Archive for January 25th, 2014

Venezuelan Government Devalues Currency

January 25, 2014


After promisiing that it would not devalue, the Venezuelan Government not only implemented a devaluation equivalent to a 22.2% devaluation, but also established a fairly restrictive foreign currency budget, doubling Sicad auctions to US$ 220 million per week and reducing the travel and remittance quotas that individuals had access to. While promising to honor debt obligation in the form of bonds issued by Pdvsa and the Republic, the Government simply said it had no foreign currency to pay the US$ 8.4 billion debt between CADIVI and the private sector from imports made in 2013, which if true will have a drastic impact on local companies.

The announcements were made by the Vice President for Economic Affairs Rafael Ramirez, who said that there will be a budget for foreign currency of US$ 42.7 billion in 2014 (Imports in 2012 were US$ 75 billion and 2013 should be above US$ 65 billion). Of these, US$ 11.4 billion would be for weekly Sicad auctions of foreign currency at Bs. 11.3 per US$ in the amount of US$ 220 million plus US$ 5 billion for travel (Yes, the numbers do not add up!) US$ 30 billion would be left at the Bs. 6.3 per US$ rate for “essentials”, which include food, health, industry, education and pensions. Thus, the weighted average, if the Government sticks to the budget will be Bs. 7.6 per US$, for a 22.2% devaluation, even if Ramirez insisted that this was not a devaluation.

This is a very restrictive foreign currency budget and allocation, which at first sight suggests the Government is keeping some foreign currency for its own purposes and suggests the private sector will have even more difficulties in 2014 and shortages should intensify. The devaluation was much less than expected as most analysts were expecting the reverse weighting, with 70% at the higher Bs. 11.3 per US$ rate. Instead 72.3% will be at the old rate of Bs. 6.3 per US$. Wall St. voted down the adjustment pushing debt prices down sharply on concerns about the country’s ability to pay in the future, despite the promises.

Thus, the Government does very little to remove economic distortions, leaving a huge arbitrage between the official rate and the black market rate, which promotes contraband and finding ways, legal or not, to obtain CADIVI or Sicad foreign currency.

The Government did reduce travel, internet and remittance quotas which were all moved to the rate of the last Sicad auction. For remittances, the Government will require a tax filing, which most workers in the informal sector do not do, but I am sure they will come up to speed fast, filing so they can continue having access to the three US$ 166 monthly remittances for close relatives.

While one Government official said that debt with airlines would be paid (It stands at over US$ 3 billion now), Ramirez’ statement about private sector debt prompted the few airlines that were selling tickets to stop doing so. This confrontation could en up badly if the Government tells them to pack up or shut up, which is their usual style.

Ramirez also mentioned the word “permuta” (swap) which many took to mean a swap market a la 2003-2010 would be revived. I would say forget it, the Government can not allow a free market to function without a strong devaluation, nor does it have the dollars to supply such a market. At best, the Government could open a highly regulated and controlled market at Bs. 17 or so if things got tight. (They will)

All in all, another blow to the private sector, to the Venezuelan economy and to the so called Bolívar fuerte or strong Bolívar which has been battered since its creation barely five years ago in January 2008, when the exchange rate was Bs. 2.7 per US$.

We suspect that the Sicad rate would slide during the year and that slowly during the year more and more items will be moved to the higher Sicad rate. The Government will call it whatever it likes, but it will simply be more stealth devaluations of the currency as the year moves on. And so will move the unmentionable rate to higher levels together with inflation as the destruction of the Venezuelan economy by the revolution marches on.