Maduro’s Announcements: The Devil Sees Few Details

January 24, 2015

maduro

After postponing his “announcements” for a while due to his Magical Mystery Tour, President Maduro finally had time to come back to Venezuela and give his also twice postponed State of the Union address, where we were supposed to hear his new “program” for the economy. In the end, there were few details on what he plans to do with the foreign exchange, while very specific plans to spend even more.

Maduro announced that he would keep a three tier foreign exchange system (Four if you include the black market, which will not necessarily disappear). This is clearly a negative, as it has failed over and over again, but Chavismo is stuck in this model. Here are the three parts of the new system:

-Food and medicines will be kept at Bs. 6.3 per US$. This is obviously a #FAIL, as the implicit exchange rate stands at Bs. 97 per US$ and the Government will devalue the other two rates to factors of even more than ten times this level, which opens up for corruption, arbitrage and smuggling to Colombia everything imported to Venezuela at this price.

-A second rate, lets call it Sicad, will merge the old Sicad 1 (Around Bs. 12 per US$) and Sicad 2 (Around Bs. 50 per US$) into a single auction mechanism. This is impossible to judge at this time. First, we don’t know the level, it could be Bs. 12, it could be Bs. 40 or whatever. Somehow, I think it will be closer to Bs. 12 than to Bs. 40, as President Maduro said yesterday that the oligarchy thought he was going to devalue to Bs. 40, but “he was driving them crazy”. Well, he is also driving himself deeply into a hole with his ignorance about these matters. In the end, for this rate, anything below Bs. 30-40 per US$ will do nothing to help in having more currency available overall, which should be the point of any new policy. Seems like a #FAIL, but until the Devil knows the details he will hold judgement and give the Government the benefit of the doubt.

-The final one, which got everyone excited is that the Government plans to have a legal parallel system in which the price will somewhat determined by the laws of supply and demand in which people, companies, brokers, the Public Bolsa can participate and supervised by the Governemnt.

Ummm, Where have I heard this before? Ahh! Yes! This is how Sicad 2 started, in the words of Rafael Ramirez, exactly one year ago and when implementation came around, it all became a Sitme-like system at a rate of Bs. 50 per US$ and subject to arbitrary criteria, unknown forces and preferential treatment. A waste of foreign currency in the end.

But let’s assume and suppose that it will be almost free, the Government will impose lots of rules and regulations. It will impose daily limits etc. Then, the current parallel market will not disappear, there will be four rates of exchange with the “Dolar Today” rate surviving. This would be a #FAIL.

Let us then assume that it will really be free, supply and demand, market forces and all of that. Will the current parallel exchange rate increase or decrease?

Here is what I think: Initially, just like when Sicad 2 was announced the rate will  go down. Because people truly think (and argue) that in a free market it will go down.

First of all, it will take a while to set up this system. From what the Government has said, it will be a swap (permuta)-like system involving bonds . (What is this fixation with involving bonds, whatever happened to currency trading using currencies?) But it so happens that currently local brokers can not hold dollar denominated bonds. Thus, the Securities Law needs to be changed. Then, the Government has to decide how the market will function, hours, the like. This could take at least two or three months to be implemented. The parallel exchange rate is likely to move up as people lose patience.

Then the market starts and this is where I have a few doubts that it will go down. How much money does the Government have to supply this “free” market? Given the shortage of currency, I don’t believe it has much. Additionally, there are many multinationals, that have not purchased a single dollar in the illegal market since May 2010. There were others that were not even buying then in the innocent belief that they would get their dollars at Bs. 4.3 per US$. Most of them in the face of a free and legal exchange will decide to repatriate at least some of the Monopoly money they have in Venezuela today. That is a lot of Monopoly money even at Bs. 200 per US$.

People argue that the cash held by some companies becomes peanuts at Bs. 200. It may be so. But the cash held by many people and many companies, which have found it impossible to get their money out of the country for almost five years, can become a lot of money.

Let me give you an example: Suppose the Government decides to sell US$ 2 billion at Bs. 150 (They will surely try to push the parallel rate down) right off the bat to “cool” off the market. At that price, this only suctions out of the system only 15% of M2 (Monetary Liquidity which is 2 trillion Bolivars today). Will the Government have or want to use another US$ 2 billion to keep it down at that time?

I doubt it.

Thus, the rate will go up.

Thus, I am skeptical of how well it will work, more so since the Government has to provide lots of foreign currency at the other two lower rates. But, while this legal and free system may not help solving the problem of fewer dollars and may exacerbate other problems like inflation, I would welcome and approve this system. That’s the way it should always be. Ask the Swiss.

