(Death to the Hoarders)
Not much has changed since I wrote the earlier post on the Government creating a third controlled exchange rate which will be managed by the Venezuelan Central Bank. The Bill was expedited through the National Assembly and in a few words the Bill, which has yet to be approved and published by Chavez, modified the earlier foreign exchange illicit Law, such that:
- The definition of foreign currency includes dollar denominated securities, thus buying such an instrument is illegal now.
- The Central Bank is given total control and supervision over the trading of foreign currency and securities such that someone receives foreign currency in the end. This has fines, if the amount is between 10K and 20K $10,000 and jail of 2 to 6 years if it is more than 20K.
- The Law gives almost every relevant Government office competence in policing compliance with the law, including the Consumer Protection Agency, the Immigration Office and the Tax Office.
- The Law appears to ban the trading of bonds held by Venezuelan companies (think banks) in foreign currency. The legal interpretation is that such sales will have to take place thru the Central Bank (I wonder if the Central Bank buys Ukrainian bonds). This is a legal interpretation, if true, the Government wants the controls to be Draconian.
The swap market is dead, as the Central Bank will apparently establish a market of dollar bonds for cash. That is, if you need Dollars you go to whomever is allowed to participate in this, put in your order and the Central Bank will decide if and how much you get of the short term BCV dollar bonds it will sell to you. If you want to sell that bond before maturity, you have to ask this agent to sell it to the Central bank also, that is, there will be no one on one transactions between those holding the bonds, the Central Bank will always be in the middle. If you have US$ and want Bs. you have to buy a bond abroad and offer it for sale to the Central Bank or sell one of those you already obtained earlier.
And I say agent, because it is unknown even who will be able to participate in this market at the BCV. Today’s papers say only Government banks will be able to, insuring the process is more cumbersome and opaque. (Yesterday recently nationalized Banco de Venezuela could not open a new account, because “we ran out of forms”)
Thus, now the Central Bank and the Ministry of Finance have to figure out how they want to set up this and how it will work. This could take days to define.
Of course, in the end, the Government led by the ignorance on economic and financial matters by Jorge Giordani, is attacking the consequences of the distortions and the structural problems, but not the origin of them. Thus, much like the much ballyhooed devaluation and dual exchange rate in January (Another bright idea of the Minister of Finance) this will simply not work. The problem with the parallel swap rate was not speculation, but lack of dollars in the market. This has not changed and will not change in the upcoming weeks or months.
One of the new distortions introduced by Giordani in January was a second exchange rate at Bs. 4.3. This introduced a new level of decision by the CADIVI bureaucracy which essentially decided to give largely at the lower rate, forcing those eligible for the Bs. 4.3 to go to the swap market, adding further pressure to the rate.
And since the dollars are limited and they will be sold at a fixed price to be decided by the bright minds at the BCV, they will be distributed inefficiently and ineffectively (just like Cadivi, this is just Cadivi 3). Thus, the book of orders will grow and grow in time until the Government creates the fourth rate or does away with this silly new scheme.
Of course, a new parallel market, illegal and black, will flourish and the sky is the limit and merchants will use it to fix prices and /or if persecuted, shortages will be truly Cuban style. Inflation or shortages, choose your potion.
Not a pretty picture…