Archive for March 8th, 2007

Nutty, weird, shocking, and not so shocking items in the press #2: Rodrigo Cabezas

March 8, 2007

My second post is about Rodrigo Cabezas. When he was named Minister of Finance I certainly was in agreement that he was a much better choice than Mathematician Nelson Merentes, at least Cabezas is an economist, even if he invented the strange concept of excess  international reserves which will come one day to haunt the Government and I certainly hope Cabezas is the Minister when it happens.

But the more I hear Cabezas speak, the more I get concerned about the future direction of the Venezuelan economy under his helm. About the only think I like of what he has done is stop that vicious circle of corruption involving the discretionary sale of Argentinean bonds and structured notes to local banks, as a way of intervening the parallel market.

Unfortunately he has done little else. For the first month in office he did essentially nothing. For the second, very little. Then they issued the Bono del Sur 2, which he hailed as a smashing success, for which Quico gave him the Chutzpa of the young year award. (Still time to beat this!)

And now comes monetary reform also known as monetary reconversion, under which the new currency will be known as the “Bolivar Fuerte” or the strong Bolivar.
 
Unfortunately, other than taking three digits off the currency, almost nothing has been done in terms of trying to help the Bolivar be strong. This has generated lots of criticism and today Cabezas blasted the critics. Let’s see what he had as ammunition:

“Those that predict a devaluation are lying. The new monetary exchange will generate equilibrium when it is established at Bs. 2.15 (per US$), thus there would be no devaluation because there will not be a need for it. We will not give in to the pressure of economic groups that cartelize the foreign exchange market”

Wow! Where do I begin. If taking three digits off the currency “generates equilibrium”, why not take four, five or six? The more digits you take off, the more equilibrium it should generate. Or not? Am I missing something in his explanation?

As to the strength, the equilibrium and devaluation. If the currency is so strong, why did he sell his smashing success bonds at an implicit rate of Bs. 2800, a full 30.2% higher than the “official”, “equilibrium” rate. And why are these cretin, cartelized, economic groups willing to buy dollars at Bs. 4,000 to the dollar in the parallel market, a full 86% above the official exchange rate? Do they really expect to make money if Cabezas devalue let’s say to bs. 2,800 to mimic the Chutzpah bond?

By the way, did you notice the paralell rate did nothing when the bonds were sold? Shouldn’t this be telling them something? Apparently not.

As for the “need” for a devaluation, has Cabezas added up the Government’s income this year and compared it to the budget? Let’s see, last year there was a fiscal deficit of about US$ 1 billion in a budget of US$ 53 billion. The new budget started at US$ 60 billion. They need US$ 7 billion. Oil is about 10% lower so far in 2007. They need another US$ 3 billion, we are up to US$ 10 billion. Uups, they cut the Value Added Tax, for some US$ 6.5 billion more, we are down US$ 16.5 billion. We need to adjust salaries by at least inflation add another US$ 4-5 billion, for a grand total of some US$ 20 billion plus or minus 2 billion. Scary, no? And this does not take into account the income tax reduction decreed by the Supreme Court if it gets applied this year.

Let’s move on.

The Minister explained that there are two modes that force a devaluation: Capital Flight or a lack of foreign currency. “None of that is happening, thus it is a stupidity to say there will be a devaluation”

Well, I left the word stupidity in bold, so that when the devaluation occurs I will be able to remind you who is the stupid person here.

Somehow Cabezas forgot a third mode: Spending too much. Last year imports were US$ 31 billion, this year shoudl go higher at the current pace. It is not whether your income is sufficient, it is a matter of the balance between income and spending.

—“We have to get used to living without inflation”

We would love to!

—“Those that say this is a cosmetic change in the streets are wrong…there is a systematic policy for reducing inflation: An increase in production, a flow of imports, controlled liquidity and a macro policy to lower inflation to a single digit”

Here he sounds like he was in Sweden. Inflation in two months is already close to 4%, 12 month inflation is at 20% and has been moving higher.

As for systematic, the term implies a system, many steps, many measures. As far as I know, of all the steps taken, only one really helps in curtailing inflation, that of having PDVSA hand over the foreign currency to the Treasury. Unfortunately, like the VAT cut, the effect will only be temporary as when “equilibrium” is reached, to use the Minister’s words, it ceases to have an effect. And the the 1.5 billion removed in liquidity by the Bono del Sur, is equal to the increase in liquidity in the last six weeks. So the systematics appear to be an empty set, in new math terminology.

As for the rest of the sentence, some parts are missing: Production has been decreasing in the face of cheaper imports and liquidity has been out of control…

See why I am worried?

