Archive for May, 2010

You know you have a centralized Government when the office of the President decides on science and scientific financing

May 16, 2010

(What are you searching for?)

On May 7th. the Director of Venezuela’s formerly premier scientific research Institute in Venezuela IVIC (there are none now) sent the letter below, translated liberally by me to all research personnel:

Good Afternoon, the present letter is to request from all those responsible of research projects with the Institute, your cooperation to fill out a file of project, at the request of the Presidency of the Republic, with urgent and priority character.

In this file, only those projects at IVIC which fulfill the following characteristics should be included:

Useful and or social impact projects that solve people’s problems or have the capacity to solve social problems.

The format can be found at the following link:

http://intranet.ivic.gob.ve/varios/ficha_de_proyecto.xls

which should be sent to IVIC’s Planning Office.

The deadline for handing in the information will be: Monday May 10th.

We should note that the information will be received and reviewed by the Director and later resent to the Office of the President of the republic for his consideration.

Regards

Angel Viloria

Director

Thus, “Science” in Venezuela is now reduced to the definition of President Hugo Chavez, beginning with the oxymoronic concept of “useful science” and Chavez will now bypass the peer review process and likely decide himself what should get funding.

I wonder how many Lysenkos this will yield?

Exchange controls get tighter in Venezuela, now what?

May 15, 2010

(Death to the Hoarders)

Not much has changed since I wrote the earlier post on the Government creating a third controlled exchange rate which will be managed by the Venezuelan Central Bank. The Bill was expedited through the National Assembly and in a few words the Bill, which has yet to be approved and published by Chavez, modified the earlier foreign exchange illicit Law, such that:

  • The definition of foreign currency includes dollar denominated securities, thus buying such an instrument is illegal now.
  • The Central Bank is given total control and supervision over the trading of foreign currency and securities such that someone receives foreign currency in the end. This has fines, if the amount is between 10K and 20K $10,000 and jail of 2 to 6 years if it is more than 20K.
  • The Law gives almost every relevant Government office competence in policing compliance with the law, including the Consumer Protection Agency, the Immigration Office and the Tax Office.
  • The Law appears to ban the trading of bonds held by Venezuelan companies (think banks) in foreign currency. The legal interpretation is that such sales will have to take place thru the Central Bank (I wonder if the Central Bank buys Ukrainian bonds). This is a legal interpretation, if true, the Government wants the controls to be Draconian.

The swap market is dead, as the Central Bank will apparently establish a market of dollar bonds for cash. That is, if you need Dollars you go to whomever is allowed to participate in this, put in your order and the Central Bank will decide if and how much you get of the short term BCV dollar bonds it will sell to you. If you want to sell that bond before maturity, you have to ask this agent to sell it to the Central bank also, that is, there will be no one on one transactions between those holding the bonds, the Central Bank will always be in the middle. If you have US$ and want Bs. you have to buy a bond abroad and offer it for sale to the Central Bank or sell one of those you already obtained earlier.

And I say agent, because it is unknown even who will be able to participate in this market at the BCV. Today’s papers say only Government banks will be able to, insuring the process is more cumbersome and opaque. (Yesterday recently nationalized Banco de Venezuela could not open a new account, because “we ran out of forms”)

Thus, now the Central Bank and the Ministry of Finance have to figure out how they want to set up this and how it will work. This could take days to define.

Of course, in the end, the Government led by the ignorance on economic and financial matters by Jorge Giordani, is attacking the consequences of the distortions and the structural problems, but not the origin of them. Thus, much like the much ballyhooed devaluation and dual exchange rate in January (Another bright idea of the Minister of Finance) this will simply not work. The problem with the parallel swap rate was not speculation, but lack of dollars in the market. This has not changed and will not change in the upcoming weeks or months.

One of the new distortions introduced by Giordani in January was a second exchange rate at Bs. 4.3. This introduced a new level of decision by the CADIVI bureaucracy which essentially decided to give largely at the lower rate, forcing those eligible for the Bs. 4.3 to go to the swap market, adding further pressure to the rate.

And since the dollars are limited and they will be sold at a fixed price to be decided by the bright minds at the BCV, they will be distributed inefficiently and ineffectively (just like Cadivi, this is just Cadivi 3). Thus, the book of orders will grow and grow in time until the Government creates the fourth rate or does away with this silly new scheme.

