Archive for March 26th, 2014

A Premature Look At The Nascent Sicad-2 Venezuelan Foreign Exchange System

March 26, 2014

Sicad2

It is premature to judge the Sicad-2 system yet, but I think it will be premature to give judgement on it for quite a while, so it is worth talking about what has (finally!) happened with this nascent foreign exchange system.

First of all, I clarify what I tell everyone that wants to listen: this is not a trading system for fx, as has been reported in the international press. This is a system by which the Government allocates foreign currency to those that request it, with the Government exercising a significant discretionary judgement in the amounts and levels at which people are allocated the foreign currency.

The Government took quite a while in implementing the system and it is still not fully functional, but I guess it was getting to be somewhat embarrassing to announce that it would begin operating so many times and having it postponed for almost a month.

So, the first good thing to say about Sicad-2 ,is that it is here! Finally!

The bond part of the system is not functional, but should be up and running soon. Basically, right now you are just given cash. At some point in the future you will be told that you were given the equivalent of the amount allocated to you, but in the form of a bond at the price of that particular instrument in the international markets. There will be uncertainty in the final price as the bond will be sold in two or three days.

So far, only banks are part of the system. The regulations for brokers are not out yet and they have not been authorized to work in the system. Many banks have yet to begin operating with Sicad-2, essentially because they have not given the system an urgent priority and are taking their time starting operations. Other banks, you can even place orders via their webpages.

The second good news is that the Government wisely decided to operate a a price higher than apparently many people expected. This is good for reducing the distortions, it will improve the fiscal balance, create incentives for foreign oil companies to invest in the Heavy crude projects and help with PDVSA’s cash flow. According to the President of the Venezuelan Central bank, foreign currency has been allocated between Bs. 50 and 61 with the average price each day at Bs. 51.84 and Bs. 51.58. Apparently, no order above Bs. 61 has been filled.

The parallel market went down to Bs. 55 before Sicad-2 began operating, but is being indicated at Bs. 75 today already. Either people sold a lot of dollars ahead of the start of Sicad-2 or they were expecting much lower levels for it.

Reportedly, individuals are being assigned, so far, small amounts, even if they requested large ones. Similarly, many company orders are allocated a large fraction of their order, but not all. The Government is not reporting total amounts.

Demand has been slow. On the one side, those requesting dollars may not have an account in dollars in Venezuela or in the case of companies, they are still looking at the legal issues surrounding Sicad-2. On the financial institution side, not all are ready for it.

In the end, the big question remains how much is the Government planning to sell via Sicad-2. This is what will determine its success. We believe that it will only work if part of the foreign currency allocated to Cencocex at Bs. 6.3 per US$ or the Sicad I at Bs. 10.8 per US$ is moved up. Perhaps the fact that Sicad 1 was lowered to Bs. 10.8 per US$ implies that the Cencoex  dollar will be moved to the Sicad 1 rate. There are indications that this is what the Government has told some industries in private, but it will require increasing regulated prices significantly.

Thus, the conclusion is that it finally started, foreign currency is being sold at a good level to make the system successful but we don’t know yet about whether the Government will sell daily average amounts that are ample to satisfy demand and make the system a total success.

Despite the cartoon above, it is looking well, but we reserve final judgment until wee see the dynamics for a coupe of weeks.

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