A Devaluation By Any Other Name…

March 19, 2013


So today, the Minister of Planning and Finance, Jorge Giordani, the Minister for Energy and OIl Rafael Ramirez and the President of the Venezuelan Central Bank, announced the new “Complementary System For Foreign Currency”. If you ask me, the system is still not completely well defined and as the President of the Centarl Bank roughly said when he answered a question: “The point is not that we will all get A’s when asked how the system works, but we will learn about it as we go along”. My translation: “This is all still being worked out, please don’t ask so many details, as we are improvising as we go along.

Clearly, there were and are differences between the various members of Government. The radicals, which includes Vice-President Arreaza and Jorge Giordani, go under the Pol Potean theory that they know how much the country needs to live on in terms of imports (US$ 40 billion) and that should be it. On the other side are the pragmatists with the President of the Central Bank Nelson Merentes and the Minister of Energy and Oil, Rafael Ramirez, who want to be more pragmatic and the latter wants PDVSA to get more Bolivars for its foreign currency.

Only yesterday, Giordani was saying he was opposed to an alternative system to SITME, during the baptism of his latest book, the only Minister of Finance in the world, who has time to write books, because the economy of Venezuela does not require his constant attention, because it is doing so peachy. Today, he oversees the compliance of the system.

Somewhere in the middle is interim President Maduro, who seems to be trying not to take sides until it matters.

Well, it seems as if the pragmatists won for today. They went from no alternate system, to a system with a Vietnamese auction (previous post) which meant having a reference price, to a modified Vickrey auction, which if you put together all of the answers given today during the press conference, implies the following:

The Government will hold non-daily auctions of cash dollars. The Superior Entity for Foreign Currency (SEFC) will decide when these auctions take place and how much will be sold at each auction.

For now, to participate in the auction, you have to be registered in RUSAD, the same organism that you needed to be registered for for SITME or CADIVI if you were a company. (No individuals may apply for now)

The main difference is that for CADIVI, CADIVI looked up if what you are asking for is in the list of approved items. In the new and “improved” SICAD system, you can ask for anything you want, attach a quote and someone will decide if your request can go to the auction. You will make the request for XX US Dollars via your favorite bank and specify at what price you are willing to buy the dollars.

Once the auction is called, the SEFC will decide how much it wants to sell. The top bidders for the amount available will be able to buy the foreign currency, but rather than at the price they bid for, at the average price of all the bidders that qualify. This is what apparently means by a “modified” Vickrey auction, it is not the second best price, but the average price of all the bids accepted. (It is unclear if the average is weighted or not)

Now, when asked at what price, the President of the Venezuelan Central Bank said quite clearly: “At the price of the best bids”, implying and suggesting that there will be no cap to the price set by each auction. While we find this hard to believe, this seems to be the understanding of most analysts.

What we can gather from this, is that this is nothing but a disguised or veiled devaluation, whereby the Government introduces a “new” system where it will sell as many dollars as it wants (or not), becoming a de facto large devaluation, where it may decide to sell as few or as many dollars as it wants.

And where do the dollars come form? Easy, there are no new dollars in this equation. As Ramirez said, there is a finite number of dollars from PDVSA and from Fonden. The Government will assign cash to CADIVI requests or cash to SICAD requests, deciding to prefer one over the other, at its convenience.

Now, given that this system will not produce results before the election. That it was not an electoral priority, I can’t help but believe that this is a veiled devaluation, whereby the Government will assign more dollars at the much higher rate (in the teens?) as needed, in order to help the economy function and ease PDVSA’s cash flow problems by having it receive more Bs. per dollars than Bs. 6.3. In fact, PDVSA will receive many more Bolívars. Like over two times more.

In fact, if my interpretation is correct, more and more requests will come via SICAD and companies will wise up to the fact that they have a better chance of going to SICAD than CADIVI. In some sense this may even open the doors to removal of the exchange controls, but at a much higher rate of exchange, keeping only a few items at the lower rate of Bs. 6.3 per US$.

This is in fact, just another dual exchange rate system, common in our history, in which the discretion of the Government will determine how much is sold at the lower rate and how much at the higher rate, at its convenience. This convenience implies heavily subsidizing basic staples and allowing inflation rates to be very high temporarily on non-essential items.

The presentation was confusing, not clear, and vague, but in the end it creates a more realistic system. It suggests that the pragmatic wing has taken over and if Maduro were to be elected, the system may be made even more pragmatic than described here, despite its political costs.

