The Devil's Excrement

These economic gems were said this week by various officials:

-The Supreme Court in rejecting the illegality of the current exchange controls:

“The Government did not impose exchange controls; it simply established policies to regulate monetary policy”

Well, in that case, it must be legal

–The Head of the Exchange Control Office on the benefits of Exchange controls:

“One of the blessings of exchange controls has been the increase in monetary liquidity”

Tell that to the Central Bank that has spent billions trying to drain it.

-The Head of the Finance Committee of the National Assembly on the rumors of devaluation:

“A maxi-devaluation is not being proposed, what has been agreed on is an adjustment on the parity of the currency due to inflation”

Oh, I see, since inflation was 27% it’s a mini devaluation!

These economic gems were said this week by various officials:

-The Supreme Court in rejecting the illegality of the current exchange controls:

“The Government did not impose exchange controls; it simply established policies to regulate monetary policy”

Well, in that case, it must be legal

–The Head of the Exchange Control Office on the benefits of Exchange controls:

“One of the blessings of exchange controls has been the increase in monetary liquidity”

Tell that to the Central Bank that has spent billions trying to drain it.

-The Head of the Finance Committee of the National Assembly on the rumors of devaluation:

“A maxi-devaluation is not being proposed, what has been agreed on is an adjustment on the parity of the currency due to inflation”

Oh, I see, since inflation was 27% it’s a mini devaluation!

Chavez celebrated today the eleven year anniversary of his bloody coup attempt during which 137 Venezuelans died, including a nine year old girl. During the celebration, Chavez announced that one of the most arrogant, despicable and obnoxious Generals in the Venezuelan military will be his candidate for Governor in Carabobo state. I choose not to blog today.

A reader sends me a note, asking me how I can be against the Government giving out bolivars at the official rate to foreign companies to pay dividends. The problem to me is the distortions and perversions you create with exchange controls. Moreover, you should set priorities and in any Government, whether “revolutionary” or not, you would think that health and food would be the priority. I am against exchange controls, period. They are and have always been a source of immense corruption and have never proven effective. Right now, dozens of Government officials are getting very rich thanks to them, orders of magnitude more than in the previous which were also a disgrace. The corrections they generate when they are removed are always traumatic. You would have thought that in Venezuela people would have learned the lesson, but clearly they have not. However, imposing exchange controls is a also source of additional power to be tapped by the power hungry. Going back to my reader, just imagine the following Gedanken Economic Experiment and you will understand:

The Manager of a foreign multinational is told every year to repatriate 50% of all profits in the form of dividends. Suddenly, exchange controls are imposed. There is an official rate of Bs. 1600 and a parallel rate of Bs. 3200 per US$. 50% of your profits are one million dollars at the official rate or Bs. 1.6 billion. You have been eyeing that land next to your factory which costs Bs. 3.2 billion or US$ 2 million at the official rate, or 100% of your profits for the year. Instead of paying the usual dividend of 50%, you pay 100% of all profits at the official rate, send US$ 2 million to your home office and immediately take one million and exchange it back in the parallel market at Bs. 3200. You have your home office buy that land with this money, courtesy of the Venezuelan Government, which paid for half of it and they also get to keep the original one million dollars in profits. You then pay rent to the home office for the land, which you can deduct from profits and pay less taxes. Magic? You bet! Such is the world of exchange controls.

Opposition representatives were in Washington DC today to meet with OAS Secretary General Cesar Gaviria and US Government officials. The purpose of the trip, led by Manuel Cova, one of the leading figures of the opposition who is said to be the front runner as candidate in an election to replace Chavez after a possible recall, was to express their concern over what has happened at the Elctoral Council in the last few days. After a number of irregularities surfaced last week, Chavez revived his charges of fraud and said he would hold a nationiwde TV program to explain to the country how the fraud was perpetrated. So much for respect for the CNE.  CNE Director  Jorge Rodriguez, accepted there were irregularities in how the forms were processed and the unusual jump in forms under observation and said a few employees were removed. He did defend the CIO of the CNE, who the opposition had asked to be removed from his position. The CIO was said to be a member of Patria para Todos. Rodriguez defended him saying the charges were unfounded. The other CNE Director Ezequiel Zamora blamed the jump in froms under observation on the CIO himself. In theory, there are only ten days left for the CNE to announce if it accepts or not the opposition signatures requesting a recall referendum vote for Hugo Chavez.

