good, the Government and the Central Bank have a new strategy, more transparent than the way they used to intervene the swap market. Sound very interesting. Except…

—The bond needs a market, buyers want currency, not bonds

—How can they do it this fast? They should announce it and then give people the chance to call clients and the like. A few days and this may work.

And then, as fast as you can say “Zero Coupon”, an announcement comes, you have to place your orders between 3 PM and 4 PM, those that “win” the auction will have to pay by 9 AM tomorrow and the bonds will only have custody at the Venezuelan Central Bank, no custody abroad. And…

And…in the best innovative Bolivarian style (Or is it Bolibanana?) the “auction” will be at a fixed price.

Say what?

Why even call it an auction if  this is the sale of a bond at a price and the Central Bank will decide using its Bolivarian random number generator who got the bond and who didn’t.

I know the Bolivarians hate markets, but this s somehow ridiculous.

And here I have to get a little “technical” and explain the bond. Since there is no auction, the price is like a nice full lunch in Paris “prix fixe”, the bonds will be sold at 116.25% at an exchange rate of Bs. 4.3 per dollar.

So, with the swap rate near Bs. 6, the Central Bank will sell you a bond with no interest, payable on March 14th. at Bs. 4.3 x 1.1625=Bs. 4.99875 per $. That is a difference of “only” 20%. (Note that we now have four rates of exchange, Bs. 2.6, Bs. 4.3, Bs. 4.99 and the swap rate)

That is, if you sold 1,000 dollars in the swap market at Bs. 6, you received Bs. 6,000 and you could turn around and order $ 1,200 of the new bond that in three months will give you $1,200. A nice 20% profit in US$ if you can hold on to the bond for three months.

But you had to have the Bs. in the Central Bank by 8 AM tomorrow, which not everyone could. Despite this, the Central Bank, I am told, received orders for US$ 500 million.

Thus, if the idea was like the Reuters source indicated, to lower the swap rate to Bs. 5, probably when they saw the size of the orders, they probably went to get some of these, because it looks like a very tall order to really lower the swap rate that much.

Unless of course, this was simply rigged to help a few make a buck.

Nahh! you say.

Well, here is the very transparent “result” of the “auction”. Yeap, they offered $50 million, they sold $50 million. And all at the “prixe fix” of 116.25 per $100. Who got it? Oh! That is confidential, someone definitely did. Not me, but I do want some.

It was indeed a Zero Coupon Bolibanana”auction”

After eleven years of failed policies, the Government of President Hugo Chavez will finally achieve what it has been unable to achieve in any other field: It will bring to all Venezuelan citizens a true feature of socialism in the form of electricity rationing. Yes, I know, dollars were rationed too before, but the poor have no access to them. Thus, for the first time the Government will impose a policy on all of the citizens which represents a worsening of their quality of life, certainly a very distinct characteristic of socialism and similar regimes. Somehow, they always end up imposing rationing of some sort.

Way to go Hugo!

And if the policy was not bad enough, it was announced an implemented with the same level of confusion, incompetence and improvisation that caused the electricity shortages, Daniel has a good summary of some of them, but I will describe some in more detail.

Basically, in Caracas (so far the rationing details have not been announced everywhere), every two days, wherever you live or work, there will be rationing for four hours in 4×6 chunks. You can download this complex document (see one page above, including the cynical Ahora Venezuela es de Todos sign), where you can see which Areas of Caracas correspond to each block. If you are in block A then you can find when your home or work will have the electricity shut off from midnight to 4 AM, from 4 AM to 8 AM and so forth.

Except that for each area, even to some streets, there are six zones for each residential or business area. That is if you are in Zone 1…

but wait, nowhere does it say how these zones are defined! That is, rationing begins tonight in about three hours, but nobody knows what their Zone number is. I have reviewed my electric Bill, no zone. I have tried to log in to the Corpoelec website, overwhelmed. Electricidad de Caracas website, also overwhelmed. Not ready for prime time, but coming very soon.

You’ve gotta love the robolution! Even when they deliver socialism, they do it inefficiently and incompetently!

But I digress..

Once again, the Government imposes a half-baked model. Since it is hard to know when somebody will or not be shutdown, there will be a lot of frustration and wasted time.

