The Devil's Excrement

With the decision today by Caracas’ Metropolitan Mayor Antonio Ledezma to withdraw from the race, the number of viable opposition candidates has been reduced to a very manageable and desirable number. Not that I found Ledezma competitive, but had AD backed him, he would have had a potential number of votes come February that gave him a chance of not being last. The rest, Eduardo Fernandez and the former Supreme Court Justice that I never want to remember her name don’t count in my book.

I have nothing against many people running, but I think that some of the candidates were a little unrealistic in their prospects, you can’t withdraw from Venezuelan politics for twenty years, particularly these twenty years and expect to have a chance. Others may be in the race because they think maybe next time they have a chance, like Maria Corina Machado. Or they want to make a point like Diego Arria. But in my mind, there are only three and a half candidates left, whereby I am giving Ms. Machado a half, only because I think that that Pablo Perez’ candidacy may flounder with AD’s backing and she may get quite close to him.

Without further ado, here are the significant candidates left in the race, in the order of my current perception of where they stand:

Henrique Capriles Radonski: HCR has become the clear front runner. So far he has timed his movements well, picked his spots and used a fairly non-confrontational strategy of setting his own agenda to become the clear front runner according to most polls. Up to very recently, HCR would not even mention Chavez by name, he has changed that strategy recently. HCR has not been too specific other than preaching unity, a Government for all and hard work. He has attracted very important backings from Causa R, PPT and some unions, becoming a de facto candidate of the left wing of the opposition, save for Bandera Roja. As most candidates he has been short on specifics, which is all right with me, except that he was very specific about currency controls, a subject that I feel very strongly about. HCR has a strong management background, he was a Deputy of the National Assembly in 1998, Mayor of the complex municipality of Baruta and now Governor of the most complex state in Venezuela: Miranda.

I like his organization, his soft message so far, his veiled messages to Chavismo telling them he will not be partisan and how he has managed to position himself ahead so far, despite not being the terribly charismatic (He should smile more often)

I worry that he may have peaked too early and he may not generate the passion that a race against a recovered (if it happens) Chavez would require. But right now it is his race to lose.

Leopoldo Lopez: His campaign has been delayed by the uncertainty as to whether he should run or not, by the former mayor of Chacao got a green light and that should change his position in the polls as well as in his ability to raise funds for the primary. LL is a terrific campaigner and very charismatic, which should help in a National race. As with the other candidates his message has been one of a better Venezuela with some specifics, particularly on oil (He wants to increase production). He has built a very impressive national network and has been going around Venezuela thinking long term. He probably has the largest national organization at the grassroots levels.

I like his long term thinking and how he stuck to the CIDH suit to be allowed to be a candidate. He is a great campaigner and generates passion (either way). He is a good listener and seeks out opinions (Disclaimer: he is the only candidate to have contacted  the Devil for opinions up to now. And more than once). I think he has what it takes to win and the smarts to run a good Government.

Some people perceive him as being too individualistic and too much of a caudillo in a country of caudillos. Chacao is a small municipality with lots of resources, but it was well run. The fact that he is still formally banned from taking office may hold off many voters, but if he wins, I have not doubt he will be able to be sworn in.

Pablo Perez: The Governor of Zulia is young, articulate and managed to get the endorsement of AD that I think may work against him at this stage, as people are wary of the old political parties. He also promotes unity, his track record as Governor and hard work. He comes across well, but like HCR is not charismatic, may even be boring. I don’t think the historical fact that a maracucho has never been President matters. What matters is that  he is not as well know nationally as Capriles or Lopez and the winner is going to have to get lots of votes outside the large states, where PP is not well known.

Perez has the advantage of being the only major candidate that has popular roots, can not be accused of being an oligarch. He comes across well and has support and some organization to project nationally.

He lacks charisma, not a great speaker and in the end his experience is limited. His adeco past and new endorsement may come to haunt him

Maria Corina Machado: I was going to leave MCM out of my post, but her persistence and my feeling that PP could melt, convinced me that it would be unfair. MCM has little managerial experience but has been quite an eloquent and articulate speaker as a Deputy of the National Assembly. While I don’t particularly like her “Capitalismo Popular” slogan, I understand such labels can be quite useful and I like what they stand for.

She has stuck to her guns so far, despite her imperceptible ratings in the polls. She has a political posture, which is unique and more than can be said about most candidates.

Her drawback is that she has no political structure, she is too oligarchic, not well know nationally and I dont think she is electable. Venezuelans clearly want “someone like you” and she ain’t it.

