Archive for May 8th, 2010

As Venezuelan economy unravels due to XXIst. Century Socialism, Chavez criticizes European capitalism

May 8, 2010

It was simply bizarre, if not tragic, to hear President Chavez talk about the European crisis last night, saying this was part of the crisis of capitalism, just as the Venezuelan economy was showing signs of unraveling with simultaneous events of a soaring swap rate, monthly inflation rate of 5.2% (11% for food and beverages!) and increasing signs of shortages everywhere. (GDP number not out, but steel company Sivensa reported a 25% drop in Metric Tons sold of products)

But Chavez continued acting as if things in Venezuela were peachy and rosy as his so called XXIst. Century Socialism was the one unraveling the Venezuelan economy, which did not happen much earlier simply because of soaring oil prices. But in fact in terms of impact, the Greek crisis is much smaller than the Venezuelan one. It will not impact the people as much, standards of living are and will remain way higher in Greece and Europe, inflation in Europe is irrelevant and the devaluation of the Euro will in the end make those economies more competitive. (Wasn’t Chavez the one that decided in his financial wisdom to move Venezuela’s reserves to Euros?) Meanwhile Chavez’ irresponsible project accounts by now with a 1,000% devaluation in 11 years and almost a 1,000% inflation in the same period, a reflection of the ignorant and misguided policies Hugo Chavez and his incredible lack of judgement in choosing advisers.

And Chavez continued acting like it was everyone’s fault but his and the case of meat shortages proves once again how silly and misguided Chavez’ policies have been. After taking over cattle ranches which are no longer functioning and destroying half of the country’s heads of cattle, the Government began flooding the market with cheap imports at the Bs. 2.15 per dollar rate which was held constant for almost five years. Local producers obviously had a hard time competing with this, which reduced production even further. Then, so far in 2010, Government imports of meat are down 52% and shortages began to appear and price increases followed. The solution was typical Chavez: Jail some butchers for speculating and, even worse, take them to a military prison. By now, many butchers have shut their doors and meat is quite scarce and Hugo threatens to nationalize the meat industry. This will certainly guarantee that meat will go the way of coffee, cement, sugar, milk and all of the industries that have fallen into the incompetent hands of the Government.

And apparently the swap market is the next one in the Dictator’s sights. After the rate soared in the last few months, manipulators and speculators were blamed and controls were threatened. The reality is that 95% of the foreign currency sold in the swap market is sold in non-transparent fashion by the Government and this year such sales have dropped, much like the meat imports have dropped. The reason is simple, under the “new and improved” exchange controls, two rates were created and Pdvsa was force to sell a large fraction of it’s dollars at this rate to the Central Bank. Thus, Pdvsa stopped selling in the swap market and the swap rare soared. Adding to this, the “parallel” funds were depleted last year as oil prices dropped.

To add insult to injury, when two different exchange rates were created a new level of decision making was introduced: Do you approve dollars for items at the lower Bs. 2.6 rate or the higher Bs. 4.3 rate? Since the supply of foreign currency is not infinite, the foreign exchange control office has been mostly approving items that can be brought in at the lower rate, forcing manufacturers to go to the swap market to get all the raw materials and components. The result is a rate at an all time high value on the same day that inflation is reported to be at it’s highest monthly rate in at least seven years. Coincidentally, that peak was also due to the inventive and ignorant policies of Jorge Giordani, who once again shows he has no clue on economic matters. And Chavez criticizes Europe’s problems…

And while the Ministry of Finance looks for speculators inn the swap market, the Central Bank sells 90 day zero coupon bonds at such a cheap rate that it promotes….


If those bonds were offered at a rate near the swap rate or at auction, only importers would participate to satisfy their needs. Instead, the fact that you can buy dollars at Bs. 5 means that if you are assigned bonds, you can make a hefty profit of close to 60% on you Bs. Very fast, which only attracts more “investors” as the swap rate rises.

And once again the solution is to threaten more controls or even suggesting the swap market may even be shut down, a guarantee of the appearance of a black market and an even higher rate.

Meanwhile, nothing has been done about improving the supply of foreign currency to the swap market which is really the only logical solution to the problem. Perhaps the 11.1% increase in food and beverages in April (a month which had a ten day vacation) will wake up the Government into action. But somehow, I suspect it will be the wrong action…

The track record is there!