Article about the Castro Chavez relationhsip in today’s Wall Street Journal (by subscription). Among the highlights:

“Over the past three years, Cuba has run up a massive debt of $752 million for oil shipped by Venezuela‘s state oil company, according to people close to the company and internal documents reviewed by The Wall Street Journal.

Though Venezuelan officials deny that Cuba is falling behind, people familiar with the matter say the debt is piling up and that the government has made little effort to collect. This makes the shipments a crucial subsidy that is helping keep the island nation’s economy afloat as it struggles with the impact of endemic mismanagement, declining sugar sales and longstanding U.S. sanctions.

While the subsidy doesn’t approach what the Soviets were doling out to Cuba at the height of the Cold War, it underlines the growing strategic alliance between Venezuela‘s Mr. Chávez, a populist former coup plotter elected in 1998, and Cuba‘s Mr. Castro. At a time of rising anti-American and anti-free-trade sentiments, U.S. officials fear that the combination of Venezuela‘s oil billions and Mr. Castro’s well-honed political skills could cause trouble for the U.S. throughout a restless Latin America.

The debt represents about 80% of the roughly $931 million owed PDVSA by its clients, say the people close to the company. In 2002, PDVSA had revenue of $42.58 billion and net income of $2.59 billion, according to its latest filing with the U.S. Securities and Exchange Commission. The company is still struggling to bring oil production back to prestrike levels of 3.1 million barrels a day, according to independent oil analysts.

Prospects for repayment appear slim. Although Cuba has managed to double its own production since 1991, so far it has only found sulfur-laden heavy oil, which is less valuable. The country is pinning hopes of finding more oil on newly announced projects by foreign companies to explore in deeper waters.”

President Chavez loves to use the term “oligarch” when referring to the opposition. It is unclear who falls within that group. In fact, it seems as if Chavez is not using the term properly, as oligarchs only refers to the few that control Government or an organization. In some wide sense, one may talk arbitrarily about three types of oligarchs, the ones from the Government, the ones from the private sector who are Venezuelans and the foreign oligarchs. If one inspects the Venezuelan private sector, it is surprising to find that few of the really large sectors belong to the local oligarchs. The Polar beer group is one exception and media groups such as the Cisneros is a second one. But today few major industrial group remains in the hands of locals. Locals are not important players in telecommunications, power generation or electric services, oil, auto, mineral, pharmaceutical and steel. Surprisingly, the most important group largely controlled by locals is the one defended the most by President Chavez: agriculture and cattle, a sector that has received for years subsidies via cheap loans, gimmicks and preferential rates. Construction and commerce are also largely in the hands of Venezuelans. And then there is banking. While Venezuela’s banking system had been mostly in the hands of Venezuelans, this did not survive the 1994 banking crisis, when a huge percentage of the banking system was taken over by the Government, due in part to terrible supervision and mishandling of the crisis, which I will not go into at this time. Many of these banks were later privatized and sold to foreign investors and in the process of consolidation they in turn bought smaller banks as a way of supposedly gaining the economies of scale. Today, a large part of the private Venezuelan banking system is in the hands of foreigners.

One of the most curious aspects of this “revolutionary” Government is how it has allowed the banks to make huge profits, while most of the economy (and the country) languishes. Of course, from an economic point of view, it is a symbiotic relationship, the Government needs the banks to buy Government bonds and the banks need the Government in order to invest the excess cash they have from their deposits. Indeed, with economic activity in decline, high inflation and high interest rates, it is difficult to borrow at 30% lending rates. Thus intermediation by banks is marginally at best. Meanwhile, banks pay 12-13% on deposits, making spreads huge. Exchange controls have a lot to do with this, if people were free to purchase foreign currency, banks could not get away with paying such low rates (some corporates get paid only 3-4%). Thus, with the “revolution” banks have been making huge profits, not for doing their usual job of intermediation, but by making money off the large spread between Government bonds and the savings rates they pay their depositors. To this, you may add commission fees on everything from minimum balances, to Internet service, to checkbooks, to copies of your monthly statement. Bankers argue that they really are not making such huge amounts of money, since their capital base has been eroded by constant devaluations. In fact, many bankers argue that the profits they have made in the last four years do not even compensate for the loss of their capital.  Of course this is true, but most economic groups have lost their capital base with no other compensation whatsoever.

But what really caught my attention was to learn how the Chavez administration through its exchange control office CADIVI has been giving preferential dollars for these banks to repatriate dividends to their home offices. Thus, foreign banks make money twice, once because of the large spreads and easy money and the second time when they are given dollars at the official exchange rate of Bs. 1600 per US$.

