Archive for March 11th, 2014

Si-Cad Or So-So-Cad in Venezuela’s new fx system?

March 11, 2014


Almost eleven months ago, Nicolas Maduro was elected President and since then, the Government’s economic team has been telling us about the new foreign exchange system (fx for short) in the works, which was almost ready. Today, everyone wants me to write about the “new” and “improved”  fx system, called Sicad 2, but there is not that much really that I can say about it. The Devil is in the details and we still don’t know most of them.

Meanwhile, Maduro keeps thinking that talking and not working, is the way to survive as President. He now has a new program (above), While that may have been something good to do for his former boss, he just does not foot the Bill. I mean who wants to listen to Nicolas give us his usual BS that half of Venezuelans are right wing fascists oligarchs, and the other half pure PSUV socialists? If that were true, there would be hope for Venezuela, not because we need more oligarchs, we have enough with Chavistas, but because there would be more market ideas, which does not seem to be what the opposition is proposing either. But Nico sounded nostalgic tonight, maybe he has been reading too much Dieterich these days. Eight weeks left of this nightmare? First time I am rooting for a Chavista prediction!

But going back to the new fx system, the so called Sicad-2, which is what people want to know about, all I can sayis , so far it looks like So-So-Cad, more than Si-Cad in my opinion. And I do hope they change my mind in the upcoming days. I would love to be proven wrong.

But let me be clear: Sicad-2 is a huge and positive step for Chavismo. First, it is a significant break with their ideological straight jacket, which has tied them for so long, and it it is very positive step for PDVSA, which will improve its cash flow by selling dollars at a much higher rate than the official Bs. 6.3 per US$ or the Sicad-1 rate of Bs. 11.8 per US$.

End of positives.

Because in Sicad-2, the Government has not created a foreign exchange market, but as usual, a complicated auction-like system, in which it is not clear who will win and how much you win. This is typical Chavista thinking: They spend eleven months thinking of what to do and come up with a Goldberesque system for fx trading.

To begin with, what is the fixation with bonds? Why can’t people trade Bolivars for US Dollars, Euros, or Yuans?  (or vice-versa). Remember that bonds were introduced in the fx system as a pantomime to mask the true fx rate at which things were being done. The Government made it a criminal activity to buy or sell Bolivars for dollars or vice-versa, unless you used securities. You could not even say at what equivalent price transactions were being made.

But now, neither how you do it, nor saying the price is illegal. You can even say the price of even the black market, it is no longer a crime. Remember all those brokers jailed in 2010? The case against them has been dropped, as the new Foreign Exchange Illicit Bill, decriminalized everything they were accused of doing.

So, why not forget about bonds? The Venezuelan Central Bank will actually state at which rate each batch of dollars will be sold on average.

Anyway. The new and improved Sicad-2 will begin operating…soon. We still need the rules and regulation. But if we are to believe the authorities, it will work something like his:

You go to your friendly bank, where you will say you want to buy x dollars and you given them a range of prices at which you want to buy (or sell if you are deranged enough). (You need an account in Venezuela and in dollars first)

Your bank, will create a spreadsheet with all its postures, which it will send two or three times daily to the Central Bank. You can only place a single posture per day. Unlimited, in amount or price.

The Venezuelan Central Bank will come back to you and say Si-Sicad for you, or No-Sicad for you, without explanation, after “matching” buying (bids) prices and sell (offer) prices. At the end of the day, the Central Bank will publish only the average price of all dollars sold.

So, this is not a market, it is a pseudo-auction system, where only the Central Bank will know bids and asks and what it does with them.

Fairly opaque in the details.

The system has no upper bands, limits and is flexible, but nothing says there will be unlimited offer to all the bids. In fact, I am sure there will be limited offer only. Nothing says that if you want to buy 1 million dollars at Bs. 100, they will give it to you. In fact, they may give it to you cheaper, as the Government has the right to intervene to keep the price down.

So, it is still is unclear. My opinion is that the Government has very limited resources for this market. Thus, initially there may be some optimism, which will fade fast. No matter what you may have heard, the parallel market (it is no longer black) has barely budged, suggesting some level of skepticism with the new Sicad-2 system.

At the same time, there will be little demand at the beginning. The large buyers (multinationals) will have to review the foreign exchange agreement, the regulations and the Foreign Exchange illicit Bill before they can even begin to operate in this new Sicad-2 market. The small buyers (you!) will have to open a dollar account in Venezuela, which is apparently one of the requirements to participate.

So, it may be on Maduro’s first year anniversary as President in mid-April (which falls in the middle of Dieterich’s prediction) before Sicad-2 shows its true dynamics and whether it is a real positive or not. In my humble opinion,there will be too many exchange rates, not enough transparency and too many limitations. The Government in trying to solve economic distortions, simply creates more and more, without understanding the true implications. To begin with, a new price for the dollar, which represents a huge devaluation, implies allowing prices to rise in the middle of 56% inflation per year. The Government has yet to understand that a foreign exchange market is not economic policy, but a transactional part of the economy. If it does not create other rules and regulations, it will all be a waste of time.

But if Sicad-2 is all they could come up with in eleven months, there is little hope for the rest of the policies. Thus, maybe Dieterich is right.

I just find it hard to be that optimistic.