Archive for July 7th, 2016

Myths And Realities Of The Distorted Venezuelan Economy Part II

July 7, 2016

In the beginning ,,,

Chavismo tried to expropriate land and agricultural companies. It did not work…

It then tried to get into the production business. It failed…

Then came exchange controls. One lower rate for essentials, another higher rate for non-essentials. A third parallel, and legal rate, the swap rate, sprouted spontaneously.

Except the difference between the first two rates became wider in time, the subsidies became gigantic (including dumb subsidies for travel abroad) and the third rate soared.

Thus, the Government made the third rate illegal. Which did not stop it, it simply became the black market rate, which continued to go up…

Price controls were then introduced…

In parallel, the Government became importer of goods at the lowest rate, expropriated whole industries and began to distribute products without the private sector. Shortages began.

Profit controls were then introduced…even larger shortages became daily events, as inflation soared…

By then, the official rate stood at Bs. 10 per US$, the second rate at Bs. 200 per US$ and the black market rate around US$ 1,000.

Just imagine getting your hands on anything imported at Bs. 10, export to Colombia or sell it to those desperate for acquiring for it. We are talking profits of 10,000%…

If you sell it locally, profits are less, but there is less work, Bachaquerismo became a profession. Arbitrage at its best!

This was the picture three or four months ago when the Maduro Government supposedly decided to do “something” about the distorted Venezuelan economy.

This would be the picture for the exchange rates at the time:

rates

If you want to “get” the size of the distortions, think about this picture: At Bs. 10 per US$ monetary liquidity (M2) is about US$ 500 billion, a large amount for the Venezuelan economy. At Bs. 1,000 per US$ it is barely US$ 5 billion, peanuts for an economy of a couple of hundred billion dollars of GDP.

It does not take a genius to realize that the first rate, Bs. 10 per US$ is simply too low and should be moved first closer to the second rate which is “only” twenty times larger.

Instead the Government, in its ignorance, decided to:

  1. Create a “new” rate called Dicom which would start at the level of the second rate (Bs. 200 per US$) which was called Simadi. New regulations would be issued within thirty days
  2. Keep the lower rate of Bs. 10 per US$
  3. Slide the second rate towards the third rate
  4. Adjust controlled prices on a large number of essential items
  5. Quietly (Very quietly!) forget about profit controls
  6. Restrict excess liquidity in the financial system to lower the black rate

Today we thus have:

rat2                   Mostly Government                             Little Volume                  Limited by liquidity

The result is that today, the Government has moved prices up, fueled inflation, barely affected the black rate and done little about shortages. It “adjusted” the Venezuelan economy, without the benefits of an adjustment.

And the Government, for example, has yet to issue the Dicom regulations. That’s how efficient they are!

Why can’t the Government solve the problem with shortages or just improve supplies?

Easy, at Bs. 10 the main importer and distributor is the Government, some importers of essential goods are given some dollars, but it is a small fraction of the overall amount.

The Government is not only inefficient, but there is wholesale corruption, over-charging and a lot of the stuff imported is taken to Colombia and other bordering countries.

And the private sector can do very little to help, because it has been minimized, it has become for lack of a better word, miniscule. There were over 600,000 employers in Venezuela in 1998, there are around 260,000 now.

That’s how bad it has been decimated…

But to understand why shortages can not be reduced by the private sector let me give you an example: Assume for a second, that you are a private meat importer/distributor. A meat cargo ship carries somewhere around 15,000 Tons of meat. (About a two day supply for the whole country). Depending on the type of meat, this would cost around US$ 25 million to US$ 35 million to import.

Let’s say it costs US$ 30 million, simply as an example.

There is NOT A SINGLE COMPANY IN VENEZUELA that has enough Bolivars in the bank to pay for this ship at the Dicom rate of Bs. 600 per US$., as this would be Bs. 18 billion. (0.36% of M2)

In fact, not a single private or public bank could lend any company this amount, as the largest banks have capital of about Bs. 50 billion and they are not allowed to lend more than 10% of their capital to a single customer (Which mostly don’t do anyway, it is just too risky, suppose the Government nationalizes that company). It would take a syndicated loan of all banks to bring a ship that carries all of two days of meat for the whole country.

Get the picture?: Even if the Government gave a company dollars to import meat at the Dicom rate, no company could pay for a single ship (two days supply). This applies to wheat, corn, rice and many of the basic staples needed for the population. And the Government is not willing to give foreign currency at any other rate to the private sector. It reserves the Bs. 10 rate for itself

This simply shows how hyper-distorted the Venezuelan economy is today.

At Bs. 600, the largest private bank in the country has capital of around US$ 90 million, ridiculous for the size of the economy. No company can receive dollars at the Dicom rate and bring any sizable import that would make a difference.

The economy is simply trapped in the hands of an incompetent, inefficient and corrupt Government that has tried to control everything.

The whole thing is so distorted, you practically have to start from scratch to fix things…Eliminate all the rules, controls, regulations, start over…

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