Thus, I decided to look at the CADIVI Web page to see what I could learn about these dividend payments. First, I must say (Warning: Miguel is about to say something good about the Government!!!) that I think it is great that CADIVI places so much information in its web page, this is what being transparent is all about. It is a pity that it is not presented in a form adequate for full analysis (For example, you can find a list of all foreign currency approved, but you get the name of the bank, not of the beneficiary). But what I saw in this web page absolutely and completely shocked me. In a country with food and pharmaceutical shortages, the government is giving out huge amounts of foreign currency for both dividend and private debt payments. Mind you, I think that the Government should do all of them, but after all of the problems consumers have due to how slow CADIVI is approving foreign currency, which I thought were due to priorities and limits in how much is given out per day, I find the amounts very surprising. In the Table below, taken from CADIVI, in the bottom right hand corner its says CADIVI has given out US$ 519 million for “Inversion Extranjera” which is simply dividends to parent companies of registered investments. Now, there is no law guaranteeing these, or placing a limit on the time frame for this payment, so I was very surprised the foreign “oligarchs” are being treated so nicely more so, if you consider that most of these dividends are for banks and I have heard that one bank, not in the top four, received $52 million to send to its main shareholder.. (As far as I know only one company in the Caracas Stock Exchange has been given foreign currency for dividends, which were given to CANTV the Venezuelan telephone company. Think about this, if you are a Venezuelan investor in Venezuela you get dividends in local currency and have no access to foreign currency. But if you are a foreign investor, you receive dividends in US dollars at the official rate, so much for equality under the law…Oh well).

Now, if this was astounding to me, imagine when I saw the amount of how much has been given to pay private external debt, versus how much has been given to imports. Imports have received US$ 3.7 billion while private external debt has received US$ 1.63 billion, a full 43% of what has been given to imports, including food and pharmaceuticals.  Understand that in the much derided IVth. Republic no recognition was ever given to private external debt when there were exchange controls, simply because it can be so easily fudged or made up.

This raises three additional questions. First, is the Government simply pleasing foreign investors because in this manner they will simply be silenced? Imagine you are an expat in Venezuela for a foreign company, your yearly bonus depends on how much your company makes and repatriates, all of a sudden your estimate based on the profits at the parallel rate double magically. Will you criticize the Government of your host country? Will you even get involved if you saw injustices? You tell me. Second, does the money simply flow easily at CADIVI? I have some stock in a small private pharmaceutical company. When the exchange controls were imposed the company had foreign debt of US$ 220,000. The company has requested foreign currency at the official rate, but has received nothing. But the company has definitely received offers to “ease” the way within CADIVI for a small payment, say Bs. 170 per US$.  Third, private individuals have had little access to foreign currency. This week, CADIVI announced that it will allow up to US$ 2000 per person at the official rate starting on March 1^st. However, in order to have access to this you need to have a credit card. Credit Card penetration in Venezuela is very low; something like 3-4% of the population has a credit card. Thus, once again, only a few, will be able to receive official dollars for travel. By now, we have so many oligarchic groups receiving foreign currency that if they created a union there would be so many of them that they will not qualify as oligarchs. And there are other examples, such as the fact that airlines have received US$ 200 million. Oh! I am not saying airlines are oligarchs, but definitely those in Venezuela that can travel abroad are definitely part of a selected group, you might even say a few. The truth is that traveling abroad is a very cheap option today, you get the airline ticket at Bs. 1600 per US$. Same with buying a car, the same table shows that the auto industry has received US$ 474 million allowing the few that can afford a car to buy them practically at the same price you would purchase them in US$ at the parallel exchange rate.

I could go on and on. The point is that this “revolutionary” Government is buying silence, corrupting its officials, corrupting the private sector and privileging a select few through the exchange control system. And many in the private sector are shutting up, enjoy the moment and forgetting about the future. Somehow this is not what I think about when I think of a revolution. In fact, these privileges and perversities sound closer to a savage capitalistic system than anything else I can think of. But then again, as I like to say, what do I know…

