Archive for February 17th, 2016

Maduro’s Miniscule Adjustment

February 17, 2016


Almost two years and ten months to the date of his election in 2013 and two months and 11 days after leading his party to an embarrassing defeat, Nicolas Maduro announced the first real economic measures of his almost three year old administration.

But the measures turned out to be miniscule…

In fact, what the Venezuelan President announced today was likely insufficient in April of 2013, when he was sworn in, when the parallel rate of exchange stood at Bs. 25 per US$, but may have had a bigger impact on the distortions in 2013 than it will have now. Chavismo continues to be trapped in its own distortion field, fearing adjusting the economy, but at the same time implementing a very meek adjustment which will likely be received badly by the population. If Maduro was going to take the blame for an adjustment, he should (and could!) have gone further than he did and the population would have not been able to measure the difference in impact on inflation and problems than this softer adjustment will have.

It took the Venezuelan President four hours of rambling to get to the real measures he proposed. He talked about the Economic War, created Productive (!!) Councils for each State in Venezuela and talked about a “new” Venezuela, as if Chavismo had recently been elected.

Some of the announcements had leaked, as Venezuela’s and PDVSA’s bonds, which had been strong in the morning, soared right before the speech, gaining as much as 12% in price for the day before the market closed, but before the detailed announcements had been made. Maybe it will be a matter of “buy on the leak, sell on the news”, now that the details have been revealed.

The first important announcement by Maduro was the first increase in the price of gasoline since Chávez was first elected in 1998. In fact, then candidate Chávez asked President Caldera to hold off on scheduled increases until after the election. Thus, the price of gasoline in Venezuela has stayed constant for over 17 years. While the rate of exchange has gone from Bs. 0.57 per US$ to Bs. 1,045 per US$, the price of gasoline had been kept constant at Bs. 0.097 per liter (US$ 0.000097 per liter or US$ 0.0004268 per gallon). So you get it, in this post in 2014, I filled my car in Caracas in 2014 with about 10 gallons of gas and paid the equivalent today of barely 4.2 cents in US$ for the ten gallons to fill up.

So, today Maduro increased the price of 95 octane gasoline from Bs. 0.097 per liter to Bs. 6 per liter, a 6,000-plus percent increase, but in the end:

Venezuela went today from having the cheapest gasoline in the world, to having the cheapest gasoline in the world.

How cheap? Well, if you consider a standard 14 gallon gas tank, at Bs. 6 per liter, you will be paying to fill up the tank a total of US$ 0.37 or all of 37 cents in US$. That is how cheap it will continue to be.

Obviously, this is a positive, but whatever positive there was in the announcement, was erased rather quickly with the announcement that the difference between the old and the new price will be placed in a “new” fund to support social programs. Thus, PDVSA will not benefit from the increase, the money will go into a non-transparent fund run by Maduro and the increase will likely be used in new expenditures, doing little to close the fiscal deficit.

And to top it all off, the 91 octane gasoline, was only increased to Bs. 1 per liter (one tenth of a cent). This gas has lead in it and currently 70% of the gasoline consumed in Venezuela is the higher  no-lead grade, since it is basically free. Thus, I see two problems: One, people may start using the cheaper grade to save pennies, but damaging their car and creating more pollution. Two, the difference in cost of manufacturing the two gasoline types is small, so it makes little sense to have such a difference, if what you want is to get back some of the cost of producing it.

In the end, Maduro could have gone higher in both prices and made the two prices closer and the “people” would not have minded or would have blamed him for inflation as much as they will anyway. He would have also reduced the incentives for smuggling gas to Colombia, which remain quite high. (A liter of gas in Colombia runs around 1 US$, versus 0.6 US$ cents in Venezuela)

Next, Maduro announced that he will “simplify” the current foreign exchange system. He said there will be only two rates (There will be three, he ignored the parallel rate), eliminating one of the three “official” rates currently in effect. Thus, Maduro announced the devaluation of the Bs. 6.3 per US$ rate to Bs. 10 per US$ rate for essentials (food and medicine), while moving everything else to a floating (floating not free) which he said would start at the current Simadi rate (Bs. 202.9 per US$ today). In the end, all this does, is move the absurd travel allowance rate from Bs. 12 to Bs. 202.9 per US$, where it will continue to be a perverse subsidy for the rich that can travel.

This is probably the worst of the announcements made. With the parallel rate of exchange at Bs. 1,045 per US$ today, it simply reduces the profit of the arbitrageurs from Bs. 1,038 per US$ to Bs. 1,035 per US$, maintaining and sustaining the reasons for the huge  corruption surrounding the foreign exchange office CENCOEX and the contraband of goods to Colombia and to a lesser extent Brazil and the Caribbean. This racket is dominated by the Venezuelan military.

Finally, Maduro announced a minimum salary increase of 20% from Bs. 11,557 to Bs. 13,720. (Divide by 1000 and you will gulp!) What can I say, people really need it, but in an environment of extremely high inflation and with no measures to really stop the process, in two months, another increase will be needed. And another one…

And the people will still be even further behind that they are today.

I could talk about the other non-announcements Maduro made, but by now, you have been as patient with me, as I was with Maduro today.

And that would be the antonym of miniscule. Which is that you have been enormously patient to get here! Thanks!

(Maduro also made a very vague announcement of a debit card for poor families, which sounded like Manuel Rosales’ Mi Negra card in the 2006 Presidential election, but he gave very few specifics of how much it will involve in Bolivars and who would be eligible and why)