Of course, a new parallel market, illegal and black, will flourish and the sky is the limit and merchants will use it to fix prices and /or if persecuted, shortages will be truly Cuban style. Inflation or shortages, choose your potion.

Not a pretty picture…

Three Strikes: Famous quotes from the revolution’s leader

May 13, 2010

(You struck out)

Uno.- January 13th. 2010. Hugo Chavez: We are going to pull down the swap rate, the intervention is going to be sustained, permanent and strong as far down as the Central Bank wants”

Dos.- May 9th. 2010. Hugo Chavez: “You can be assured that you could burn, Nelson (referering to Merentes Presiden of the Central Bank), all of interational reserves and we would not lower the paralll rate”

Tres.- May 12th. 2010. Hugo Chavez: “We are going to hit speculators where it hurts (darles en la madre)”

With Hugo, he seems to get as many strikes as he wants, he never really gets to ever strike out, even when he is always wrong.

Venezuelan Government to issue decree apparently creating new third controlled foreign exchange rate

May 10, 2010

(I swear from this basket to always keep alive the flame of XXIst. Century Socialism)

Not content with having two controlled exchange rates, the Venezuelan Government is getting ready to issue a decree or change the laws in such a way that it apparently creates…

a third controlled exchange rate…

Way to go Hugo, call me when there are 14, that is the world record. (Alan Garcia in Peru)

But seriously, the Government will apaprently issue  a decree which says that banks and brokers will no longer be able to “intermediate” dollars (??) or dollar-denominated bonds* and those demanding dollars will have to go to a “closed-market” at the Venezuelan Central Bank, where one interprets or assumes the Government will sell foreign currency by an unknown mechanism or process which will be announced in the next few (days, weeks, months?).

Of course, since the Government wants this new rate to replace the swap rate and keep it down, it is certainly not going to be enough to satisfy everyone’s needs and you can guess what will happen…

A fourth rate, a true black rate will show up and it will be higher than the eightish rate at which the swap market closed today.

This is all guessing from an eight line decree which will be published today or tomorrow, but there are no more details.

To me the implications in this instant analysis are :

-A fourth black exchange rate

-Another mismanaged exchange rate that will not be enough and a new mechanism will be invented a couple of months later.

-Further shortages down the line as the swap rate provided an efficient mechanism to purchase foreign currency.

-Difficulties for the Government to offer bonds in local currency in the if investors have no “parallel” market to work with.

-A rise in the country’s bonds given that it shuts down the doors to any possible issuance in the near future to use as means of lowering the swap rate.

-More inflation.

These are my initials conclusions with little knowledge of what is behind the decree. Stay tuned.

*The change in the law as introduced this morning simply bans swaps with securities, thus shutting the “permuta” market.

Venezuela: Inflation, speculation and irresponsibility

May 9, 2010


Reader Island Canuck from Margarita sends this very interesting table in which he has kept tabs on prices at the Sigo store in the tax free island of a bunch of items. Clearly it is not your mother’s CPI, it has lots of luxury items, but it gives an insight into not only how much prices have moved upward, but also on availability. Curiously, 100% Oraneg Juice, the biggest gainer at 84.6%, is not available and the o% gainer Real carupano rum, is also not available.

Meanwhile, Chavez has refused to accept, as usual, any responsibility for the problems. It is all the oligarchs and the speculators. He plans to smash speculation. Yeah, sure, if he shuts down the swap market, what will happen is that the parallel rate will become black, it will go to Bs. 15 per dollars and shortages will be huge. He now thinks that even if he burns all international reserves the swap rate will not go down. True, if he freely sells all dollars in exchange for all Bolivars in the economy, the equivalent rate would be Bs.  8.5 per dollars, which is simply a result of his irresponsible transfer of international reserves to spend as he wishes, while printing more and more Bolivars without any backing in the Central Bank. It’s call economics, not speculation.

And if he tries to persecute those that trade foreign currency swaps, it will be just like persecuting the meat industry, there will be no dollars to sell, the price will go up, there will be no dollars for imports, there will be no imports. It is also called economics.

The problem in the end is that the Government and the Central Bank don’t have enough dollars to satisfy all of the needs. This article in today’s El Universal explains it very clearly: The Government has less foreign currency, reserves are going down and PDVSA is selling less foreign currency to the Venezuelan Central Bank. In some sense, by giving PDVSA autonomy in how much it gives or not to the Central Bank, the monetary authority has less ability to fight the rise in the swap market, even as oil prices go up (and PDVSA needs more). But the Central Bank also has been trying do to in a baffling manner, selling bonds that are useless in pushing the swap rate down.

