Archive for February 9th, 2013

Government Devalues to Bs. 6.3 per US$, Too Little, A Little Late

February 9, 2013


An so it came. The much predicted, expected, delayed and surprising devaluation arrived today. Reportedly, this was ready before Chavez’ illness, postponed until after his return, who nobody thought would take so long. And then, as all sources were saying nothing would be done, boom, Friday before Carnival, the Government devalues the currency 46.5% to Bs. 6.3 per US$ (more correctly 32%)

And there is more…

Because at the same press conference, the Government announced the elimination of the Central Bank’s SITME foreign exchange system. The same one hailed by the Central Bank’s President at its creation as being so “good”, it could last 100 years. It never made it to its third anniversary.

And when Merentes said that it made no sense to have the country issue new debt to supply SITME, one did not know whether to laugh or cry. Because the Government issued over US$ 10 billion in debt in the last two years only for that: To maintain an absurd and artificial foreign exchange system with cheap dollars at Bs. 5.3.

And today’s decision has to be related to today’s CPI announcement for January. Despite all the controls, threats and new institutions created to insure prices don’t go up, the January CPI came in at 3.3% (22% for the last 12 months), with the all important Food and Beverages coming in at 5.3%. In December, Food and Beverages was 5.7%, keep it at 5% per month and we are talking an annualized value of 80% per year for the group that poo people spend 80% of their income on.

And even worse, the scarcity index went from 16% to 20%-plus, as Venezuelans hoard and buy whatever they can get in basic staples. (Luxury goods are available, mostly through SITME, so maybe wine, foie and caviar hoarding will begin now)

But all the 46.5% devaluation does, is to provide a little bit of fiscal relief for a little while. The problem is that it still leaves a fiscal gap that is too large, which is likely to require another devaluation later in the year. Because this devaluation only covers about 60% of the expected deficit. At least another Bolivar in devaluation is needed now, which will only make a devaluation later much larger.

I see Bs. 8 by the end of the year.

Because in the end, the problem is not that the Government devalued by 46.5%, the problem is that the gap between the official rate and the black market illegal rate, went from 318%, to 272%, making arbitrage still very attractive and making prices of goods imported at the official rate of exchange too attractive to pass up. And the black rate sets many prices today.

Because in the end a devaluation is not a policy, it is the result of bad policy, and if it is not accompanied by a bunch of other measures, all it does it postpone the adjustments.

And when the President of the Central Bank announced that SITME was eliminated and there will be no alternative to it, what he was doing is insuring that the black market rate never goes down. Because SITME accounted for US$ 10 billion in imports last year and ALL of that will move to the black market, implying more inflation and a higher rate for that price which can not be mentioned in these pages.

Thus, ten years and four days after establishing exchange controls, the Chavez Government devalued once more. It has been a long road. First, it devalued in February of 2012, when the “band” was moved from Bs. 773 to Bs 980 (old Bs.). Then came the real controls and the price was fixed at Bs. 1,600 (old Bs.), then 1,900, the Bs. 2,150, which created the “strong” (jaja) Bolivar. Then Bs. 2.65, then Bs. 4.3 and now Bs. 6.3 per US$.

Some record no? Seven devaluations in fourteen years.

And Merentes and Giordani still suggest things are peachy, the economy is strong and we have to be more “efficient” (with US$ 15 billion in fake imports)

Oh yes! I forgot, part of the problem will be fixed with the creation of a new control body, above CADIVI, which will be an office to “Optimize the use of Foreign Currency”.

Merentes also announced that accounts in dollars in Venezuela will now be able to receive dollars from anywhere. I am still wondering about this one. These accounts were created to receive dollars from Sitme, now Sitme is eliminated, so that they will allow money to come from everywhere ,for those demented enough to have dollars in Venezuela’s revolutionary banking system.

Things that make you got uhhh???

But both Giordani and Merentes actually even managed to smile during their surprise announcement. In the end, it is the poor, the “people” who suffer most from devaluation and inflation and neither of them is in that group. And they really don’t seem to care

And you had to laugh when Giordani said that economics is hard. It’s hard when you know so little and do so many idiotic things.

About the only “good” news to come from this, is that the country’s bonds will go up next week, not only because a devaluation improves the country’s ability to pay, but because the elimination of SITME also means there will be no more idiotic issuance of bonds to supply that market.

But the bad news, is that these announcements reflect that Giordani is still in control of economic policy. Which means more ideology, less pragmatism and more distortions.

And Maduro said he backs all these measures, which must have Diosdado smiling…

He must be the only one…