The Devil's Excrement

The Venezuelan Government devalued the currency today from Bs. 1600 to the US$ to Bs. 1920 to the US$. The move was not unexpected as the 2004 budget was calculated at exactly the new rate an average for the full year. Thus, it was only a question of when exactly the Government would implement it.

The decision will have its strongest impact on basic foodstuffs which were receiving foreign currency at the official rate as well as regulated products which, if not adjusted, will become scarce. The move will obviously add to inflation in 2004 as the parallel market exchange rate moved today from Bs. 3100 to Bs. 3200 as part of the devaluation had already been priced in last week when the foreign exchange control office CADIVI stopped the flow of foreign currency arguing that it was changing its already brand new information system.

As suggested here last Friday, this is likely to be a first step before the Government issues two bonds in US$ one to be swapped for local debt in the hands of the banks and the second one to be sold to local investors in Bolívars.

From a practical point of view, the measure will immediately have a positive impact on exporters and companies that maintain foreign currency positions. These positions are maintained in the books at the official exchange rate and will generate a one time gain for their holders. The opposite will be true for companies that have liabilities in US$, since they will have to generate Bolívars to cover their debt.

A quirky effect will occur in any Bolivar denominated mutual fund that has US$ instruments in its portfolio, it will generate a 20% gain in one day in those instruments. Some mutual funds I know have as much as 50% of their holdings in foreign currency instruments.

Additionally, the holders of CANTV ADR’s will lose as CADIVI had yet to approve the dividend paid by the company in December, so that in the end they will receive US$ 1.278 rather than expected US$ 1.535 per ADR.

The devaluation will have its strongest impact in the lower strata of the population, since food will likely record the highest increase of all items in the CPI and it represents the highest percentage of the budget of poor people. Of course, the Minister of Finance claims it will not have an impact on inflation because it had already been taken into account. What a cynic! Once again, the hidden tax which a devaluation represents is paid by those that can afford it the least.

Curiously, President Chávez did not announce the decision in his Sunday program, despite the fact that the official gazette with the decree had already been printed on Friday. Venezuela maybe the only country in the world where a devaluation is not announced by any Government official. Nobody wants to look bad?

The Venezuelan Government devalued the currency today from Bs. 1600 to the US$ to Bs. 1920 to the US$. The move was not unexpected as the 2004 budget was calculated at exactly the new rate an average for the full year. Thus, it was only a question of when exactly the Government would implement it.

The decision will have its strongest impact on basic foodstuffs which were receiving foreign currency at the official rate as well as regulated products which, if not adjusted, will become scarce. The move will obviously add to inflation in 2004 as the parallel market exchange rate moved today from Bs. 3100 to Bs. 3200 as part of the devaluation had already been priced in last week when the foreign exchange control office CADIVI stopped the flow of foreign currency arguing that it was changing its already brand new information system.

As suggested here last Friday, this is likely to be a first step before the Government issues two bonds in US$ one to be swapped for local debt in the hands of the banks and the second one to be sold to local investors in Bolívars.

From a practical point of view, the measure will immediately have a positive impact on exporters and companies that maintain foreign currency positions. These positions are maintained in the books at the official exchange rate and will generate a one time gain for their holders. The opposite will be true for companies that have liabilities in US$, since they will have to generate Bolívars to cover their debt.

A quirky effect will occur in any Bolivar denominated mutual fund that has US$ instruments in its portfolio, it will generate a 20% gain in one day in those instruments. Some mutual funds I know have as much as 50% of their holdings in foreign currency instruments.

Additionally, the holders of CANTV ADR’s will lose as CADIVI had yet to approve the dividend paid by the company in December, so that in the end they will receive US$ 1.278 rather than expected US$ 1.535 per ADR.