If they do implement it would be an incredible irony and inconsistency that Chavismo destroyed Venezuela’s Capital markets in 2010, blaming them for the rate being at Bs. 8 per US in May 2010 and will now try to replicate that system, when the parallel rate is now over TWENTY times higher. Of course, there is no remorse or apology to those whose lives were destroyed, those that were jailed and those that lost their jobs. For Chavismo, it is always somebody else’s fault

But Maduro still thinks that there is something “modern” about the system he is planning to implement and that there is nothing less modern than controls. I actually wonder if he has realized that if there is legal and free system, then anyone importing at that rate can increase prices proportionately. What ever happened to controlling prices too?

But multinationals are likely worrying already about taking the loss from Bs. 50 to the new parallel market. Ouch!

The rest of the announcements did have specifics: Maduro plans to spend like a bandit and gave many specifics of new programs that add up to a significant fraction (6-7%?) of GDP. Go figure.

Maduro did not mention a single number of all the funding that he claims he obtained in the trip.

And given that 90 days ago Venezuela’s oil basket was close to US$ 80 per barrel, I wonder if a new economic plan will be needed at the time, since today’s cash flow is coming from those barrels sold three months ago. In April, it will be at a price below US$ 40 per barrel. And appealing to Maduro’s own speech: If God does not provide, who will he call upon to help? The pajarito*?

*Little bird

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70 Responses to “Maduro’s Announcements: The Devil Sees Few Details”


  1. […] 21, Maduro finally acknowledged the recession and shortages faced by Venezuelan citizens. Yet, he failed again to clearly implement any of the pragmatic economic reforms[1] advocated by Rafael Ramírez, the former minister of […]

  2. Ira Says:

    Could Merrill be so wrong, and Maduro just lied to them?

    According to this article, Merrill was told the Chinese are giving VZ $20b in liquid funds, and they can adopt a “pay us when you can” policy for oil shipments/monies due on past loans:

    http://blogs.barrons.com/emergingmarketsdaily/2015/01/26/venezuela-significant-currency-depreciation-coming/#comment-992820

    • moctavio Says:

      I dont buy. I dont believe the Chinese would lend them that much and if they did, there would be no barrels of oil to pay them. A barrel sent to China is a barrel not sold in the market, so in the end they would be running in place.

  3. Chavista Imperialista Says:

    So let’s get down to the nitty gritty: how does a foreigner with dollars (but no connections) exploit this arbitrage opportunity?

  4. Alex Says:

    Miguel, when Sicad II excited everyone last year, you did clearly state in one of your articles that it was not going to succeed. You used numbers, money in circulation and available reserves to show a very inflated exchange rate which no way would the government accept.

    So what is your opinion this time? Because if you ask me – I stand by your former reasoning- I still think that this free market thing is a fantasy under this government and current macro conditions.

    • moctavio Says:

      I thought I made it clear, I think exactly the same thing. Except there are fewer resources now. Just think at current levels, foreign currency is only 2.5 billion per month coming in.

  5. Dr. Faustus Says:

    Top 10 reasons why Maduro went BACK to Saudi Arabia after having just left 7 days earlier.

    10) Cilia threw him out of the house
    9) The bathroom facilities are much nicer on the Cubana Ilyushin than at Miraflores
    8) He forgot that he left his multi-colored, Venezuelan-flag-inspired scarf in the transit lounge at the airport in Riyadh.
    7) There’s a job opening for a bus driver at the Riyadh transport office.
    6) He forgot to pay the hooker at the Sheraton Continental in Riyadh.
    5) He just likes riding on airplanes, especially if they’re free.
    4) He’s planning to make an offer to the new Saudi King: .. Margarita Island, and all the babes he wants (!), in exchange for 10 containers of toilette paper.
    3) He forgot to bring back the Bolivar sword.
    2) He said Saudi Arabia, but he secretly flew into Greece and voted for the new left-wing government hoping that eventually their economy would be worse than his.
    1) What the hell! There’s nothing else to do around here. Road Trip II ..!


  6. […] Maduro’s Announcements: The Devil Sees Few Details […]

  7. halfempty Says:

    Maduro, looking at that picture, there is a part for him in TeleNovels in the U.S. That is to say Soap Operas. He’s a natural.

    Or higher concept:
    Home From Home
    A self-deposed South American dictator lands smack dab in the middle of Vermont on the lake, where he tries to use a truck load of Bolivars to buy a run down bed and breakfast from it’s crank proprietor (Bob Newhart, note must have for the pilot) Negotiations derail when 3 other sexed siblings
    (Sarah, Sera and Sara) join in the fight to keep the bed and breakfast ‘Murican.
    Note: Need Alexander Solzhenitsyn big, big time for this.