Let me give you a simple example: Suppose somebody wants to visit my office. We actually installed an emergency back up power plant eight months ago (We were certainly not surprised by all this, even if the Government was!). It can power us up for a total of 24 hours. However, if the person does know we are open, they will not show up. And even if they do, they may not want to walk up eight flights of stairs and then sit in my office without air conditioning for an hour or so.

But then look at it from our point of view, if our counterparts in our business are shut down, that in itself will hamper my business. How can I sell somebody something if they are not there? Because in fact, few of my counterparts had the foresight to get an emergency plant. In fact, we were originally told we could not install one in our building, but when the future looked clear to many last year, we were told to go ahead. (If we knew, why didn’t the Government know?)

And remember, the lag now is eight months to install an emergency power plant of any reasonable size. (I am also purchasing two Uninterrupted Power Supplies for my ADSL, WiFi and computers at home, if I am going to sit at home in the dark from 8 PM to 12 PM some nights, I might as well be surfing or blogging, no?)

I am just waiting for the Government to argue that this will not impact economic growth. Sure, fewer and more inefficient hours of work, have no impact in the economy. Tell me about Cinderella now!

And then we come to my biggest concern: Crime. You can be sure that criminals will be looking at the same maps to take advantage of the lack of police and security in whole areas that will now have no lights for four hours at a time:No lights, no alarms, no police, a sweet model indeed!For crime. Crime will go up, that is about the only prediction you can make.

Unfortunately, it will go up unevenly. This is where socialism will break down, poor areas will be hurt the most. Because they have more crime to begin with, because they have less security and because they are more exposed.

Because in the end my argument is false, absolutely spurious. Most of what Chavez and his Government does in the end hurts the poor more, not equally with the well to do, The devaluation hurt the well to do less, because those that can save at least managed to preserve some of their purchasing power in the form of savings in dollars. The poor don’t save. Or if they have a job, the purchasing power of the well to do will be restored in time, but the poor’s will take time to recover. It will take years now for the Government to even try to argue that the poor are better off in Venezuela under the robolution. This is the 2002 devaluation in steroids!. Crimes will get worse for everyone, but it will be worse for the poor. And inflation will affect the poor much more than it affects those that have jobs and purchasing power.

Short term, I actually think that this will piss people off more than the devaluation. This has an immediate effect on the quality of life of every single Venezuelan. The devaluation will show its ugly face slowly over the next two months.

Remarkably, it is hard to imagine anybody, anyone, doing a job that is worse than this. Everything, from economic, policy, to oil policy, energy policy , has been royally screwed up by the Chavez Government. Only the fact that oil prices soared had managed to mask the perverse effects of ignorance, incompetence and the full devotion to politics of Chavez’ Government.

Now that Socialism is here to stay, Venezuelans should brace themselves for many forms of shortages and rationing. If your lights go out at midnight where you live, turn on your flashlight and your laptop (keep fully charged!) and you will immediately know what is the number of the zone where you live!

Congratulations!

Chávez’s “socialism” is extinguishing Venezuela by Veneconomy

In the first 12 days of 2010, it has had to resort to a drastic devaluation of the currency, announced on Friday, January 8, despite its reluctance to take this step for more than four years. And now, on Tuesday, January 12, it has had to make the electricity debacle official with the joint announcement by the Ministry for Electrical Energy and the affiliates of the state-owned National Electricity Corporation of a “special electricity rationing plan that will cover the entire country and will involve suspensions of the service for a maximum of four hours” in each region.

What is even more serious –and important- is not merely that this critical situation in the supply of electricity is the result of more than ten years of lack of investment and planning and of having totally abandoned a coherent, sustained maintenance program, but the fact that the government persists in making last-ditch efforts, refusing to rectify the pernicious way in which it has been handling the country.

On that issue, it is worth mentioning statements given this Monday to El Nacional by José Manuel Aller, a professor at Simón Bolívar University with PhD in electrical engineering, when he maintains that “lack of investment in the national energy system over the past ten years amounts to approximately $20 billion and some 20,000 megawatts.”

Worse still is the fact that, instead of assuming its responsibility in the debacle into which it has plunged the sector, the government insists on passing the buck and saying that the situation is due to the atmospheric phenomenon, El Niño, or to the population’s irresponsible consumption of electricity, ridiculous arguments that hold no water when one sees just one photo of the broken down turbines at Guri or at Planta Centro Power Station or reads the reports warning of the gravity of the situation that different specialists have been submitting for years. Today, the people of Venezuela are paying the price by being condemned to darkness and to a deteriorating standard of living.

