Archive for November 10th, 2013

It Is All About Arbitrage in Venezuela

November 10, 2013

While it is clear that the Maduro Government is worried about inflation, there are many things about going after appliance stores that just does not jive. The attack on them was too vicious, particularly against Daka, which was singled out among all and likely had gigantic losses. And I say it is not easy to understand the viciousness against this sector, because appliance inflation has gone up 65% this year, comparable to the inflation rate and certainly less than the huge rise in that other unimportant exchange rate called the black market rate.

But over the years, I have learned that when you don’t understand what makes Chavismo act and it has to do with exchange rates and finance, all yo have to do is think about the arbitrage between the official and the parallel rate. I still recall when I could not understand where all the dollars were coming from into the swap market, when I realized that the Government was selling Argentinean bonds into the market. It was all about arbitrage. And when the Chavista bankers got wealthy, it was all about arbitraging the Government. The Government changed the rules and they changed how they did it. In both cases, the Government got tired and went after its buddies.

And I suspect that it is the same in this case. Yes, Maduro wants to scare the private sector to hold prices in line, but in the end, it is going after groups considered to have some form of affinity to the Government. My feeling is that this is all about arbitrage.

You see, when exchange controls were imposed in 2003, initially there were relatively small differences between the official rate and the parallel rate, which was established by the swap market until 2010 and by the black market since then. Differences were initially 20-30%, which gave some groups some incentives to do business arbitraging the official rate with the parallel rate. By 2010, the difference got as large as 100%, where you can really make a lot of money if somehow you can obtain official dollars, import or make something and then sell it at a price set by you.

You see, when you buy anything in Venezuela, seldom do you know whether the dollars for the product or some of its components came from, either from the official rate or the parallel rate. Since ordinary people have little access to official dollars, their reference price is the parallel rate. If something seems cheap as measured by the parallel rate, then it’s ok. But the guy at the other end may be making a mint, because the difference between the two (taken from the data in one of the banned sites) has soared over the last year and a little bit, as shown in this graph:

Arbitrage

As you can see, a little over a year ago the percentage difference between the unmentionable rate and the official rate exceeded 100% and has now soared to over 800% (I believe this is a first in the world’s economic history). What this means is that if you somehow can get your hands on official dollars or officially bought products, then you can make a lot of money if you can sell your goods somewhere in between, particularly if because of the restrictions in foreign currency, most goods are in short supply. Supply and demand are the biggest enemies of Chavista policies.

There are basically three ways to obtain dollars: Cadivi, Sitme/Sicad or the parallel exchange rate. Cadivi (Bs. 6.3 per dollar) only works for certain items on a list that has become shorter over time. Sitme/Sicad has varied over time. In Sitme (Which was Bs. 5.3 when the official rate was 4.3 per dollar) there were fewer rules than Cadivi, you just needed to be lucky and know someone in the bank to get some dollars. In Sicad, you can obtain dollars at about Bs. 11 per dollars, but each “auction” has different rules and target sectors.

Let’s assume you are a bicycle importer. You got some Sicad dollars and bring 50 bikes which cost retail in the US, say one thousand dollars, with Sicad dollars at Bs. 11. Because there are few one thousand dollar bikes in the market, you can probably charge anywhere from Bs. 20,000 (cheap!) to Bs. 50,000 (not so cheap!) for it. To the buyer, who knows how much the bike costs in dollars abroad, even the Bs. 50,000 sounds reasonable. To the seller, it is just a matter of gauging interest. If bikes in that range are in short supply he can go the Bs. 50,000 route. Nobody knows whether he got dollars at Bs. 6.3 or at the unmentionable rate. At Bs. 50,000, he is making close to 400% profit, but to the buyer, the price is reasonable.

That is how screwed up the whole system is now in Venezuela.

But there is an additional way to get things at the official price for a dollar. You see, ordinary people and companies have to go through Cadivi, but the Government does not. And Government imports keep increasing. Last year, they were US$ 34 billion, versus US$ 26 billion for the private sector. (Giordani’s goal is zero for the private sector) And the Central Bank reported that Govt. imports went up 20% in the first half of this year. But the Government does not have the distribution capacity or the point of sale capacity to deliver all this “stuff” (some of it does not exist) to the consumer. It hires the private sector to both distribute and sell some of it. And there are huge arbitrage opportunities there, for the simple fact that the consumer has no clue as to whether the stuff was bought at the official rate or the parallel rate.

Which brings me to my punchline. My suspicion is that the viciousness against Daka was largely due to the company either receiving goods from Government imports (My main bet!) or receiving some Cadivi dollars for the stuff they sell. Daka was simply taking advantage of the arbitrage the Government was handing it over on a silver plate and the Government found out about it and got mad.

My reason for thinking this, is that all these appliance retailers have been close to the Government in the past. Daka received almost half a billion dollars from Cadivi over the nine years covered by the Cadivi data and some of the other retailers inspected received similar amounts. Another reason: Where are the owners defending their business?

In fact, I have always wondered how some business thrived in Venezuela which made no sense. Like computer makers. But after seeing that they received half a billion dollars also in nine years, then it is clear that the business was more arbitrage related than a real business.

Government dollars are obtained and used at the discretion of any Minister. (Think Minister for Sports!) The Government also got into the appliance importing business, using the Yuan from the Chinese loans, but nobody knows what they import or not. Given the closeness of some of these retailers and the Government, I would bet that the retailers were caught padding margins obscenely and Maduro (or the VP?) knew exactly at what price the goods or the dollars were obtained, leading to the events of Friday night.

In fact, Daka or Pablo Electronics charge prices which are in many cases better than those in Government stores like Bicentenario. The question is then: Who is making the money in the arbitrage from that case? Yesterday someone twitted the picture of a price tag for a 32 inch TV at Bicentenario, which clearly showed the model number. The price was Bs. 10,500 (US$ 1,666 at the official rate), I found it at a US retailer for $345 or Bs. 2,173, a 383% difference. The stuff costs some money to bring, but not that much. Who is pocketing the difference?

In Venezuela these days, it is all about the arbitrage both in the private and the public sector.

Maduro also wants to outlaw the laws of supply and demand in which too many people around him benefit from. He wouldn’t be able to.