  8. Morpheous Says:

    Thanks Miguel! – Excellent posting!
    The uncertainty seems to be always the rule and not the exception. Not only it’s hard to predict how the level of the exchange rates for unified SICAD and the “free” rate will behave, but also details such as which of the three rates would be used to liquidate the TICC bonds? – Miguel, do you know anything on this? (the part of “Bonos del Sur” that are denominated in U.S.dolars but are to be liquidated in Bolivars; there is batch expiring in March). – Also, what rate would be used for students abroad? – What rate would be used for pensions of retired people resident abroad?

    • Miguel Octavio Says:

      Nothing is defined, but I am sure TICCs will be cancelled at 6.3, as for pensions, they have not been paid in a while.

  9. Antonio Says:

    There is an important general election in Greece today. The serving Health Minister said in an interview that if the lefties win, Greece will probably leave the Euro currency and become “a failed state like Venezuela”. Another Greek political commentator just said that if the communist-like lefties win today, they will have the choice of taking Greece on a “progressive path like Lula’s in Brasil, or a disaster like Chavez’ in Venezuela”. The Economist laments the harebrained policies that resulted in the Venezuelan economic fiasco. We are in the news! (as an example of a sad failed experiment). Will the Greek go for 21st century socialism? There is still time to place your bet.

  10. FC Says:

    Flight update Sunday 2:51am Eastern: Aircraft recently departed Rome and climbing. Current altitude 13,000 ft

  11. FC Says:

    you know the leader is grandiose, delusional and out of touch when he’s travelling like this

  12. FC Says:

    Pedro Mario kills it on these trips. Don’t miss his tweets. Pedro has friends everywhere. Word is Nicolas follows this tweeter account

    https://twitter.com/pburelli

  13. FC Says:

    The bird has the range to go non-stop. Rome is a rest-stop?

  14. FC Says:

    Hey Moses, good catch. Rome refuelling stop. Obama arrives in Riyadh Tue morning….

    • GeronL Says:

      Spending millions of bucks for a photo-op, he didn’t go to France though. Only Muslims are worthy of his attentions.

  15. moses Says:

    You read it here first !

  16. moses Says:

    8000 feet and descending at 1400 feet per minute —

  17. moses Says:

    FAV1 looks like its descending in to land at Rome

  18. FC Says:

    “A friend who doesn’t help you is no better than an enemy who does you no harm.”

  19. FC Says:

    Another motive for the trip is he’s trying to meet Obama. We will see.

  20. FC Says:

    Riyadh ETA 5:00am Eastern, 11:00am Riyadh time. No women and children this time

  21. FC Says:

    Flight update 10:25 pm Eastern: They are more than half-way with another 3,000 miles to go. They will go non-stop arriving in Riyadh approx. six hours from now.

  22. moses Says:

    Don’t forget that he offered to “discuss” the gasoline price … There may be “government experts” happy because he price of imported gasoline will eventually go down …

  23. FC Says:

    they are at 38,000 ft . Check them out on flightradar24.com look for FAV1

  24. FC Says:

    it’s 10pm Eastern. Maduro is currently over Seville, Spain. They are using the Ilyushin FAV1. They can probably go non-stop.

  25. marzolian Says:

    Curious: other articles about the Venezuelan currency system often state that most transactions are made at the 6.3 rate. Is that true? It’s my impression that a large amount of dollars received by the government are spent right away in dollars. For example, most of the billions of dollars that PDVSA spends, never get converted into dollars except on their books in Venezuela. Same for most items imported by the government and not sold. When the government buys good and then sells them locally, the exchange rate is just a number on a ledger somewhere.

    Is there any way to see or to calculate how many dollars are actually sold by the government to independent parties, and at what rates?

    • moctavio Says:

      The answer is NO. There was a budget last year. So much for Cencoex, so much for Sicad 1 , so much for Sicad 2 and so much for travel and the like. It is unclear if the fullfilled it and Govt. imports are only known after the year is over.

    • Cpc Says:

      Pdvsa has always sold USD at the parallel market, before 2010 with “permutas” and thereafter in the black market. These transactions however were always registered at the official fx rate, not at the permuta or other non official rate. In effect, Pdvsa has always received the VEF equivalent at the official rate (2.15, 4.30, 6.30, Sicad, etc.), the rest was and will continue to be stolen. This is why the Government wants this strange and shady currency exchange using bonds instead of cash, and brokers instead of banks.