The devaluation will have its strongest impact in the lower strata of the population, since food will likely record the highest increase of all items in the CPI and it represents the highest percentage of the budget of poor people. Of course, the Minister of Finance claims it will not have an impact on inflation because it had already been taken into account. What a cynic! Once again, the hidden tax which a devaluation represents is paid by those that can afford it the least.

Curiously, President Chávez did not announce the decision in his Sunday program, despite the fact that the official gazette with the decree had already been printed on Friday. Venezuela maybe the only country in the world where a devaluation is not announced by any Government official. Nobody wants to look bad?

For years, Venezuela’s Instituto Venezolano de Investigaciones Cientificas (IVIC), has managed to stay above political fights, maintaining a meritocratic system. The system is not too different from what is used in high quality scientific institutions everywhere. To get tenure as a researcher, you need to publish, show originality, high impact work and the have the work recognized as your own.

This system has been in place for over forty years and IVIC has maintained a relatively high level of quality in research in the basic sciences. Despite its small size, roughly 120 researchers, IVIC publishes a large fraction of the country’s scientific output. Additionally, IVIC established the tradition of academic research in Venezuelan universities and groups of researchers from IVIC started important scientific institutions such as the oil research institute INTEVEP and the Fundacion Instituto de Ingenieria.

I worked at IVIC for quite a number of years. If anything, I thought that requirements for tenure should be tougher. My personal opinion was that if you were to be allowed to research on anything you wanted in a country like Venezuela, you better be very good, recognized internationally and a true scientific leader. Most people at IVIC were like that, but once in a while the system was a little lenient or there were strong differences between groups because someone was not allowed to stay or receive tenure. But in general, the system worked quite well.

Besides the 120 researchers, IVIC had professional research assistants called PAI’s and technicians TAI’s. PAI’s are professional in engineering or basic sciences who help out in the research, appear in publications, but are not the leaders of the research process, are not responsible for writing the publications, have no students and thus have fewer responsibilities those researchers. Any PAI that wants to become a researcher can do so, but in my time, few wanted to, given the additional responsibilities involved.

For the last few months, there have been discussions of changing the regulations that dictate how IVIC is run. Despite an extensive internal discussion, a “parallel” set of regulations has been brought directly to the Government and based on the article that appeared in yesterday’s El Universal it is clear to me what the intent of the Government is.

Under the excuse of “lack of participation” and adapting IVIC to the new Constitution, the legal adviser of the Ministry of Science says that IVIC’s paradigm needs to be changed. That it is not necessary to have a Ph.D. to be a researcher and that IVIC has a large number of professionals with Master’s degree that are researchers (Yeah! Yeah!). She says that IVIC has a very rigid structure for promotions and the scheme needs to be changed. She calls IVIC a country club in which nobody can enter.  Well, you can, you need a Ph.D., have to work very hard and do significant research.

What this is, is another example, of what is bad about this Government. This is populism at work; they want all of those PAI’s, none of which ever wanted to become researchers, to get all of the privileges without having all of the responsibilities. At the same time, they want to “take the power away” from the researchers. Some power, 14-16 hour days to attempt to remain competitive in their fields of expertise, $600 a month salaries, poor funding, lack of resources and even financing your trips to conferences with your own money.

The end result would be a blotted bureaucracy and a relaxation of academic requirements. The true researchers with potential will feel no pressure to produce, while the newly promoted researchers will know the “revolution” will defend them from tough evaluations. The best will be forced to emigrate to find environments where academic excellence is the priority. This simply means the slow death of IVIC as a world class scientific institute in a third world country. It was all a beautiful and wonderful dream while it lasted….

For years, Venezuela’s Instituto Venezolano de Investigaciones Cientificas (IVIC), has managed to stay above political fights, maintaining a meritocratic system. The system is not too different from what is used in high quality scientific institutions everywhere. To get tenure as a researcher, you need to publish, show originality, high impact work and the have the work recognized as your own.