My preference at this time is for LL, I think he is electable and will seek out a good team. However, I also think HCR will be hard to unseat from the lead. The race is his to lose.

I will vote for the winner of the primary on October 7th. 2012 in any case.

No rationing card…yet, but some enterprising supermarkets in San Tome, Edo. Anzoategui, have started putting ink on client’s fingers in order to “mark them” as clients that already purchased the difficult to find powdered milk.(Source: Correo del Caroni).

Milk Shortages? Nahhhh, it is all opposition BS….

Oh, the revolution…

Continuing my unpopular posture on the need to remove exchange controls essentially immediately after taking office (If elected), today I look back at two similar unpopular measures and their impact on inflation (I wish I could measure the impact on corruption, but I can’t)

First, we look at inflation rate right before, during and after the 300% devaluation of CAP II:

Right before CAP took office inflation was running at 5% a month, they devalued increased the price of gasoline and obviously there was a huge jump, but by the end of the year inflation was below 2% per month.

If we look at Caldera’s devaluation:

which was much smaller (89%, from Bs. 290 to Bs. 530), inflation was running at around 8% right before Caldera named Petkoff and the currency was devalued on April 22nd. Once again there was a peak of inflation, but by the end of the year, inflation was just above 2%. Why didn’t it drop more? Simple, Caldera did not adjust the price of gasoline all at once, but did it quarterly over a year.

Thus, I reason, the new President will be riding high in popularity, bite the bullet, take the big hit on inflation (Take measures to mitigate the impact) and then in a few months you will be hailing how inflation has been brought down dramatically. And it will…And people will feel it.

Doing things gradually means living with the higher inflation and allowing corruption, arbitrage and all that to continue. We are not talking small time corruption, we are talking corruption to the core, big stuff, billions of dollars that can be used efficiently to generate jobs and make peoples lives better. There is an incredible opportunity cost in all of the distortions surrounding controls.

You know I am no friend of the Carter Center after its action in Venezuela in the 2004 recall vote, but you have to love this press release issued by the Carter Center entitled “Declaration of the Friends of the Inter-American Democratic Charter on the Venezuelan Decision Regrading the Ruling  of the Inter-American Court of Human Rights”. The declaration is signed, among many others by Cesar Gaviria, Jorge Castaneda, Andres Pastrana, Sergio Ramirez, Alejandro Toledo and Jimmy Carter. The bold face on the part about the military Courts of Fujimori is mine. Can it be clearer than this?:

“We, the undersigned, regret the announcement of the Venezuelan Supreme Court that it will not be feasible to comply with the decisions of the Inter-American Court of Human Rights in the case of Leopoldo Lopez vs. Venezuela issued on September 1, 2011.   The Inter-American Court together with the Inter-American Commission of Human Rights constitute a human rights system that serves as a model for the world.  Based in the American Convention on Human Rights, the system is an achievement of Latin American and Caribbean states (neither Canada nor the United States have ratified) that should be jealously protected by all.

We note with concern that to our knowledge, with the exception of the military courts rulings during the Fujimori regime, this is the only country in the hemisphere where the merits rulings of the Inter-American Court of Human Rights have been rejected by the Supreme Court in expressly declaring them non-binding and unenforceable.

The failure to comply with the findings of the Court by a signatory state under the jurisdiction of the Court, and departing from its international obligations as dictated by the American Convention, threatens not only the Court itself but also the collective defense of human rights in the hemisphere.”

Last week there was a lot of fuzz over an interview with Dr. Salvador Navarrete in a Mexican magazine in which the Doctor said that Chavez’ life expectancy was limited and gave lots of details about Chavez’ past health, when supposedly he had been part pf the medical team taking care of the Venezuelan President. Most of the analysis focused on the veracity of the interview and whether the doctor was or not unethical in revealing information about his former patient. There were also reports that the Doctor had been taken to the intelligence service SEBIN for an interview.

Well, today Dr. Navarrete has published an open letter in Tal Cual, in which says he has left the country. In his letter, Dr. Navarrete says among other things:

“I was thinking about the ethical dilemma which represents to watch over the health of the most important person in our country, at a time that he has been diagnosed with a malignant illness and the lack of foresight in the face of a possible absence, whether temporal or definitive, in the handling of the Nation due to a lack of a clear medical communique about his current condition”

“I am concerned that the President and his political surroundings do not know the magnitude of his illness due to the complete secretiveness with which it has been handled. The consequences of a fatal ending and the importance both to his organization as well as the groups that back him, as well as the political groups that oppose him, were the reason that made me tackle such a delicate subject”

“The analysis of the current condition of the President is based on official information that in some cases has been issued by the President himself and is nothing more that a clinical exercise that can be completed by any medical professional to reach a diagnosis and a presumed prognosis, which is never definitive”

Clearly Dr. Navarrete did not have access to the President on this subject, but claims to be making an educated medical guess on the President’s health based on the information he has. He clearly believes that this is not being handled correctly by Chavez and his entourage, believing that if the President’s condition worsened it could create an undesirable situation in the country and within his political movement.