  26. FC Says:

    It’s bizarre because Saudi and its neighbors are pumping production to curtail Iranian expansion and right now Iran has the upper hand. They are also concerned about Iran military nuclear program. Iran has gained influence in Yemen, Syria, Lebanon and Iraq to name a few.

    Bolivarian Venezuela has made clear its alliance with Shia over Sunni in its support of Iran, Syria, Hezbollah and Hamas to name a few.

    Venezuela is no friend of Saudi Arabia.

  27. FC Says:

    He’s airborne right now. There’s nothing tracking…don’t know if using the Cubana Ilyushin or the Falcon. Twice to Saudi Arabia in one month. I would have never guessed that.

  28. m_astera Says:

    I would be embarrassed to appear in public in a dumbass costume like he is wearing in the photo.

  29. madacol Says:

    It’s a LOT more important to “Legalize” black market than to reduce it. So the fact that it goes up, doesn’t mean it failed

  30. Ira Says:

    Another question:

    Does the average Venelozano actually believe that U.S. oil production is a plot to harm them?


    • I don’t know the answer to your question though that is one of the memes that government of Venezuela is pushing. While fracking is one of the reasons that oil prices have dropped, the Venezuelan government’s theory runs into problems because fracking is only really profitable when oil is above $50 USD per barrels (fracking really needs a price around $60 USD per barrel for profitability) so the current moment about 90 percent of US fracking is marginally profitable or unprofitable. There is a global oil glut because the world economy has slowed down and because oil is now being drilled in countries for export that were once importers. The United States, Brazil and Colombia to name three have gone from net importers to net exporters in the past decade.

      I can’t think of a more incompetent government that than of Maduro. Even Zimbabwe seems better off than Venezuela.

    • Jeff Says:

      Ira, it must work because it gives supporters some semblance of hope and some “talking points”. To me it seems it is the only thing that leftists have left, look at Cuba blaming the US for everything for over 50 years and look at the Democratic Party in the US accusing the Republicans of everything at the drop of a hat. It works. As a matter of fact the rhetoric of Obama and the Democrats such as “you didn’t build that”, “rich people are bad”, “free everything” (the latest just this week being free community college for everybody) is very similar to the rhetoric of Chavez/Maduro.

      • stuart Says:

        I’ve never heard this mantra that; “everything for free, rich people are bad” coming from the many Dems I know. I suppose, just like fanatical Repubs who claim that Obama is a Muslim, was born in Kenya, is a communist, is a socialist, is destroying the country, that there are those fanatical Dems who are ignorant too.

        • Noel Says:

          Somehow, moderates and Republicans think that it is not worth it to counter ludicrous assertions by leftists and demagogues, whether in Latin America or the US. They are wrong. They should remember Basilio’s aria about calumny in the Barber of Seville.

        • GeronL Says:

          Obama is definitely a socialist

          • Alexis Says:

            What are you talking about? In most of the world, Obama and the democrats would be center-right. They certainly didn’t nationalize private industries.

            Remember that the U.S. is/was the only developed country without free and universal healthcare.

        • Firepigette Says:

          Stuart, liberals say those things all the time…If you don’t hear, you are not listening….the Dems are every bit as biased and blameworthy as are the Rebublicans…and often worse because they try to win arguments by discount: ” you are racist, you hate the poor, you are ignorant etc.i absolutely hate both parties but the progressive are almost like Naazis in their insistence on regulating even the right to feel if it differs from them…a very dangerous situation for us in this country.


      • I support free education for elevator, TV set, and food blender mechanics. Those who don’t want to study these critical natural security professions should only get help if they have really good grades and if they commit to pay back the money adjusted for inflation.

  31. Ira Says:

    OT, but not totally:

    In his address, didn’t Maduro promise the construction of 200,000 housing units in 2015? Or did I get that number wrong?

    Building affordable housing is a noble thing. It’s even the kind of thing which can “excuse away” many of VZ’s problems because of their high cost. But can someone give me a few paragraphs’ analysis of past housing promises made, and what was actually delivered?

    I understand that many Venezolanos are still riding the Chavismo Bullshit Train because they’re on a “list” to get housing, but that many are fed up and got off at the last station.

    How important is this issue, today, within the big picture?

  32. Miguel Octavio Says:

    If the new parallel market is not totally and absolutely free, the black one will stay around. I am betting that there will be too many regulations, bands, limits and thus the black market will exist.

  33. captainccs Says:

    >>> (Four if you include the black market, which will not necessarily disappear)

    The black market disappears when you have white market but stays when you have a red market. Finance 101


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