37 Responses to “A Devaluation By Any Other Name…”

  1. Monte Says:

    Hi there, everything is going fine here and ofcourse every one is sharing facts, that’s in fact fine,
    keep up writing.

  2. NET Says:

    Miguel: Regardless of the system used, given the current Government/policies, the only real provider of $ will be PDVSA. And, there’s the rub-they don’t produce enough $ to supply the Country’s yearly needs: at 2.4 million bbl. or so daily production, subtract essentially unpaid: 800m internal consumption, 450m owed China, 150m or so Cuba/Petro-Caribe, and you may have 1mm left to sell at, say, maybe, $100=$100mm/da.x365das./yr.=$36.5bbm/yr. But, from this, one has to subtract:100-150m daily imports of gas/refined products at market prices due to damaged Venezuelan refineries, intl. debt interest payments, and costs of maintaining declining production in mostly older oil fields. And, this doesn’t include overdue $ payments to foreign oil field suppliers,unfullfilled heavy-oil investment promises, large pharmeceutical company $ debts to their home companies, probable large payments for international arbitration lawsuits in process, customary multi-$bbm armaments purchases, etc. etc. So, how is Ramirez going to provide his promised $41bbm to the Market (+$9bbm to Fonden) this year? Also, Venezuela imported $61bbm last year. Assuming further intl. indebtedness/ more large China/Russia loans are not feasible, as they were in the past, to cover the $ gap, especially since the inmates are running the asylum, there will be continued huge dollar demand only met by the Parallel Market, which will also continue to rise with M1 as the Government pours its higher-income Bs.into the Market to finance elections, general wage hikes, etc.

    • Yes and no. The problem is that there are so many Bolivars looking for so few dollars. If the rate was determined by equilibrium forces, certain goods would not be so cheap (like traveling to the US for shopping, for example) and demand would contract and there would be a need for fewer dollars.

      • NET Says:

        True, equilibrium would shrink the gap, but real equilibrium probably wont be allowed to happen, the gap is huge, an ever-increasing amount of Bolivars will continue pressuring the Bs./$ theoretical 27 rate higher, and, with it the Parallel Market (and, that assuming the price of oil doesn’t fall). Rational policies/Government change will be the only real solution, which doesn’t seem to be in the cards for now.

        • Totally agree, but I think once this auction mechanism starts, it will be too tempting for the Government to get more Bs. using it and use ever increasing amounts of foreign currency in it.

  3. Sales Man Says:

    Point of order. Has anyone recently stated that a “dual exchange rate system” is fundamentally insane and self destructive?

  4. Alex (the other) Says:

    My take:

    1. Forget about a free market auction.Vickery, Dutch, whatever, they will not allow a regular auction in which buyers are the ones setting the price. I agree with Francisco Toro in this point. Precisely, the complete obliteration of the brokerage house sector in 2010 was motivated by the desire to remove all traces of a free market system in which Supply and Demand regulate the dollar price.
    2. Given the latter, I predict the “parallel rate” (not to call it by it’s real name) will continue rising, with dollar sellers preferring this option -with all its negative aspects- to Sicad. So dollars will have to come from government sources. Forget private sector participation on the seller side.
    3. The letter of credit system, a letter of credit issued by a Venezuelan bank, will likely be worthless both to most foreign providers and foregin banks. Basically trade finance is closed to Venezuelan companies given the rigid exchange control. I wonder, will the letter of credit have some sort of guarantee issued by Banco Central? I really don’t get this.
    4. The system, beyond all, is really designed to comply with Jorge Giordani’s (enemy numero uno of Venezuelan bankers and guisadores) wishes to produce a system in which bankers or agents won’t be able to make illegal profits on arbitraging cheap dollars. However, this doesn’t solve the problem of related offshore providers over-billing their onshore partners to make some sort of profit on the way. Neither will it eliminate clientelism: BCV and Ministry of Finances will have full discretion on who will participate in the supposed auctions.

    Now, I could be wrong. If it is indeed a free market auction then we would be witnessing a complete “spin-off” from the Chavista policy of rigid control over reconomic variables.

    • I feel that if it is a freemarket, the Venezuelan economy – still subject to the invisible hand of self interest – will over time tend towards stabilising at the freemarket – parallel – rate: many market prices in Venezuela will be set at the top rate, workers will demand salary increases, tax authorities will (should) attempt to maintain the real value of taxes, etc. Some part of the Venezuelan economy is still operating on the market basis where the top rate will rule or prices will tend towards the top rate.