The fact of the matter is –now revealed in all its glory and impossible to hide- that the project that Chávez has wanted to implement by force and against the wishes of the vast majority of Venezuelans has only brought failure after failure in all areas of development that are vital for the population.

(In Spanish here)

As President Hugo Chavez seems to be having an epiphany that most of his economic policies of the last few years were wrong, I do wish someone would explain to him that taking US$ 7 billion from the international reserves simply works against him and insures that next year, he will be forced to devalue again.

Let me explain. Let us assume that oil holds up and PDVSA sells the Central Bank for example US$ 30 billion. PDVSA will get some Bs. 120 billion to spend. This means that monetary liquidity will grow by a similar amount more or less. That represents an increase of 50% in M2, i.e. even if this money does not multiply, like it will, but let’s keep the argument simple. This means that by December monetary liquidity will reach Bs. 360 billion. Assume that the Central Bank will save US$ 8 billion of the US$ 30 billion, international reserves will reach US$ 36 billion.

This means that for each 10 Bs. in circulation in Venezuela there will be one US$ in the Central Bank. In contrast, today, before Chavez removes the US$ 8 billion, the equivalent number is 6.55 Bs. per $ and in a month it will become Bs. 8.24 per $. Well, as you can see this represents too many Bolivars searching for too few dollars, much like today. There will be 50% (it is actually more, but who cares?) more Bs. in December than yesterday. This will drive inflation and devaluation, as simple as that.Nobody seems to have told Hugo, in contrast with Argentina, where a Court has voided a decree to use international reserves to pay debt and stopped the firing of the President of the Central Bank by Mrs. Kirchner over the issue. Gee, if Chavez had done that with reserves, Venezuela would have no international debt by now, but Argentineans realize it would debase the currency and create inflation, precisely what nobody seems to have explained to Hugo.

Meanwhile, the next few days are going to be filled with confusion. You have all seen reports that Venezuelans are out buying everything and they are. But beyond that, I have seen supermarkets with shelves empty of all imported things, even if they did not get dollars from the Government, like soap, or fancy cereals. And as an anecdote, all imported dog food disappeared from Friday to Saturday from the shelves, as the store simply decided to hide the stff until things get cleared up.

And there is a lot to clear up. First of all, what will be approved at the new Bs. 2.6 per $. For example, will veterinary medicines will be included or not? All foodstuffs? It will be days before we find out. The same with the second rate, where nobody really knows what will or not be included.

Beyond that, there is the problem of accounting. Currently, most companies had to register their foreign currency at Bs. 2.15 per $ (There were some exceptions, but I would bore you with that). On top of that there were rules for exporters, mostly that they had to exchange 95% of their foreign currency revenues at the official rate.

Well, now we have two official rates, so that the Government or the accounting board will have to tell companies what to do. We had a dual exchange system in the 80’s, the rules were complicated. Expect the same. Then, some companies with access to the second rate, could register things at the higher rate.

One thing I do expect is for the country’s debt to rally. There are two reasons for that: First, investors will feel the country’s ability to pay has improved. But more importantly, the Government will have many more Bolivars thanks to the devaluation, so that the deficit will be smaller and it will not be until the second semester that the Government may go back to the international markets and issue new debt. Because in the end this was the biggest fear of foreign investors, that the Chavez Government would continue endlessly issuing new debt, flooding the market with new issues that take time for the international markets to absorb them.

Then, there is the likely rise of the Caracas Stock Market. Why? A number of reasons. Even if a company will be affected by the devaluation, businesses have an intrinsic value, a paper plant, a steel plant or even a bank, cost money to set up and build. Thus, ongoing businesses are perceived as being a good hedge against inflation due to a devaluation. But there are other reasons, a plant has a value in dollars, you devalue, the plant still holds value in dollars, even if you can not move it. If you are an exporter (not many left in the Caracas Exchange) then you will get more Bs. for your exports.  Finally, many local banks hold Venezuela’s debt in US$ or the so called TICC’s, bonds whose face value and interest are indexed to the exchange rate. If this value increases from Bs. 2.15 to Bs. 4.3 (depending on what the Government says) some banks will have huge extraordinary profits in Bolivars in 2010, which should translate into nice dividends.

