The New Foreign Exchange Agreement Between The Central Bank And The Venezuela Government

July 21, 2012

There has been a lot of noise since yesterday because of the new Foreign Exchange Agreement (Convenio Cambiario #20) between the Central Bank and the Venezuelan Government, with most of the focus placed on the fact that bank accounts may now be opened in foreign currency in Venezuela. However, it is a limited form of bank accounts that can really be opened, as I will explain below. But first let’s review the current foreign exchange system before the new decree came out:

There are two ways of accessing foreign currency today in Venezuela. First, via Cadivi, which gives you dollars for imports, travel and certain medical treatments and studies. These dollars are sold to you at Bs. 4.3. You pay in Bs. and Cadivi pays the provider or if it is money for travel, you use your credit card in foreign currency and pay your bank in Bolivars. Similarly, banks are allowed to give you some cash for travel, which you pay in Bolivars. There may be dollars for other things, but they are not critical for the discussion.

The second way to get dollars is via SITME, the Central Bank’s foreign exchange system, in which you buy bonds, sell them abroad and you receive foreign currency. Companies can buy up to US$ 50,000 per day at the rate of Bs. 5.3 per US$ , but no more than US$ 350,000 per month if they satisfy certain requirements. Similarly, individuals may obtain up to US$ 5,000 per year for travel, $10,000 for health problems and $6,000 to send to relatives via SITME at the rate of Bs. 5.3 per US$. The only common criteria in both cases, is that you have a US$ account abroad in your name to receive the funds.

Thus, what the new Foreign Exchange Agreement does first, is to allow local banks to open accounts in foreign currency  for both companies and individuals in order to receive US$ that originate in SITME. This is done, because only those that had accounts abroad could receive dollars from SITME, no more, no less. It does not mean, like some people suggest that “Venezuelans will be able to save in US$ locally” from now on. People will buy dollars via SITME and more likely than not, will immediately send the money elsewhere or spend it. Nobody in their right mind is going to add to these accounts any new funds for reasons that are too obvious to mention. But let’s suggest just two: The Government could order their forced conversion to local currency (The banks will actually have the dollars at the Central Bank) at any time and the Government will know how much you have. That should be sufficient to scare away anybody.

The second thing the Foreign Exchange Agreement does, is to allow foreign companies doing infrastructure, “public investment” or development projects to have local bank accounts in dollars, which they will be able to mobilize via partial or total withdrawals in local currency at the official rate of exchange (Bs. 4.3 per US$).

Finally, and this is likely to be the most relevant thing, the Foreign Exchange Agreement allows “State companies” which obtain foreign currency from their exports to devote up to 5% of the average monthly balance of their foreign currency accounts, to acquire bonds in the secondary market to be sold in the SITME Foreign Exchange System.

Read: State companies will now be able to sell 5% of what they have in their dollar accounts at Bs. 5.3 per US$, rather than at the Bs 4.3 per US$ that they were forced to sell their foreign currency to the Central Bank before.

What this is, is a small partial devaluation of the currency which will give PDVSA and in lesser grade, other state companies, more Bolivars for the foreign currency obtained from their exports.

This also means that the offer in SITME will increase by 30-35%, as these bonds bought by the State enterprises flow to the SITME, rather than directly to the Venezuelan Central Bank. So far this year, the average daily volume via SITME has been around US$ 43-45 million, so we could see around US$ 56-60 million per day once this gets going.

One interesting consequence of this, is that PDVSA will have more local currency and less pressure to sell new bonds in the international markets. Another minor one, is that these companies will buy bonds in the open market, which can take up to a month to come back to the international markets, which means there will be a small impact on supply, which will be reduced.

Thus, the agreement aims to extend the people that can get SITME dollars. make it more practical for some foreign companies to operate in Venezuela and allow Government owned companies to get more Bolivars for their dollars which originate in exports.

That’s it, boys and girls, nothing to get too excited about. It’s actually quite boring and of secondary importance when you come down to it.

29 Responses to “The New Foreign Exchange Agreement Between The Central Bank And The Venezuela Government”

  1. Roberto Says:

    Question: this new “convenio” might lead to a decrease in the paralel FX rate?