The Government can issue debt to push the swap rate down, but that mechanism, like Greece issuing new debt to pay the old one, will one day stop working and all they do is lower the swap rate temporarily.

In the end, it is irresponsible policies that have taken us to where we are and there is clearly no intention by Chavez to assume any responsibility. He has no EU to help him and he will not spend less, the end will clearly be a disaster as the new inflation levels show.

Chavez needs an economsit that KNOWS economics, Merentes is a Mathematician with no background in finance, Giordani is an Urban Planner, they are both ideologues and it is ideology that has taken us to where we are today. It will not get them out of this Gordian knot in which they find themselves.

And we will sink with them.

As Venezuelan economy unravels due to XXIst. Century Socialism, Chavez criticizes European capitalism

May 8, 2010

It was simply bizarre, if not tragic, to hear President Chavez talk about the European crisis last night, saying this was part of the crisis of capitalism, just as the Venezuelan economy was showing signs of unraveling with simultaneous events of a soaring swap rate, monthly inflation rate of 5.2% (11% for food and beverages!) and increasing signs of shortages everywhere. (GDP number not out, but steel company Sivensa reported a 25% drop in Metric Tons sold of products)

But Chavez continued acting as if things in Venezuela were peachy and rosy as his so called XXIst. Century Socialism was the one unraveling the Venezuelan economy, which did not happen much earlier simply because of soaring oil prices. But in fact in terms of impact, the Greek crisis is much smaller than the Venezuelan one. It will not impact the people as much, standards of living are and will remain way higher in Greece and Europe, inflation in Europe is irrelevant and the devaluation of the Euro will in the end make those economies more competitive. (Wasn’t Chavez the one that decided in his financial wisdom to move Venezuela’s reserves to Euros?) Meanwhile Chavez’ irresponsible project accounts by now with a 1,000% devaluation in 11 years and almost a 1,000% inflation in the same period, a reflection of the ignorant and misguided policies Hugo Chavez and his incredible lack of judgement in choosing advisers.

And Chavez continued acting like it was everyone’s fault but his and the case of meat shortages proves once again how silly and misguided Chavez’ policies have been. After taking over cattle ranches which are no longer functioning and destroying half of the country’s heads of cattle, the Government began flooding the market with cheap imports at the Bs. 2.15 per dollar rate which was held constant for almost five years. Local producers obviously had a hard time competing with this, which reduced production even further. Then, so far in 2010, Government imports of meat are down 52% and shortages began to appear and price increases followed. The solution was typical Chavez: Jail some butchers for speculating and, even worse, take them to a military prison. By now, many butchers have shut their doors and meat is quite scarce and Hugo threatens to nationalize the meat industry. This will certainly guarantee that meat will go the way of coffee, cement, sugar, milk and all of the industries that have fallen into the incompetent hands of the Government.

And apparently the swap market is the next one in the Dictator’s sights. After the rate soared in the last few months, manipulators and speculators were blamed and controls were threatened. The reality is that 95% of the foreign currency sold in the swap market is sold in non-transparent fashion by the Government and this year such sales have dropped, much like the meat imports have dropped. The reason is simple, under the “new and improved” exchange controls, two rates were created and Pdvsa was force to sell a large fraction of it’s dollars at this rate to the Central Bank. Thus, Pdvsa stopped selling in the swap market and the swap rare soared. Adding to this, the “parallel” funds were depleted last year as oil prices dropped.

To add insult to injury, when two different exchange rates were created a new level of decision making was introduced: Do you approve dollars for items at the lower Bs. 2.6 rate or the higher Bs. 4.3 rate? Since the supply of foreign currency is not infinite, the foreign exchange control office has been mostly approving items that can be brought in at the lower rate, forcing manufacturers to go to the swap market to get all the raw materials and components. The result is a rate at an all time high value on the same day that inflation is reported to be at it’s highest monthly rate in at least seven years. Coincidentally, that peak was also due to the inventive and ignorant policies of Jorge Giordani, who once again shows he has no clue on economic matters. And Chavez criticizes Europe’s problems…

And while the Ministry of Finance looks for speculators inn the swap market, the Central Bank sells 90 day zero coupon bonds at such a cheap rate that it promotes….

Speculation!!!