Inflation will be horrible in the next few months, the poor are going to feel it, just the basic foodstuffs will have to go up 20%, but there is a whole range of things that will come at the higher rate of Bs. 4.3 per US$. I do expect the swap rate to go down first, but in a few months it will be higher. Inflation is in the end a monetary phenomenon and there will be a huge monetary imbalance in Venezuela in the next few months. We will be lucky if GDP grows this year.

The sad part is that nothing has been learned from all this. Controls have never worked, because they end up exploding in your face at some point. Chavez has devalued five times. This is his second explosion (The other one was in February 2002). This one did not happen earlier because oil went sharply up in 2008. But the conditions that created are still in place. Some PSF’s have asked periodically about my dire economic predictions, here is the first explosion with more to come. Any gain in the purchasing power of the poor will be decimated over the next few months, but their surroundings, health, crime, electricity, housing, water are worse than when Chavez came to power in 1998. Eleven years and and a huge oil boom lost. As easy as that. That is the price of ignorance and doing things for politics sake. Venezuelans have seen this movie before, this time on steroids.

The problem is that nothing structurally is being done to change the system. The origin of the problems remain, it is the effects that are being attacked. When Carlos Andres Perez came into power he tried an all front attack, he failed politically, but there were real changes. When Caldera first came to power in 1994, he also attacked the effects rather than the causes. Once he realized the country was entering hyperinflation, he changed course, trying to minimize the State and rationalize things like pensions. Oil did not help him in his last two years.

Chavez needs oil and needs to attack the distortions, but will he? I doubt it, which will bring more of the same.

Ok, ok, I admit it. I have a self-centered sense of devaluation. When Chavez devalues I think of my loss, not that of the currency. What can I say, I live here. When Huguito says that it is going to cost me twice as much to travel (Confirmed by Jorge “No clue” Giordani) I erroneously think this is going to cost me double, not the poor Bolivar’s value has been cut by 50%. This is not like inflation, 100% inflation is 100% inflation, everything cost double, the Bolivar’ value has been cut in half.

The funny thing is that in Chavista doublespeak land, there was no devaluation, the price of the dollar was changed. I have news aporreos: The devaluation makes the Government look better, the devaluation of the Bolivar was from 2.15 to 2.6 per dollar, the Bolivar is worth 17.3 % less, but a dollar will cost 20.9% more Bolivars. The Government wants to use the best of both worlds, it says it changed the price, but it only devalued by 17.3%.

So, I apologize, the devaluation was not 63.7%, but 34%, but I will certainly need 63.7% more Bolivars to buy anything. Inflation in imported items will be 63.7%. When salaries are increased, that is also the number that needs to be used. If I travel, I need double the money. Bolivar Fuerte loses 50%, I get screwed 100%.

That is after all, rule number one of Economics, we are all self-centered  first. I thought of me, not of the Bolivar Fuerte, which is already weak.

Apologies, but can you lend me more than I asked for?

(In Spanish here)

As usual it was an irresponsible and perverse performance by Hugo Chavez. The President that likes to go on nationwide TV to announce the most trivial things, from phantom death threats against him to handing out fake loans to people, did not dare to do the same  to announce a dramatic devaluation which is a consequence of his own irresponsible policies. But he even dared to call Venezuela’s foreign exchange controls “efficient”, despite the fact that he was taking this dramatic step and that the exchange controls have been not only the biggest corruption racket in the country’s history, but also represented a perverse subsidy to the rich, via preferential rates for travel and the import of some luxury goods.

And as if the old system was not bad enough, Chavez announced a dual Government exchange rate, triple if you take into account the swap rate, devaluing the official rate of Bs. 2.15 per dollar to Bs. 2.6 per dollar, a 20.9% devaluation, which will be applied only to foodstuffs, medicines, machinery and certain remittances abroad. The remainder of imports will suffer a 100% devaluation to Bs. 4.3 per US$, including supposedly travel allowances and airline tickets, although this was not included in the formal announcement.

Based on last year’s imports of goods, this implies that 45.9% of the goods imported will have a price increase of 20.9%, while 54.1% will have a price increase of 100%, for a weighted average of 63.7% for the increase in price of all of the country’s imports. Thus, the inflationary impact of the devaluation will be very high, much higher than the irresponsible estimate by the Minister of Finance that this will only represent a 3-5% increase to the CPI. It is my understanding that technical people in the Ministry of Finance were not even asked to calculate the impact of the devaluation, another demonstration of the primitive nature of this administration.