This system has been in place for over forty years and IVIC has maintained a relatively high level of quality in research in the basic sciences. Despite its small size, roughly 120 researchers, IVIC publishes a large fraction of the country’s scientific output. Additionally, IVIC established the tradition of academic research in Venezuelan universities and groups of researchers from IVIC started important scientific institutions such as the oil research institute INTEVEP and the Fundacion Instituto de Ingenieria.

I worked at IVIC for quite a number of years. If anything, I thought that requirements for tenure should be tougher. My personal opinion was that if you were to be allowed to research on anything you wanted in a country like Venezuela, you better be very good, recognized internationally and a true scientific leader. Most people at IVIC were like that, but once in a while the system was a little lenient or there were strong differences between groups because someone was not allowed to stay or receive tenure. But in general, the system worked quite well.

Besides the 120 researchers, IVIC had professional research assistants called PAI’s and technicians TAI’s. PAI’s are professional in engineering or basic sciences who help out in the research, appear in publications, but are not the leaders of the research process, are not responsible for writing the publications, have no students and thus have fewer responsibilities those researchers. Any PAI that wants to become a researcher can do so, but in my time, few wanted to, given the additional responsibilities involved.

For the last few months, there have been discussions of changing the regulations that dictate how IVIC is run. Despite an extensive internal discussion, a “parallel” set of regulations has been brought directly to the Government and based on the article that appeared in yesterday’s El Universal it is clear to me what the intent of the Government is.

Under the excuse of “lack of participation” and adapting IVIC to the new Constitution, the legal adviser of the Ministry of Science says that IVIC’s paradigm needs to be changed. That it is not necessary to have a Ph.D. to be a researcher and that IVIC has a large number of professionals with Master’s degree that are researchers (Yeah! Yeah!). She says that IVIC has a very rigid structure for promotions and the scheme needs to be changed. She calls IVIC a country club in which nobody can enter.  Well, you can, you need a Ph.D., have to work very hard and do significant research.

What this is, is another example, of what is bad about this Government. This is populism at work; they want all of those PAI’s, none of which ever wanted to become researchers, to get all of the privileges without having all of the responsibilities. At the same time, they want to “take the power away” from the researchers. Some power, 14-16 hour days to attempt to remain competitive in their fields of expertise, $600 a month salaries, poor funding, lack of resources and even financing your trips to conferences with your own money.

The end result would be a blotted bureaucracy and a relaxation of academic requirements. The true researchers with potential will feel no pressure to produce, while the newly promoted researchers will know the “revolution” will defend them from tough evaluations. The best will be forced to emigrate to find environments where academic excellence is the priority. This simply means the slow death of IVIC as a world class scientific institute in a third world country. It was all a beautiful and wonderful dream while it lasted….

Long article in today’s El Nacional (page A-17, by subscription only) by banking analyst Francisco Faraco. Faraco is best known for his ratings of the banking system. In this article he gives out numbers that are quite scary. The article is long, thus instead of translation I will condense it in my own words.

The Minister of Finance announced that he is preparing a resolution so that ”excess” public funds in the banking system are returned to the Ministry. The Central Bank (BCV) said such funds amount to 37% of the budget and 26% of all deposits in the banking system, which implies that half of the internal debt was unnecessary.

However, this issuing of internal debt increased liquidity by 61%, forcing the Central Bank to issue its own liabilities in the form of CD’s to drain liquidity. This forces interest rates up and is a drag on the economy.

At the end of 2003, the banking system had 83% of all of the internal debt, add to this the BCV’s CD’s and the system had 8.7 trillion Bs. which gave the banking system Bs. 1.9 trillion in profits. Add to that some Bs. 400 billions and the banking system earned Bs. 2.3 trillion or 80% of its profits from Government deposits and paper.

If the Ministry of Finance delivers on its threat, eleven banks (3 public, 4 private and regional and four private and nationwide) or 27% of the system will need financial assistance from the Central Bank and 19 banks would start losing money. Additionally, two public banks would have to be liquidated and eight private ones would need to be capitalized, if they don’t want to be liquidated.