This whole thing and his interrogation lead us once again to the question of the secrecy that has been maintained on this issue. What is the need for this secrecy? Is the matter of the Doctor speaking out , a matter for the intelligence services? Why did he feel he had to leave the country, despite being an important member of PSUV and a founder of Chavez MVR movement?

Nothing new in all this, just another bizarre episode in the already abnormal every day life in revolutionary Venezuela.

Over in Caracas Chronicles, I have been having this discussion with Juan N. about exchange controls and their possible removal. Basically, one of the candidates, Henrique Capriles, said twice in one week, that he would not remove exchange controls. In particular, he told El Mundo something like: “En este momento, no estan dadas las condiciones para remover el control de cambios” (At this time, conditions are not given for the removal of exchange controls)

I did not like this statement for a number of reasons. First of all, there are so many specific proposals he could make, why choose this topic to be specific, in the absence of others. On top of that, thing could be better or worse i January 2012, the fact that his mind is set worries me.  Second, because keeping exchange controls is the easy way out, the typical trap of “I will remove them slowly”, “I will remove them later” and their many variations. But in the end it is a trap. There are so many political consequences to removing exchange controls, that they become impossible to remove after a while. But I think they should be like the proverbial band-aid removal: Do it all at once, fast and speedy.

There is never an ideal moment to remove exchange controls.

Rather than continue the discussion with Juan over there, then let me outline my thoughts here for all to argue and destroy what I say. I am, after all, not an economist.

My first argument for the removal of exchange controls is very simple: Exchange controls represent today the biggest source of corruption and graft there is in the country. A whole system of approvals has been set up and we have no idea why some requests in CADIVI are approved and others are not. To say nothing of bond offerings with huge profit margins, CADIVI cupos, “remesas” to family members and the like all of which generate an industry of people benefiting at the expense of the remainder of Venezuelans. Arbitrage has become a way of life in Venezuela, if you can get at it.

Doing away with controls will wipe all of this insanity. Instantly.

But there is more. When you go to a store and buy a computer, for example, that company probably obtained dollars at Bs. 4.3 per dollar, but you have no clue if they did. In your mind, you are thinking about prices in the context of that now non-existing exchange rate which was forbidden a year and a half ago. Or think about what happens when you get a bottle of wine: How do you differentiate between the wine imported by that large company, which is given no CADIVI dollars or that imported by the small company which needs less than US$ 300,000 a year and can thus bring things in via the Central Bank’s SITME system at Bs.5.3.

The fact that you can’t tell at what price the dollar was purchased at from the Government,  turns into obscene profits for someone, whether the wine seller, the laptop seller, the camera seller or the whatever seller. By keeping exchange controls, you keep these so called arbitrage opportunities all over the economy.

There is a vast sector of the economy that lives off this arbitrage. You think you are getting a great deal buying something and the seller is making a mint, because the dollars were bought at Bs. 4.3 (CADIVI), Bs. 5.3 (SITME) or they were obtained at around Bs. 6 from one of the Bs./US$ local bond issues. Some food even importers bring in the food, over bill and don’t even bother to sell the food, with the over billing they already made a lot of money.

All of that has to go.

Think for a moment, you are assuming the Presidency of a State that has been destroyed. There are no checks and balances. No controls. If you keep the current system in place: Who are you going to trust to control the myriad requirements, steps, approvals and the like that are built into the system? It is simply impossible, you are trying to play a game you can’t possibly win.

Then there is the problem of competition. It is very difficult for local industry to compete with 30% inflation year after year, with imported products at the official rate of exchange. Thus, by allowing for the differential, you favor foreign producers. Think chicken producers, for example, in 2002 with the dollar at Bs. 1.6, a Venezuela chicken producer competed with that dollar. Since then, assume 25% inflation per year, if he could compete then, his costs are now, if we adjust them for inflation, at Bs. 11.9 per US$, while imported chickens are being brought in at Bs. 4.3 per US$. This guy can’t possibly compete with this. This happens everywhere, this is why local production has been destroyed over the last few years.