President Chavez loves to use the term “oligarch” when referring to the opposition. It is unclear who falls within that group. In fact, it seems as if Chavez is not using the term properly, as oligarchs only refers to the few that control Government or an organization. In some wide sense, one may talk arbitrarily about three types of oligarchs, the ones from the Government, the ones from the private sector who are Venezuelans and the foreign oligarchs. If one inspects the Venezuelan private sector, it is surprising to find that few of the really large sectors belong to the local oligarchs. The Polar beer group is one exception and media groups such as the Cisneros is a second one. But today few major industrial group remains in the hands of locals. Locals are not important players in telecommunications, power generation or electric services, oil, auto, mineral, pharmaceutical and steel. Surprisingly, the most important group largely controlled by locals is the one defended the most by President Chavez: agriculture and cattle, a sector that has received for years subsidies via cheap loans, gimmicks and preferential rates. Construction and commerce are also largely in the hands of Venezuelans. And then there is banking. While Venezuela’s banking system had been mostly in the hands of Venezuelans, this did not survive the 1994 banking crisis, when a huge percentage of the banking system was taken over by the Government, due in part to terrible supervision and mishandling of the crisis, which I will not go into at this time. Many of these banks were later privatized and sold to foreign investors and in the process of consolidation they in turn bought smaller banks as a way of supposedly gaining the economies of scale. Today, a large part of the private Venezuelan banking system is in the hands of foreigners.

One of the most curious aspects of this “revolutionary” Government is how it has allowed the banks to make huge profits, while most of the economy (and the country) languishes. Of course, from an economic point of view, it is a symbiotic relationship, the Government needs the banks to buy Government bonds and the banks need the Government in order to invest the excess cash they have from their deposits. Indeed, with economic activity in decline, high inflation and high interest rates, it is difficult to borrow at 30% lending rates. Thus intermediation by banks is marginally at best. Meanwhile, banks pay 12-13% on deposits, making spreads huge. Exchange controls have a lot to do with this, if people were free to purchase foreign currency, banks could not get away with paying such low rates (some corporates get paid only 3-4%). Thus, with the “revolution” banks have been making huge profits, not for doing their usual job of intermediation, but by making money off the large spread between Government bonds and the savings rates they pay their depositors. To this, you may add commission fees on everything from minimum balances, to Internet service, to checkbooks, to copies of your monthly statement. Bankers argue that they really are not making such huge amounts of money, since their capital base has been eroded by constant devaluations. In fact, many bankers argue that the profits they have made in the last four years do not even compensate for the loss of their capital.  Of course this is true, but most economic groups have lost their capital base with no other compensation whatsoever.

But what really caught my attention was to learn how the Chavez administration through its exchange control office CADIVI has been giving preferential dollars for these banks to repatriate dividends to their home offices. Thus, foreign banks make money twice, once because of the large spreads and easy money and the second time when they are given dollars at the official exchange rate of Bs. 1600 per US$.

Thus, I decided to look at the CADIVI Web page to see what I could learn about these dividend payments. First, I must say (Warning: Miguel is about to say something good about the Government!!!) that I think it is great that CADIVI places so much information in its web page, this is what being transparent is all about. It is a pity that it is not presented in a form adequate for full analysis (For example, you can find a list of all foreign currency approved, but you get the name of the bank, not of the beneficiary). But what I saw in this web page absolutely and completely shocked me. In a country with food and pharmaceutical shortages, the government is giving out huge amounts of foreign currency for both dividend and private debt payments. Mind you, I think that the Government should do all of them, but after all of the problems consumers have due to how slow CADIVI is approving foreign currency, which I thought were due to priorities and limits in how much is given out per day, I find the amounts very surprising. In the Table below, taken from CADIVI, in the bottom right hand corner its says CADIVI has given out US$ 519 million for “Inversion Extranjera” which is simply dividends to parent companies of registered investments. Now, there is no law guaranteeing these, or placing a limit on the time frame for this payment, so I was very surprised the foreign “oligarchs” are being treated so nicely more so, if you consider that most of these dividends are for banks and I have heard that one bank, not in the top four, received $52 million to send to its main shareholder.. (As far as I know only one company in the Caracas Stock Exchange has been given foreign currency for dividends, which were given to CANTV the Venezuelan telephone company. Think about this, if you are a Venezuelan investor in Venezuela you get dividends in local currency and have no access to foreign currency. But if you are a foreign investor, you receive dividends in US dollars at the official rate, so much for equality under the law…Oh well).

Now, if this was astounding to me, imagine when I saw the amount of how much has been given to pay private external debt, versus how much has been given to imports. Imports have received US$ 3.7 billion while private external debt has received US$ 1.63 billion, a full 43% of what has been given to imports, including food and pharmaceuticals.  Understand that in the much derided IVth. Republic no recognition was ever given to private external debt when there were exchange controls, simply because it can be so easily fudged or made up.