  5. bobthebuilder Says:

    With the flexibility this gives the chavistas to pick the rate, does this mean this is the devaluation to end all devaluations?

  6. concerned Says:

    This is merely a way to make dollars available to preferential parties at affordable rates, while allowing PDVSA a more simple method to obtain more bolivars for their dollars to make payroll. It will be manipulated as needed, and available only to preferred, insert “loyal” companies. Others need not attempt to participate. Calling it an auction is silly, and for sure the “best price” will not be the best price for the country. If it looks like a duck, and quacks like a duck, it probably is.

  7. Dr. Faustus Says:

    I read that post above a number of times and,….and, I get it! It is a devaluation. You betcha. No question about it. The analysis by Moctavio was nothing short of brilliant. Thanks!

  8. xp Says:

    >>>> …. “The point is not that we will all get A’s when asked how the system works, but we will learn about it as we go along”. My translation: “This is all still being worked out, please don’t ask so many details, as we are improvising as we go along.

    I might as well add >>> come april 15, in memorial, and for the continued need to counter fascist maneuvers intent on roiling the patriotic waters of our fatherland, a major blow will be given to all those exploiters of hapless citizens by decisively raising the price of gasolina to a more realistic level.
    And if those fascists should EVEN think of squealing, then the loyal forces will take the necessary measures. Take that, all you freeloaders of gas! 🙂

    • xp Says:

      The Usds assigned by the Complementary System via auction[?]
      to its close collaborators,
      will find home in an OFFSHORE fund and will be freely traded to
      those that will need dollars at the free rate.
      In other words, Econoinvest or its equivalent will operate in a nearby
      country for the crucial currency needs of our country.

      • xp Says:

        thousands of shell companies already exist, and will make it all that much easier

      • xp Says:

        When a woman becomes pregnant, she spends months eating
        enough for both her and her baby. That’s obvious.
        So why is it a sin for pdvsa to eat enough to subsist and also
        maintain a steady supply of oil for the wellbeing of the nation?
        Why is pdvsa being starved, by meeting important social needs
        and allowing the oil supply to dwindle at the same time?
        [The Oil industry is the destroyer of this nation
        because the political elite is frittering away its own
        future and giving away its oil related resources].

    • xp Says:

      Devaluation is a SYMPTOM not the CAUSE.
      Our Nation isn’t making enough to cover its minimum wage.

      the nation needs a minimum wage, on which to survive
      with dignity. Right now, the money just isn’t there.
      Rent and utilities are not an option. Even imported food
      is hard to get. Do we have to starve in this land of plenty?

      Easter celebrates Jesus rising from the dead.
      On april 14, give our dead nation LIFE. VOTE!

  9. CArlos Says:

    Any controls and restrictions are not good. However, instead of this crazy and mixed bag named SICAD it would be easier just to fix a second 10-12Bs/US$ CADIVI rate using the same waxed MILCO, leaving only food and drugs at the ludicrous 6.3 and any other goods at the new rate…Simpler, easy to do inmediately, same “solvencias”, same lines, same paperwork, same banks, etc etc…
    We had 1 year with 2 CADIVI rates, 2.6 and 4.3 and it worked

  10. Is it not normal economic behavior that this new auction price will very quickly equal the parallel rate?

    When I need USD in Venezuela and I know the current parallel rate, I will bid a little below the parallel rate. If I get USD like that, I will bid a little lower next time, and so on.

    Basically the new market will be a normal forex market with the price set to the higest bidder – or the average as per the Vikeray rule.

    Where do I get it wrong?

    • moctavio Says:

      Not necessarily, because the parallel rate suffers from too little offer. In fact, at Bs. 18, for example, certain items will see no demand for them at the new price and there will be more dollars to be sold. I would bet that the average rate for imports has a weighted average below Bs. 15 or so, so that initially if you allowed a free market, that is where this market rate would go.

      • moctavio Says:

        In fact, one of the defects I find in this system is that it may satrt low and rise, while strategically it would be better if it started high and went down, to create expectations of lower, not higher prices.

      • Historically the dual rates always equalise at the parallel rate which is the freemarket rate.

        • moctavio Says:

          The problem is that you have a system in which US$ 57 billion was sold at Bs. 4.3, US$ 10 billion at at Bs. 6.3 and less than US$ 10 billion in the parallel rate now in the twenties. The weighted average of that will be below.

          In fact, in the 1995 devaluation in Venezuela, the two rates were unified at the higher rate and it went down 20% where it stayed for three years.

