Let The Sicad Foreign Exchange Games Begin In Venezuela!

July 14, 2013


As you may have guessed, I have been away, biking in a very nice area of the world, which together with sightseeing and resting from the exercise, gave me little time to post. Which does not mean that I did not follow the news, despite spotty internet coverage in many places. And I am very happy that I avoided the Snowden drama, which I will post about at some point, but consider it to be mostly a distraction.  What I found more interesting, was that after only three months, the incompetent Venezuelan Government finally will start selling dollars into a new, and they claim, improved, SICAD system. It took only three months to create rules, limitations, allocations, quotas and the like, attempting to include almost everyone. I have been somewhat surprised at the positive reaction to this new system by many analysts, suggesting is a step forward and that the unmentionable rate will somehow go down.

But I am not impressed.

To begin with, the Government will sell US$ 200 million every two weeks in this new revitalized SICAD system. This comes out to about US$ 20 million per day, well below the US$ 40 million that used to be regularly sold per day in the old SITME system. The difference is that now there are some quotas and individuals will be allowed to participate (and more Bolivars in the system). Sitme was good about oiling the system in providing dollars to importers and in emergencies, but I really don’t think it eased the pressure in the black market very much.

As if this were not enough, there will be more participants. And I think this is the weak point of the system. With the control the Government will exert on the rate at which dollars are sold, the arbitrage between the SICAD rate and the black rate will be large and more and more individuals will register to participate and that number, much like what happened in the Bolivar/dollar bond system, will balloon in time as individuals try to take advantage of the system. If a family of four, for example, plans to travel, having each member participate creates a subsidy for the trip that can even be partially funded selling dollars in the other market.

The rules reportedly will be different for each auction, which simply creates too much guesswork for importers who really need the foreign currency to function. In the first auction Margarita and Paraguana will receive a quota, if this is not permanent, it may not do the job desired. But more importantly, companies have lots of pent up demand and now that a mechanism in which they can get what they need is available, they will all go to Sicad to complement their needs. Massively. Access to Sitme had more rules than the new Sicad does, so the demand side will be stronger.

The good news is that exporters will be able to sell their foreign currency in Sicad, which is definitely a very positive development. But one needs to be careful in estimating how much this will bring to Sicad, as exporters can keep part of their dollars, so that not all of their foreign currency will flow back. What is positive is that it increases the competitiveness of these exporters, a sector that has been affected severely by exchange controls and the overvaluation of the currency.

I think the unmentionable rate may slow down its increase with the expectations of the first of auction, but I really don’t think it will have a significant impact in bringing it down. The new Venezuelan foreign exchange market, under Sicad, will not be a true market. There are billions of Bolivars that will be chasing for those few dollars. With monetary liquidity about Bs. 851 billion, at Bs. 20, for example, there are US$ 42 billion in the system. Pent up demand is large, as for over six months, the only game in town has been Cadivi and to a lesser extent that other market. Thus, you have lots of demand with little supply comparatively speaking. The only way that other rate would go down, would be if the Government did not impose any limit on the price of the Sicad dollars, but as long as this is under control, it just will not happen.

So, a new era in foreign exchange games begins in Venezuela this week. The Government is likely to increase rules as it goes along (there are rules even at what times you may access the system depending on your cedula or tax number), they simply like to do this too much. And the players will all be ready to adapt, change course and develop strategies in order to get their foreign currency. We have seen this movie too many times in the last few years. Moreover, all of this will be done with no transparency, as to who gets the dollars and at what price, allowing once again for favoritism and graft.

As usual, some will make a lot of money, others will be frustrated and then the Government will reintroduce a new and improved Sicad again, as the problems are noted. They are just too predictable.

10 Responses to “Let The Sicad Foreign Exchange Games Begin In Venezuela!”

  1. firepigette Says:

    AS USUAL, a basic sense of injustice reigns.Now that would be a great topic.

  2. Lars Says:

    Trust me, in Finland we envy the fact that Americans and Venezuelans have guns.

  3. Lars Says:

    Do you think George Zimmerman will find safety in Venezuela?

  4. Dr. Faustus Says:

    The ‘Director of the Central Bank of Venezuela (BCV) Armando León’ said today:

    “Additionally, León said inflation in the second half will be “significantly lower” than in the first half because the problems that led to high prices have stabilized.”

    Does this make sense? They’ve just undertaken a vast devaluation of the Bolivar, and the Director of BCV says, “Hey, we just whipped inflation.” What school of economics does this come from?

    • Morpheous Says:

      Do you really believe in the statistics of INE and BCV?… I am sure that the real inflation and scarcity indexes are much higher than the government publishes. They pay and give back change to themselves. “Ellos pagan y se dan lo vuelto.”

  5. m_astera Says:

    And so it goes, Maduro taking orders from a senile dictator in Cuba. Along with his pendantant parasites.
    The best feature of this government is its incompetence and blatant corruption. Makes it easy to figure out.

  6. Alezander Says:

    Octavio, the only way to get parallel market price down a little bit is by getting rid of control exchange; otherwise, we will have the same shit, a rationing system with the “subasta” costume, and without CADIVI. If controls are removed the dollar will fly to the 30’s, so after that Central Bank Bank and free price system are in charge, the exchange rate will not stabilize.
    However, the main problem, the one which is behind all this mess, is the government fiscal position, which is very precarious, government deficit of 24% in terms of GDP, that is, unsustainable. Government will not have money to finance its political market; the political and social consequences are well known.
    Just to clarify, up to know the institutional unbalances, between government, national ensemble and judiciary, does not allow the fiscal crisis to develop politically, nobody is “aware” that we are carrying a untold fiscal crises, even though the fiscal collapse is around the corner, but without “politics” the fiscal crises will not have the expected consequences.
    PDVSA carries a negative cash flow -28% of its turnover- which it is going to extend for next five years if a capital market does not come to help as it is happened between 2005 and 2011. Without debt –dollars- PDVSA will be in trouble, so,the government. PDVSA makes 98% of international reserves and 56 of government fiscal revenues.

    • VJ Says:

      AG…. If goverment gets rid of the control exchange, in less than a week the whole BCV reserves will fly out of Venezuela. IMHO first thing to do for the government is to reestablish trust in the venezuelan economy by aknowledging the total failure of the model of socialismo XXI.

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