Archive for March 5th, 2015

I Will Turn You Into Powder!

March 5, 2015

Twice in one year, Venezuelan Government officials have said:

“I will turn you into powder”

referring to the parallel or black market for the exchange of BolĂ­vars into US dollars.

Last year, it was Mr. Rafael Ramirez that said it. He is long gone. This year, it was none other than Nicolas Maduro, I am not implying anything by the similarity, other than the fact, that it has been shown how little they have understood the implications of the systems they implemented.

Last year, it was Sicad 2, a sort of glorified Sitme (The previous system)

This year, it was the creation of Simadi, a kludgy system, with little logic or connection with the reality of markets. A system so badly conceived, that I thought it would utterly fail. But I never thought it would fail so fast.

In barely two weeks, Siamdi has become Sicad 2 at a higher rate of exchange of Bs. 170 per US$ instead of Bs. 50 per US$.

Nothing more, nothing less.

And as I said, the system never was free, nor unlimited, nor market driven. All of which guaranteed its failure.

And it failed. Within a week, as shown in this plot (yes, today it was higher):

black

the parallel market dollar has soared. While the Simadi rate remains at Bs. 177 per US$, any chance that the Government had to succeed failed when: 1) They set the Simadi rate below the parallel rate. 2) They failed to supply the private system with dollars, only giving foreign currency to Government-owned banks and 3) They limited any transaction to Bs. 180 per US$.

As those who had waited for a month for Simadi got nothing, the parallel rate soared, going from 190 to 284 per $ today (That point is not in the graph, which I made up yesterday)

So by now, Simadi has become a glorified or amplified Sicad 2, exept the rate it is Bs. 177 instead of Bs. 50. And the graph above implies that Simadi is dead on arrival. You see, besides my objections before, here and here, by setting and holding the Simadi rate lower, with the parallel soaring, arbitrage becomes too much of an incentive. Go to your nearest Casa de Cambio gets US$ 300 at Bs. 177 and sell it in the “other” market at Bs. 280. The same if you go to bank or broker that gives you higher amounts. You buy it, sell it higher and you make more than a months salary for a fairly good job.

The Government simply screwed in is naive belief that anyone would like to bring their foreign currency back. That with 100% inflation (and higher soon) anyone would not buy currency and wait a few months. Instead, it created this dumb system, forcing each bank to operate with its clients, each broker with its clients and Government-owned banks to receive foreign currency to give to its clients, chosen who knows how, but creating a huge distortion in the system. But even Government-owned banks are not getting enough. And you can bet some of it filters back to the parallel market. It is too nice an opportunity to pass up.

With any normal Government, this would just require adjusting the system and trying again. But this is far from being a “normal” Government. First, they really thought they could control the market They really believed that people would bring dollars back to become rich at Bs. 177 per US$. It did not happen.

And now, it would take as long as to set up the new system, to adjust it. Consult. Check with the ideologues. Check with the President. Check with the military. But most of all, it will take understanding to convince themselves that something is wrong with their system.

After all, they were supposed to turn the black market into powder, not the other way around.

 

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