According to Faraco, all of this was possible because the Minister of Finance covered up the details of the expenses of the country, the Superintendent of Banks ignored the balance sheets of the banks,  the auditors approved false financials, the bankers looked the other way so as not to see the treachery of their colleagues and that nothing that has been said about al of these problems caught the attention of any National Assembly member, the Comptroller, the Attorney General or the Peoples’ Ombudsman.

Scary isn’t it?

Yesterday, Lina Ron, the pro-Chavez political activist held a rally to announce the creation of her political party Union Popular Venezolana. The rally was attended by numerous Chavista leaders and some Ministers. The rally was a tribute to the anti-democratic forces that support Chavez. Here are some quotes taken from today’s El Universal, El Nacional and Globovision

Lina Ron:

“There is a possibility that the CNE will allow the recall referendum, we can not accept it, I foresee that whether the answer is one or the other there is going to be a combat”

“My party is composed of the radicals, the tough ones, the violent ones”.

Minister of Infrastructure and former Vice-President Diosdado Cabello:

 “If two million signatures have to be eliminated, then they will be eliminated”

“I could care less about international opinion” (Said using a vulgar term)

“The opposition is preparing, with international backing, an institutional coup because we will not have a referendum because the signatures were not gathered”

This is the pretty and democratic revolution?

Yesterday, Lina Ron, the pro-Chavez political activist held a rally to announce the creation of her political party Union Popular Venezolana. The rally was attended by numerous Chavista leaders and some Ministers. The rally was a tribute to the anti-democratic forces that support Chavez. Here are some quotes taken from today’s El Universal, El Nacional and Globovision

Lina Ron:

“There is a possibility that the CNE will allow the recall referendum, we can not accept it, I foresee that whether the answer is one or the other there is going to be a combat”

“My party is composed of the radicals, the tough ones, the violent ones”.

Minister of Infrastructure and former Vice-President Diosdado Cabello:

 “If two million signatures have to be eliminated, then they will be eliminated”

“I could care less about international opinion” (Said using a vulgar term)

“The opposition is preparing, with international backing, an institutional coup because we will not have a referendum because the signatures were not gathered”

This is the pretty and democratic revolution?

There was little hard news this week as rumors seemed to dominate over actual facts the last two days. Among others, this is what was heard this week:

-The President of PDVSA might be removed over the conflict he had with Chavez’ former lawyer who had been named chief counsel for the company. PDVSA’s President Ali Rodriguez, fired Fabian Chacon as Chacon began making accusations of corruption within the oil industry, including a huge rip off in which PDVSA sol Diesel to a local company as an additive and this company exported it making millions. Luis Marin, the Head of CITGO is reportedly going to be Rodriguez’ successor.

-There were rumors that the Superintendent of Banks was ready to resign, which actually became official yesterday. Reportedly, Minister of Finance Nobrega will also leave and would be replaced with the Head of Cadivi, the foreign exchange control Office, Edgar Hernandez Behrens. I wonder if he will transfer the motto of the exchange control office: “God is love and prosperity” to the Ministry. Reportedly, former President of Central University and former head of the tax office, Trino Alcide Diaz will be named as Superintendent of Banks.

-A third rumor was that the Government was ready to: 1) Devalue, 2) Swap Bolivar debt held by banks for dollar denominated debt and 3) Issue a US$ 1.5 billion bond in local currency but denominated in US$. I understand all three have been proposed, but Chavez objected 1), the Central Bank 2) and 3) will only take place after 1) and 2) are decided on.

While, in my opinion, the swap makes sense form a technical point of view. It would seem that if the budget was calculated at an exchange rate of Bs. 1920 per US$, the swap should only take place after the currency has been devalued. Otherwise, it would be giving a huge windfall to the Venezuelan banking system, which has no justification.