Archive for February 11th, 2015

Venezuela: Another Marginal fx System?

February 11, 2015

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I waited until today to write about yesterday’s announcements about the “new” fx system, because we were promised for today some decrees relating to the rules that would oversee these supposedly new fx system.  But much like everything that has happened so far in 2015, there are new delays and who knows when these new rules will come out. And in any case, they may be irrelevant anyway, or to use a word that is en vogue, the details of the rule may be marginal to the whole subject and its future.

Maduro took three weeks in January traveling around the world begging for money. Then he took four days after coming back to give a speech in which he announced that “in the next few days” we would know the details about this newfangled, state of the art new system for doing what people have been doing for centuries: Exchanging one currency for another. But the few days for this complex task, took three weeks and it was not until yesterday that we heard some details details.

The new system has three parts. The first two are a rate for Cencoex (same name) of Bs. 6.3 (same number) per US$ and a rate for Sicad (same name) which will start at Bs. 12 (same number again) per US$. Thus, so far 66% of the “new” three part system is identical to what has been in place since April 2014.  In fact, it is so identical that even the percentages of foreign currency indicated by the Minister that will be sold in each market are practically the same as estimates of how foreign currency was distributed last year in the two systems.

And then there is the new and marginal third fx system, which will be called the Sistema Marginal de Divisas (SIMADI) (Marginal system for Foreign currency)

Really, you can’t make this stuff up.

Now, about the only thing we know about this “new” system for real is that it will have a price higher than the old Sicad 2 system and that it will be called SIMADI, which is the subject of numerous jokes including SIstema de MAduro y DIosdado.

The rest, is having to take at face value what the Minister of Finance and the President of the Central Bank said about it:

i) It will be a system subject to “market” forces. Free Floating.

ii) It will have no limitations or restrictions.

iii) It will operate via banks, brokers and exchange companies, but there will be a limit in the latter.

However, to participate in the “market”, the rules will be the same as for Sicad 2: You have to register, open an account in US$ in a bank in Venezuela and provide your last Venezuelan tax return.

Now, according to Maduro today, from 3-5% of all foreign currency will flow through this system. At today’s oil prices that is about US$ 1.5 billion at the top range of 5%. Of course, Merentes and Torres talked about “anyone” can sell in this market and that it would start “near” the parallel market rate and then go down. Yeah, everyone is waiting to sell…

Well, pardon me for being so skeptical. Let’s assume that the parallel rate is Bs. 200 (it has never reached that, but makes calculations easier). If the Government plans to sell only US$ 1.5 billion in this market during the whole year, that would take barely Bs. 300 billion out of the monetary liquidity which stands at Bs. 2 trillion today. That means, that only 15% of the monetary liquidity has to go to the SIMADI, in order to wipe out the US$ 1.5 billion. That is peanuts, more so, when M2 has been growing steadily at a rate of 65% per year, which means that another Bs. 300 billion would go into the system in just one quarter and a lot of it will also be looking to leave the country.

Why?

Easy, let’s look at the other side of the equation: Demand. There is lots of pent up demand, because essentially the parallel market has been illegal for the last four years. Many corporations refuse to participate if it is illegal, but now they have a way of doing it if its is legal, free-floating and unlimited. Additionally, given the shortages in the country, companies, people, will use this new market to obtain foreign currency, either to import, to complete supplies or raw materials to produce stuff in Venezuela or buy widgets to sell locally. Finally, the market has been dry lately,  savers, companies,  everyone with any sense of self-protection will look to take its savings abroad via this market at a a time of increasing political instability and uncertianity.

Given all this, I expect much more than 15% of the monetary liquidity to go to this market and at this time, it does not seem the Government is making an effort to have more foreign currency (by devaluing the other two rates), nor to reduce the deficit which is financed by money printing.

Thus, I can only conclude that this market is unlikely to be free, unlimited and market driven, for the simple reason that the Government does not want the rate to rise without control. And if it tries, it will eventually shut down the market, much like it did in 2010, as the parallel rate will drive inflation, no matter how marginal the Government wants you to believe it is.

As we say in Venezuela, we have seen this movie before, which means there will be limits, regulations, etc. and in the end the system will look a lot like Sicad 2, but at a higher price. Making it the same as that in place in most of 2014, but at a higher and controlled price.

And thus, truly marginal.

P.D. PDVSA issued a 2022 bond without telling the market, which it can use to supply the system. It is a US$ 3 billion issue, but its price will be around 34% at current levels, so that it could contribute US$ one billion to this market. I still think its not enough.