If we may call it that without insultng economists, the new “economic” team in the Chavez Government has been in place for eight weeks and we are finally seeing some important changes in policy, which if all true are in the right direction in terms of removing some of the distortions in the Venezuelan economy. While the new team has no economists or economic expertise to speak of, it appears as if the advisers are better than the ones Rodrigo Cabezas had, curiously the main adviser to the new Minister of Finance reportedly comes from that very capitalistic, oligarchic world of hedge funds.
While it may be too early to judge what they are doing, I am sure we are only seeing some of the things they want to do, it is clear we will get more news soon and the parts we have seen are parts of a larger picture. But so far there is a definite change to what they are doing and is in the right direction.
The first thing they did was to start selling structured notes into the parallel swap market. While this process is full of corruption and lacks transparency as I wrote earlier this week, it is clear that there is some method to what they are doing. Essentially, they have sold a huge amount of money into this market at a rate which is unsustainable. At US$ 150 million a week, Fonden will run out of their notes very fast and then the swap rate will jump up again, unless the whole idea behind it is simply to lower it to a certain level before a new policy is announced. (This week Fonden contributed US$ 2 billion to the China fund, further drawing down its funds). My theory is that they will simply announce the creation of a second official rate of exchange, but before they do, they want to lower the parallel swap rate to a level such that the arbitrage opportunities that have been present in the current scheme of exchange controls will go away. This huge arbitrage opportunity has been one of the biggest distortions in the system for the last two years.
This is clearly a step in the right direction as long as they play it right to insure that the swap rate does not jump up again in the future.
According to today’s El Nacional, and this is something that has been discussed before, the Government is also considering selling structured notes and bonds in the Caracas Stock Market. If true, this is a good step also. First of all, it removes corruption (which is why I am still skeptical that it will be implemented). Second, the Government will maximize the number of Bolivars it gets for each US dollar. Third, there will be a regular supply of dollars to the swap market.
Of course, there is a sort of artificiality anyway to all this, as what the Government is doing is recognizing that the official rate of exchange is not Bs. 2,150 but much higher. If the swap parallel rate stayed where it is today, it is still double the official rate and if the Government sells into it the average weighted exchange rate is much higher than the official one.
Of course, this policy will fail, if the Government continues generating monetary liquidity in the way it has for the last three years, but it is clear that the Government also wants to reign that in in various ways and that it wants to cool off the economy.
Yesterday, for example, the Venezuelan Central Bank increased regulated interest rates and their minimum as well as their caps. Credit cards will now have a cap of 32%, up from 18% and the maximum interest rate for lending and the minimum for savings have been increased. The effect of this will be to cool off the economy, contract credit demand and increase savings. This is also in the positive directions, even if the fact that it is all regulated and controlled is bad.
It is in the right direction, because it will encourage savings and reduce inflation as credit demand cools off. Part of the consumption boom, as well as the fact that people save in dollars was due to the fact that savings rates in Venezuela have been negative (less than inflation) for three years. They are still not quite up there, but when the Central Bank increases savings rates to 13%, commercial paper will come out at 20%, almost the same level of inflation. Only a year ago, people were issuing commercial paper at 7-9% and buying dollars, it was a bet that could not lose.
The problem in the end is that it is all controlled, so that if the Government does not react fast to changes, it may create other problems. It is a difficult equilibrium to maintain, particularly in an election year, the economy could cool off too much. In fact, while the Venezuelan Central Bank estimated GDP growth at 8.4% for the last quarter of 2008, apparently it was much lower, as Government spending slowed down in November and December.
Finally, in a somewhat unrelated area, the Government decided to control the country’s registrar’s and notaries. These institutions, have been out of control for decades as they had their own fee structure and compensation, making the positions very desirable as you could get very rich by running a registry of properties or a commercial registry in a city. Of course, the workers of the registries and notaries are going on strike on Monday, hopefully the Government will truly impose the reform.
It has not been usual in the last nine years for me to find something positive in the economic actions of the Chavez Government. While I still think the task facing them is daunting and very complicated, it looks like they are trying to tackle some of the problems and that in itself is good news. Let’s hope it does not stop there, although ideology will always limit their ability to reduce the distortions in the Venezuelan economy.