This raises three additional questions. First, is the Government simply pleasing foreign investors because in this manner they will simply be silenced? Imagine you are an expat in Venezuela for a foreign company, your yearly bonus depends on how much your company makes and repatriates, all of a sudden your estimate based on the profits at the parallel rate double magically. Will you criticize the Government of your host country? Will you even get involved if you saw injustices? You tell me. Second, does the money simply flow easily at CADIVI? I have some stock in a small private pharmaceutical company. When the exchange controls were imposed the company had foreign debt of US$ 220,000. The company has requested foreign currency at the official rate, but has received nothing. But the company has definitely received offers to “ease” the way within CADIVI for a small payment, say Bs. 170 per US$.  Third, private individuals have had little access to foreign currency. This week, CADIVI announced that it will allow up to US$ 2000 per person at the official rate starting on March 1^st. However, in order to have access to this you need to have a credit card. Credit Card penetration in Venezuela is very low; something like 3-4% of the population has a credit card. Thus, once again, only a few, will be able to receive official dollars for travel. By now, we have so many oligarchic groups receiving foreign currency that if they created a union there would be so many of them that they will not qualify as oligarchs. And there are other examples, such as the fact that airlines have received US$ 200 million. Oh! I am not saying airlines are oligarchs, but definitely those in Venezuela that can travel abroad are definitely part of a selected group, you might even say a few. The truth is that traveling abroad is a very cheap option today, you get the airline ticket at Bs. 1600 per US$. Same with buying a car, the same table shows that the auto industry has received US$ 474 million allowing the few that can afford a car to buy them practically at the same price you would purchase them in US$ at the parallel exchange rate.

I could go on and on. The point is that this “revolutionary” Government is buying silence, corrupting its officials, corrupting the private sector and privileging a select few through the exchange control system. And many in the private sector are shutting up, enjoy the moment and forgetting about the future. Somehow this is not what I think about when I think of a revolution. In fact, these privileges and perversities sound closer to a savage capitalistic system than anything else I can think of. But then again, as I like to say, what do I know…

Today’s big news was the accusation by leaders of Movimiento al Socialism (MAS) that the Consejo Nacional electoral had disqualified 20% of the signatures gathered by the opposition to ask for Hugo Chavez’ recall. While El Nacional (by subscription) decided to make a big deal about it, it was simply old news and incorrect, but it provided clear proof that there was something very sneaky going on at the CNE at the verification levels, which merited last week’s conflict between international observers and Government authorities.

The truth was that not a single signature has been disqualified yet from the petition. In the first stage of the verification process, those forms (there are ten signatures per form) that have irregularities are set aside to be inspected by the quality control group as well as the technical committee. These two instances will decide whether the forms will be included in the verification of the signatures or not. The big scandal the week that the OAS and Carter met with CNE authorities was precisely over the fact that all of a sudden the number of questionable forms jumped from single digit levels to as high as 60%.

The table below clearly demonstrates that there was bad faith in the process. The verification of the forms was done alphabetically state by state. This table taken from page 2 of Tal Cual shows how after checking thirteen states the percentage of forms set aside for irregularities never exceeded 10%. Given that the opposition handed in close to 30% more signatures than it needed to activate the recall vote, this meant that the process was moving smoothly towards a recall. But then all of a sudden and in a manner which can not be justified by statistics, the same criteria began yielding rejection levels as high as 65%!. This was what raised all the issues that lead to allowing international observers to participate in all stages of the verification process. Just the week before the CNE had decided that they would not participate precisely in the stages where the validity of these forms would have been decided. Thus, as the Tal Cual headline clearly said it today, no signatures have been disqualified. That is certainly the good news. The bad news is that there is clearly a pattern of cheating and bad faith present which is aimed at blocking the possibility of a Presidential recall. Fortunately for the opposition, the people carrying this out are so stupid, that their blatant attempt at hijacking the will of the people has been clearly exposed. Unfortunately, not one of those CNE workers has been fired yet, while the CNE union continues to charge that more people are being fired in order to hire more pro-Chavez workers. Moreover, since the President of the CNE continues to defend the fact that he knows what is going on at all levels within his organization, he is either being taken for a ride or not as honorable as he claims to be.

Note added on Saturday January 31st.: The Table above does not include Zulia State which was completed yesterday. In that State 61.15% of the forms were put under observation bringing the total to 93,975 or roughly 939,750 signatures. The regulations say that only signatures can be invalidated, but this is definitely a source of concern.