Nutty, weird, shocking, and not so shocking items in the press #1: The Supreme Court on income taxes

March 8, 2007

Every day, I read local newspapers with eagerness. Reading the paper has become an adventure into the unknown, I no longer read it to see what’s new, but is more like reading it to find out what is nutty, dumb, stupid or shocking, even if by now very little seems to be shocking Venezuelans accustomed to a daily barrage of ever increasing crazy, strange or weird ideas and announcements.

There have been many of these items in the last week, I lose track of them, let alone blog about them. But the intensity is increasing so much that I can remember many of the interesting items I found in the last two days. I wil write a few posts about them:

Supreme Court rules that only regular income is taxable: This is truly a weird one and may have far reaching consequences.

Someone asked the Supreme Court to issue an injunction on a tax case. The Court rejected the injunction, but since it was looking at the case, decided to take a look at the concept of “net taxable income”, perhaps concerned that Chavez cut their salary by implementing a salary cap. Thus, the Justices suddenly remembered Article 317 of the Venezuelan Constitution which says:

Artículo 316. El sistema tributario procurará la justa
distribución de las cargas públicas según la capacidad económica del o la
contribuyente, atendiendo al principio de progresividad, así como la protección de la
economía nacional y la elevación del nivel de vida de la población, y se sustentará
para ello en un sistema eficiente para la recaudación de los tributos.

which loosely translates as:

Article 316. The tax system will try to justly distribute the weight of public charges according to the economic capability of the taxpayer, addressing it using th principle of progressivity, as well as the protection of the national economy and the increase in the standard of living of the population and will sustain it on an efficient system for the collection of taxes”

Basically, the Court is ruling that because of this mandate of the Constitution, then only regular income can be taxed when you work for someone and any “irregular payment”, to use the words of the Court, will, not be taxable. Thus, most lawyers interpret bonuses, profit sharing and anything given to the worker in an irregular fashion is no longer taxable.

And here it gets even weirder. You see, Venezuelan law does not allow for any new law to be applied retroactively, but the Constitution is not new, it has been around for seven years, thus it should apply retroactively. But the Superintendent of Taxes is asking for a clarification from the Court, saying he believes it should only apply starting with the 2008 taxes, since the ruling began last week.

While I understand the problem Superintendent Vielma Mora finds himself in, there is no precedent for his novel interpretation. In fact, in the case of the CANTV pensioned workers, the company was forced to pay back at least minimum salary all the way back to the new 2000 Constitution, as it should be since it was a new interpretation.

But the Court has opened a true Pandora’s Box with the ruling. To begin with, clearly income tax collection will suffer, the last thing the Government needed at this time of lower oil prices, higher expenditures and a 5% in the Value added tax. But it would become much, much worse, if on top of that it is retroactive, because it would mean that the Government would owe all employees that do pay income taxes, any money paid on these “irregular” payments. While I do not relish calculating my income taxes all the way back five years, I would do it if it implies, like I think it does, that I will not pay taxes for the next two.

But the biggest and more serious long term problem is how the ruling could be used to help workers take home a bigger pay than they do today. Basically, you could divert any new salary increases into “irregular payments”, making sure they are truly irregular, like, for example, using a random number generator to decide on what month or day of the month you will pay it.

In any case, I am not a lawyer, but this is really tricky for the Government and I can not help but wonder how come the Justices focused so much on the “justice” part of the tax system, but they seemed to have ignored the part about the “protection of the national economy” in the article.

In the end, that is precisely what is at stake. Stay tuned…

How times change! Chavez then and now.

March 8, 2007

This is today’s headline from Caracas’ newspaper 2001: 620 soldies will guard Chavez in Argentina

Not to mention the three special military planes used to fly them there or the 2,000 buses rented by PDVSA to move people to the stadium where Chavez’ speech will take place or the $12 person that is being offered to each person to go.

Quite a change for the humble man elected in 1999 who started a campaign against the luxury trappings of power and said things like:

“I don’t want the imperial paraphernalia of power” or

“I will eliminate bodyguards and credit cards without limit”

“It is enough with a small apartment for me, my wife and my daughter and a man outside in case someone thinks of throwing a stone”

“he gets stressed by the President traveling in a caravan of luxury cars, while bare feet kids populate Caracas”

He also criticized the pomp and ceremony of the Venezuelan presidency, superior to even that of the Spanish royalty.

Well, eight years later, the pomp, the expenses and guards have only increased. Chavez travels in his brand new US$ 80 million Airbus, mobilizes 600 soldiers to his paranoia, the PDVSA jets are back and the credit cards and “special travle” dollars are the rule of the day for Government officials.

And the misery and the kids are still in the streets, even more than before.

That is the revolution.

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