  2. Narco Says:

    I dont think so, the increased supply is minor with the people’s needs and the lack of supply

  3. Javier Says:

    Of the things I read yesterday one is kind of contradictory. Your bank will have your foreign currency funds and using Dollars for simplicity, deposited in the Venezuelan Central Bank ( BCV ). I also read that one of the ways to move your funds is for your bank to issue checks against their correspondent’s accounts. So, how can a bank issue you a check from your deposits against their correspondent banks when the banks are obligated to have those Dollars are in the BCV ? Technically, at the moment of issuance aren’t the local banks issuing checks with out funds?

    • moctavio Says:

      That is not a problem, banks have Treasuries that manage such things, you pay from your correspondent account and later the BCV pays you


  4. Will individual accounts intermarry with corporate accounts?
    Will funds slosh indistinctly between personal and corporate cuentas fantasmas legally, and out of reach of provenance?
    just askin’

    • moctavio Says:

      Doris: I have considered that these could be used to hide money and the like. The problem is that of all scams and schemes, SITME is the least significant one. If they had allowed these accounts to receive money from other sources, then I would think there was a shady side to the whole thing.

  5. Tom ODonnel Says:

    I am always impressed by the clarity of your untangling of Venezuelan economic and financial matters. Thanks very much.

    In reading this I am reminded of how much time one wastes in Venezuela just getting Bolivars for Dollars during even a short visit. What a waste of time. I can’t imagine trying to engage in any significant, regular cross-border business.

    On the other hand, I also can see how much the need for the business class to engage in such machinations–under both the Bolivarian as well as the IVth Republics–has kept it preoccupied with currency manipulations (not to mention preoccupied with developing insider contacts with this or that ministry) and how this waste of time and ingenuity has retarded its modernization into modern, competitive, and independent capitalist class.

    Thanks again.

  6. syd Says:

    Congratulations, Miguel. Of the Forex-based explanations I’ve read to gain an understanding of the bigger picture, in Vzla, yours is the clearest. Many thanks.


  7. I’m mal-pensada,
    I bet this rollo got to do
    with the MierdaSur
    that Vzla got sucked into.
    cheers
    Yeah.. I know ,
    I got off the wrong side of my bed this morning.

  8. albionboy Says:

    For Chavez its a win win situation, many ordinary Venezuelans (read Ni Ni)
    will think Chavez is becoming more liberal (2 steps forwards 1 Back) ahead of elections and money that might have been deposited abroad will stay in reach of Chavez if Oil prices drop perniciously.

    This is a financial version of Mission Housing, first fantasy homes, now fantasy $ accounts. Lets see how many line-up for this one

  9. Bruni Says:

    Miguel, what is the chance that if Capriles win, the exchange control will be eliminated?

    I don’t know why people cannot have the dollars they want, if they earned it and they pay market price. Period. All this bonds and sitme and controls is so complicated.

    A few years ago, we had the canadian dollar at 0.75 the US dollar, we payed for that. Now it is almost equal, we pay for that and the economy arranges itself.

    Why Venezuela cannot have a normal economy?

    • Kepler Says:

      Well, there are other countries that also play with controls but for the long term: China, for instance. It has kept the yuan undervalued so that it can export more. This requires discipline and it is not without dangers: other countries can only keep a negative trade flow for so long. But it has helped the Chinese so far.
      So: Venezuelans are doing exactly the opposite to what the Chinese are doing. And Venezuelans, if you ask them, think they have a rich country…and the Chinese think – which it’s true – theirs is a poor developing country. Anyone’s guess who will be first a developed nation?

      Miguel,
      Correct me if I am wrong. According to IMF figures – based on what states provide – China’s GDP on PPP basis is a little bit over 8000 dollars and Venezuela’s is a bit over 12000. In reality Venezuela’s is probably what China has or below, right? (if it were not for this farce of an exchange rate)

    • Andres F Says:

      Bruni, because Venezuelans are not normal

  10. moctavio Says:

    Governments like control, exchange controls is always a simple quick, short term fix. If oil had not gone up, the whole thing would have blown up in Chavez’ face, but oil prices have helped him. They did not help Caldera. Venezuela has seldom had economists running the economy, very few Finance Ministers have been economists, thus these solutions become politically attractive.