The problem in removing controls is three fold: Where will the exchange rate go, where will the inflation rate go and will international reserves be depleted. Let’s take them one at a time:

–The Exchange Rate

The number of Bolivars available in the Venezuelan Economy is well known. Go to the BCV’s Indicadores page, go to Agregados Monetarios and download the Liquidez Monetaria spreadsheet, the latest number says M2 is Bs. 364 billion. Since International Reserves are at US$ 30.4 billion, then if the first day ALL Bolivars were exchanged for dollars, you would have to set the rate at Bs. 11.98 (Funny how close that comes to the chicken rate above, no?)

That’s the upper limit, the maximum rate which it could possibly go to if all Bs. fleed the country day one.

But the Government has many mechanisms to control this. First, 14% of all the deposits in the banking system are in the BCV, say the banks can’t get them for three months. Second, 35% of all deposits or so (Haven’t seen the numbers recently) are “official deposits”, prohibit all Government institution without Cabinet approval from buying dollars. See that rate coming down fast already?

In fact, if 50% of the goods are imported at Bs. 5 and 50% at whatever the forbidden rate is, the average is not Bs. 11.9, but something like Bs. 6.5 or Bs. 7.

Given that the Chavez Government just went from Bs. 2.6 to Bs. 4.6, is that jump so huge in order to eliminate, corruption, arbitrages and distortions? Or to help create a healthier economy?

I think not. The benefits outweigh the initial negative impact of the measure.

–Inflation

Yes, that is where the problem is. You devalue, you create inflation. In fact, Giordani has been trapped in this labyrinth for a few years. He devalues, but he does not allow prices to rise and inflation just stays at an unacceptable level. Because he is simply delaying the adjustment. He (and Chavez) would be better off allowing a big jump in inflation and then prices would come down. Inflation only stays at 25-30% because increases are repressed.

In fact, this is what happened under Caldera, when he devalued from Bs. 290 per dollar to Bs. 530 per dollar in April 1996 (and the rate went quickly down to Bs. 460). Inflation in January 1996 was running at 8.11% per month with exchange controls in place. Controls were removed in April, inflation jumped to 12% in May, was 7.1% in June, but then dropped and none of the second six months of the year were above the first six. Inflation went down!

And it was not that different in 1989 when Carlos Andres Perez devalued from Bs. 14.5 to Bs. 45. Inflation was running at 6.8% in December before CAP even suggested he would devalue. Yes, it jumped to 21% in March and 13.5% in April, but after that it began dropping like a stone and closed the year at 1.33% for November and 1.74% in December 1989.

The problem is, of course, how to mitigate the impact of that devaluation on the people and the jump in inflation. There are two ways. One is to allow the currency to float for everything, but subsidize individual food items. The second is to take a big chunk of the money saved from direct aid to Cuba and give it to people directly. Say you take US$ 3 billion and give every Venezuelan with a cedula US$ 100 to compensate the peak in inflation in February and March 2012.

–What happens to International reserves

There will be a drop. There is a lot of money repressed currently in the economy. Companies have not been able to repatriate dividends for years. There is pent up demand from individuals. But there will be savings also. The number of people traveling will go down*, it will no longer be the bargain it is at Bs. 4.3 per US$. The same with “remesas” and the large number of people who are studying abroad because it is cheap. But maybe you can create tax incentives so that companies don’t repatriate it all.

But parallel funds like Fonden will be gone, that should add to reserves about US$6-7 billion per year, so will savings from aid programs that never collect payments, to say nothing of Chavez’ largesse giving money away. Venezuela can also go to multilaterals and ask for money for specific projects. With the infrastructure decimated, there should be plenty of projects to get financing for. CAF pledged Peru’s elected President US$ 7 billion in loans, how much should Venezuela under a new Government get?

Just remember, in 1989, Venezuela pledged part of the gold to have cash in an emergency when exchange controls were removed. The loan was for all of US$ 100 million and was actually never needed. At the time liquid reserves were practically zero and the devaluation was from Bs. 14.5 to Bs. 45. Going from Bs. 4.3 to Bs. 9 initially should not be as painful this time around. And the rate will drop to below Bs. 8 fast, just watch.

And may be we can start building a healthy economy without distortions from there.

* Want to go to Europe cheap? If you have a friend in Caracas, have them buy a Miami/Madrid/Miami flight at Bs. 4.3 to the US$ with American/Iberia…