If those bonds were offered at a rate near the swap rate or at auction, only importers would participate to satisfy their needs. Instead, the fact that you can buy dollars at Bs. 5 means that if you are assigned bonds, you can make a hefty profit of close to 60% on you Bs. Very fast, which only attracts more “investors” as the swap rate rises.

And once again the solution is to threaten more controls or even suggesting the swap market may even be shut down, a guarantee of the appearance of a black market and an even higher rate.

Meanwhile, nothing has been done about improving the supply of foreign currency to the swap market which is really the only logical solution to the problem. Perhaps the 11.1% increase in food and beverages in April (a month which had a ten day vacation) will wake up the Government into action. But somehow, I suspect it will be the wrong action…

The track record is there!

Soaring swap rate, corruption, shortages and limited primaries welcome me back to Venezuela

May 5, 2010

(Dear Father, I ask that when I resucitate, it may not happen in the Republic of Venezuela)

I went away for ten days and really managed to keep my mind as far away from Venezuela as possible, something which is becoming harder and harder to do. And I must say, it was not only fun to get away but also to ignore the growing problems of our land.

And I come back with the currency soaring and reaching all time lows and the Government, as usual, refusing to take responsibility for its total incompetence and lack of coordination. It helps little when those in the key positions of responsibility have no clue as to what they are doing, but if on top of that they disagree and bicker over policy, it simply gets worse and worse. And thus, while the Government looks for culprits, the enemy is within and the swap rate soars without control. Any fool that believes that the swap rate does not matter to the masses is either nuts, or very ignorant, or simply both.

And Venezuela continues to bleed from corruption, as another Argentinean scandal hits the press. When the buddies of the Kirchner’s and even companies related to past and present Ministers and high Government officials of Mr. and Mrs. K, receive a 15% commission for doing business with Chavez’ Government, you have to wonder how much dirtier it has to get for Chavez to do anything about it. Chavez with his typical “who me?” attitude dismisses the charges, once again turning into prosecutor, judge and jury, deciding that like Maletagate (some of the principals are coincidentally the same) nothing should be investigated. It is as usual a “plot” by the “enemies” of Venezuelan-Argentinean friendship or the like.

And history will judge these “left wing” heroes like Chavez and Lula, on the one hand claiming to care about democracy and the people and on the other allowing corruption to run rampant and naming Mr. Kirchner to preside a less than democratic institution like Unasur, a “union” that only includes those they sympathize with them and will go the way of other useless and irrelevant institutions like the OAS, because they have been either reduced or created just to promote the personal interests of a few. Chavez gives away the farm, Argentina’s oil company never paid US$ 600 million to PDVSA, corruption in inter Government deals is rampant, but Chavez the clown is allowed to appoint kings to empty fiefdoms.

Meanwhile, Chavez’ own election did not go well for him. You can bicker about abstention and whether enough people showed up or not, but you can not argue that it was successful. But the numbers are remarkable, of the 106 “loyal” Deputies of the current National Assembly that aspired to repeat, a meager 22 were able to squeak by, giving clear indication that they got there because of Chavez, have no constituency and did so little in their four year tenure that nobody wants to vote for them.

But even more interesting is that “renown” figures of the robolution like that despicable character Mario Silva or the murderous shooter from Puente El Llaguno Richard Peñalver did not get there either. Instead what is considered the “right-wing” of the revolution, led by Diosdado Cabello, scored a small victory by being more organized and preserving more loyalty from his followers that Chavez managed to do. Of course, some of the losers in these stage will be re-anointed by Chavez guaranteeing the level of loyalty that Chavez the Dictator likes to have.

And the little Dictator showed his class by insulting a reporter for the biggest of all sins: questioning the almighty leader. Cubans are good he said and in any case, he does not have to defend his position. But then he proceeded to do exactly that for half an hour. Next time, only loyal press at the press conference to insure that Chavez’ autocratic and personalistic view can be espoused without impertinent questions by brain washed reporters of the opposition and only the paid slaves of the robolution can ask questions.

And thus I am back, still tired and recovering from resting too much and partying some. The water is back for the time being but the shelves at the supermarket did not look great. To the Argentinean story I will return with more details, but I leave the primaries behind, both sides failed democracy, choosing at will and violating the spirit and the letter of the Constitution.Let’s see what happens in September.

As for the economy, not doing very well so far, soon the Central Bank will let us in on the secret of the first quarter GDP numbers , maybe that jolt will wake up Chavez, Merentes or Giordani, but I doubt it.

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