And as if the devaluation itself was not the result of the irresponsible economic policies of the last few years, the Government guaranteed that this will be only the first of such announcements to come, as it announced that the Central Bank will transfer US$ 7 billion of the country’s international reserves to the development fund Fonden, leaving reserves at US$ 28 billion, while monetary liquidity stands at a record Bs. 236 billion. Just to give you some perspective, the last time the official rate was devalued in 2005, M2 stood at Bs. 46 billion and international reserves were at US$ 24 billion. Thus, at the time there were practically 2 Bolivars per dollar of international reserves with the official rate at Bs. 2.15 to the dollar, while today there are Bs. 8.42 to the dollar with the lowest official rate at Bs. 2.6. (Although the weighted average of imports stands at Bs. 3.51 per dollar)

This is simply unsustainable, you can not increase monetary liquidity (M2) by a factor of 5, while maintaining international reserves constants and expect inflation to go down or the exchange rate to be sustainable at current levels. The laws of economics can be stretched but not violated (or raped really).

Given that inflation was already going to top 30% in 2010 and if we assume that the import component of goods consumed in Venezuela is almost at 50%, then one would expect an additional 30% spike on inflation from the announced devaluation. Not a pretty picture. The impact of the devaluation may be slightly smaller on the poor quantitatively, because since most food imports are done at the lower rate, and the poor spend more of their income on food, they will feel it less, even if still a huge effect.

There is, of course, a third rate, the swap parallel rate, which people think will actually jump on Monday. The Government said it will intervene in that market and that the Central Bank will be allowed to do so. With PDVSA selling dollars at Bs. 4.3, there is less pressure on the oil company to sell dollars in the swap market. But Chavez also said something like “the Government will control (or monitor?) imports with dollars from company’s own resources”. This seems to suggest that the Government may be planning to limit imports that are not made with CADIVI dollars. Just the initial confusion on this issue may actually lower demand in the swap market initially. (But the policy would be suicidal as shortages would soar) Thus, I would epexct a drop at first and then the swap rate is likely to rise, not only because there are more Bolivars out there and less dollars, but because the Government has practically approved the swap rate as a third rate, when it says the Central Bank will intervene, which should give more confidence to those that are still hesitant to buy dollars aggressively at the swap rate.

But additionally, there is the effect of the sharp drop in demand induced by the 60-plus increase in the price of imports. For the first few months, this should relieve some of the pressure in the swap rate as importers are more cautious on how much to import and the consumer contracts.

Combine the effect of the devaluation with that of the banking crisis and the already high levels of inflation and economic contraction and you now have stagflation on steroids and a very difficult political year for the Government. Hugo Chavez who based his popularity on the delay of implementations of realistic economic policies during the Governments of the so called Fourth Republic, has met his own Red Friday. Unfortunately, he is once again attacking the consequences and not the origin of the problems. Even worse, he is exacerbating them once again by removing US$ 7 billion from international reserves.

While it is true that this improves the ability of Venezuela’s industry to export, such exports were down 50% last year and the inflationary impact of the measure itself may block any ability to compete. Recall that many of these exporters, like the Government’s industrial complex, are forced to sell their dollars at the official rate, now Bs. 2.6 per $, while enduring the high levels of inflation of the country.

Finally, about the only positive aspect that this creates is that the country’s debt is likely to enjoy a huge rally in the upcoming days, as foreign investors perceive that the ability of the country to fulfill its international commitments has improved dramatically with the devaluation. And it has indeed. With this devaluation, PDVSA and the Government will have much more Bolivars, which relieves the pressure on the dollars the Government has, as well as on the need to issue new debt, which is music to the eras of foreign investors. Most investors find Venezuela’s debt quite attractive at even higher levels than these, but it is the specter of the Government issuing new debt constantly that has kept them away from it in the recent past. This eases this concern, at least until the end of the year.

Not a pretty picture for the Government, particularly because this is only a short term solution. Once again, if oil prices do not go up significantly, a year from now, we may be witnessing a similar performance of a new adjustment to the exchange rate. Amazingly, it is incredible that these same measures were not undertaken in September so that their inflationary spike would have been felt last year and not in 2010, an electoral year. The Government now has more money in its hands, but the people will have less, by the end of the year the same distortions and needs of the Government of a month ago, will once again be present.