          • Thank you for the 1995 data. Very good information. Now I would tend to agree with your analysis that the rate would go down – because of the historical data. Let´s wait and see if the same would happen this time. I will watch out for equivalent situations in previous hyperinflations in other countries.

            I still do not understand the importance of the previous “sales” totals you state in your first paragraph. For me the parallel rate is the real rate today – no matter what the rate was in the past. That was the case in Zimbabwe. But, you know how the parallel market – as well as this new market – is made. I don´t. I hope to learn.

  11. Kepler Says:

    I read all this and I just remember the words Aristóbulo Isturiz said:
    “Si quitamos el control cambiario, nos tumban”


    Chavismo would certainly fall but not for the reason he mentioned.

  12. Sicade Scam Says:

    As for the “Superior Entity for Foreign Currency (SEFC)”, talk about Orwellian names… You just can’t make this stuff up!

  13. Paul Says:

    This “Complementary System For Foreign Currency” from an incompetent government that can’t even keep toilet paper on store shelves. Buena Suerte.

  14. moctavio Says:

    I can only go by what they said and they said the top bid would win. Now, if you move half the import to Bs. 15, demand collapses because people can not afford to buy things at say Bs. 15, thus there will be demand for fewer dollars. This looks like they want most prices to be set by this new parallel dollar, even if it has a political cost, with food and pharmaceuticals at Bs. 6.3 and subsidized.

    Back to Lusinchi pues…

    • Sicade Scam Says:

      Back to Luisinchi , back to the future, back to the same old problem of giving dollars away at a subsidized rate….

      Having said that, I welcome any change to the current system where companies cannot get any dollars at all!! The $64’000 question still remains, at what price will they sell at, and how many dollars will be made available?

      As for Whether PDVSA, aka the Chavernment, is really that hard up for dollars, the answer is obviously yes! Look at the budget deficit at 6.30 or 20+ to the dollar and you see the great difference it makes!!

  15. Bueno, if this is their idea of pragmatism we are in real trouble!

    But listen, the real problem as I see it is the price. This notion that they’re going to approve dollars at the average winning bid is pure fantasy. They would end up in an impossible bind: to avoid the SICAD dollar shooting up to the Bs.15-25 range – which I’m assuming they realize is politically unviable – they’d have to divert more and more dollars from CADIVI to SICAD, but that would quickly prove unviable, as they’d then run short of dollars for food/medicine/procurement good imports, which are their absolute priority!

    The point of the Vickrey Auction is that they’re SEALED BID auctions. The price will end up being some number that Giordani swears up and down is the average winning bid, but that we’ll have no way of verifying because bids are sealed. That price will be substantially below the real average bid. And at those lower “dirty auction” prices, there won’t be enough dollars: plenty of importers will find it impossible to meet their demand through the system.

    • Andres F Says:

      And why would they realize this “is politically unviable”? Would a chavista not be happy getting a dolar for 15 with SICAD, instead of 23, or whatever the black market is?
      Also, why would they have to divert more dollars?They can limit any dollars for CADIVI or SICAD, as they have been doing, correct?

  16. pi31416 Says:

    This is what I read on Bloomberg.com (Source http://mobile.bloomberg.com/news/2013-03-19/venezuela-to-announce-complementary-foreign-exchange-system.html):

    Venezuela will start auctioning dollars to importers, especially of medicine, food and industrial equipment… The dollars will be cheaper than in the black market, where they sell for as much as 23.5 per bolivar

    UH??? 23.5 dollars per bolivar? Do they pay ANY attention to what they write?

  17. odef007 Says:

    Auction – from Crazy to absurd in 24hrs. If the Price at auction is not within a window of stability how can price regulated products continue to be regulated? If supply of $$ is whenever they feel like it – pent-up demand will drive price. How will this help shortages & inflation? I think they are trying to “take over” the BigMac market but maintain the level of the 22+ price. This one has really bogged the mind. Is PDVsa really that Hard up for money?

  18. Hola mis mil amores!

    Systemas cabiarios controlados para “el público”, mas obviamente no para el Gobierno o de la pandilla de Los Chávez, simplemente demuestran otro control más de salida de divisas por “problemas sociales y económicos”…!

    DEMUESTREN CHAVISTAS que se atreven a un sistema cambiario abierto, en dónde el límite, es el mismo de cualquier Banco Americano u otro lugar!


    Jorgito “El Economista” …!


    Hello my thousand loves!

    Exchange Control systems for “the public”, is only jailing in what wants to escape from bad condicions, of a claimed to be good socialist government of the Chavistas!

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