    The whole SITME thing is ridiculous, why cant the Government simply sell dollars, period? No, they like to go through the mockery of making believe this is something different. Swaps existed because they were the only way it was legal, the Government could have said only the Central Bank can sell dollars at Bs. 5.3, but they keep the complicated and artificial system. I own a small piece of a company that imports raw materials, 70-80% of the time of the managers is spent on Cadivi and imports matters, it is simply unproductive.

  11. VJ Says:

    I think that “Convenio Cambiario # 20″ is the first step toward the transfer of Cadivi allowances for travellers, medical expenses, academic studies, etc. to the Sitme scheme.
    My bet is that if Chavez wins the 7-O elections, such transfer will occur around the end of year 2012.

  12. Kepler Says:

    Devaluation has to come before February, probably when most opposition leaders go to Miami or Madrid (sorry, had to say it, it has always been like that, hasn’t it?)

  13. moctavio Says:

    The devaluation is coming no matter who wins, they will be different, but they will come. If Capriles wins, which I believe is possible, nothing will be announced until after Capriles takes over in early January. If Chavez wins, the devaluation will be announced by Giordani on December 26th. when absolutely everybody is on vacation and not reading newspapers.

  14. Firepigette Says:

    Everybody is on vacation and not reading newspapers? Hmmmm.Honestly that makes me think few people are taking things seriously.


  15. Should elections point to an irreversible change of guard,
    then the current admin may be tempted to create chaos by
    freeing the currency markets. I know, it’s too farfetched.
    cheers

  16. island canuck Says:

    OT (again):

    It just has been announced that the ferry express “Concepción Mariño” has lost it’s motors 8 nautical miles from PLC on it’s way to Margarita Island with 80 passengers aboard & needs a tow.
    http://htl.li/crCD0

    This was a totally predictable event. I had guests arrive last week that left PLC on this ferry which is supposed to make the trip in 2½ hours but took more than 4 to arrive because of motor problems.

    According to the Conferry website there are only 2 trips a day from PLC to Margarita – 7 AM & 4 PM. In previous years in national vacation times there would be 8 to 10 trips per day each way – now just 2.

    If they don’t have the parts to fix this ferry then the vacation period for Margarita is doomed. Even with the ferry I don’t see how they will get everyone here. The demand will swamp them once August arrives.

    If you didn’t know Chavez expropriated Conferry last year promising a new era of ferries to Margarita.

    Just another example of the total incompetence of the Chavista machine.

    For those of us in the tourism business who have already been damaged by the destroying of the foreign tourist market (down 80%) this along with the limited available flights & delays will be the nail in the coffin.

    • firepigette Says:

      so sorry to hear that Island.

      I have a close friend in Margarita who tells me she is afraid of the air flights as well, so she has been depending on the ferry.

      It’s not just tourism that’s affected but also the life styles of all of the permanent residents.

    • island canuck Says:

      Update.

      The ferry that has the problem was being used to transport heavy trucks to Margarita & at last word is still at sea although supposedly has been put in tow.

      This doesn’t alleviate the problem as noted above – only 2 ferry express per day to Margarita when in previous years there were as many as 10 per day.

      Now we will have the problem of goods arriving in Margarita. The truck drivers already had a 3 day wait to get to the Island so now we’ll have to wait & see if things will start disappearing off the shelves.

      Time to stock up on essentials.

      What a country!

    • Jessica Wabbit Says:

      so why are you still there? reall? youve been posting for years on Venzoid blogs about all the problems there. Go to the Cook Islands or somewhere there arent any latin cartoon characters running the show in their typical incompetent macho manners….case in point..see the attached link

      http://www.independent.co.uk/news/uk/politics/london-2012-argentina-to-snub-uk-by-refusing-to-send-president-to-olympic-games-opening-ceremony-7973022.html

      • island canuck Says:

        Jessica, in truth I love Margarita in particular & Venezuela in general however after 14 years of incompetence I’m really getting impatient. These days it’s everywhere & it’s getting annoying.

        I have a great hope that O7 will be the beginning of a new life for Venezuela & Margarita Island.

        After being here 25 years & having invested everything in my life here leaving is not an option

  17. Lisa Says:

    What is Cadivi? Is it still valid now? Where is it located? My brother-in-law lives in Venezuela & wants to travel to the U.S. but needs dollars. Please advise by return.

    Thanks!


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