Archive for December 17th, 2013

El “Cambiazo”: Reality Check For Those Who Think Bolivars Are Worth Less

December 17, 2013


For those who think that our currency is worth less, here is how distortions can make Bolívars be worth actually more. Yes, in the ultimate arbitrage (or inverse arbotrage?) opportunity, you can sell Bs. 1 million for Bs. 1.1 at the border, you hand in bills and the foreign exchange houses in Cucuta give you an instant transfer of your Bs. 1.1 into your Venezuelan bank account. This transaction called the “Cambiazo”, has been the rage at the border in the last few weeks.

The reason for this? Simple, Colombians going to Venezuela to buy goods need currency, bills, they don’t want to use their Colombian credit cards, which register operations at the official rate of exchange. As the black rate has soared, the incentive to go and buy goods in Venezuela has increased to the point that there is actually a shortage of bills at the border, creating this new arbitrage which remarkably makes the Bolívar actually stronger. Since the difference between the official rate of exchange and the black rate is a factor of ten, then goods are still cheap, even if the merchant is making a 200% profit and you pay 10% more for the Bolivars.

Another market solution by inventive Venezuelans and Colombians to a problem created by the excessive controls in Venezuela. Sort of like reverse arbitrage. Is this a first instrument of its kind in the world?

Moody’s Downgrades Venezuela’s Debt to Caa1

December 17, 2013


Moody’s Investors Services downgraded last night Venezuela’s dollar denominated debt to Caa1, the equivalent of a CCC level for other credit raters. This is the first credit rater to downgrade Venezuela to this level, which means the debt has gone from having “substantial” risks to being “highly speculative”. To add insult to injury, the company keeps Venezuela on “negative watch”, suggesting it may downgrade it further at any time.

Moody’s cites increasingly unsustainable macroeconomic imbalances, as well as a higher risk of an economic collapse.

While I am not on the economic collapse side of things, I think the Government still has a lot of leeway in what it can do, I do think that the country’s debt will go lower than where it has been. Since the Mayoral election, bond prices have risen because analysts really think that the Government will become more pragmatic. I disagree, the Government will devalue and raise the price of gasoline a bit and that will be the end of the “adjustment”, but it will continue on its radical agenda, spending money like there is no tomorrow and controlling more the private sector. I will write more on what I think will happen in a post before the end of the year.

While some of these credit raters are usually late to the game and people tend to ignore the news, they are important. In particular, this lowering to CCC or Caa1 in Moody’s system, represents the first time Venezuela goes this low since when oil production went down right after the 2002-2003 oil strike. Investors will take notice and this will reflect in higher interest rates for the country and fewer investors being interested.

As I said, I think prices of the debt will go lower as investors realize there will be little pragmatism and more radicalism. To start, the inflation number, which by law has to be released in the first ten days of the month, has yet to be released and it is Dec. 17th. I hear that it is not the inflation number that looks bad, but the scarcity number which went up 50%. Thus, while investors want to hear the good news, they seem to be ignoring the bad ones. While inflation numbers have been doctored in the past, they have been manipulated using new formulas and weights, but this time we don’t even know the number and whatever is announced will have less credibility.

So, hold on to your seats, the movie gets interesting. Never a dull moment in Venezuela!