Venezuela’s Timid Reduction of Exchange Controls Won’t Cut It

EspañolWall Street seems to be euphoric about “Sicad 2,” Venezuela’s brand new exchange regime, in operation since Monday.

This translated into most Venezuelan bond prices going up yesterday, the sovereign global 2027 gaining 2.22 percent to a bid price of 76.750.

In which the 100-Bolívares note saw the light of day with a much, much lower number printed on it... Source: Aixa Diaz
The 100-bolívar note with more, shall we say, realistic artwork. Source: Aixa Diaz.

And well, who could blame them? Late as it is, it appears to be Venezuela’s government first move towards dismantling the rocambolesque exchange control regime at the heart of the country’s enormous macroeconomic imbalances.

These imbalances are reflected in the fact that the government, facing the harsh reality of the economic disaster the country is immersed into, had to launch Sicad 2 with a rate of 51.86 Bs. per US dollar.

This is more than 800 percent higher than the official rate of 6.3 Bs. per US dollar for importing food, medicine, and other basic items. And it constitutes official recognition of the Bolivarian Revolution’s utterly destructive impact on the value of the Bolivar.

So yes, this is a welcome move.

And I truly hope I could be as optimistic as Wall Street about the Maduro regime finally coming to grips with economic reality. I hope I could believe they have finally taken responsibility for the so many other inevitable measures that need to be taken, despite the unavoidable short-term pain they will cause for ordinary people.

But I can’t help but think that more than being late, the problem with Sicad 2 is that it is likely to be utterly insufficient oxygen for the country’s choking economy.

To start, most foreign currency will still be traded at the country’s surreal 6.3 exchange rate. Sicad 2 will only account for about 8 percent of total dollar sales.

And that’s if, and this is still a big if, the government truly commits to fully satisfying demand in order to stabilize the new official rate at levels that don’t stray too far from the opening 51.86 point.

In this regard, Barclays’ analyst Alejandro Grisanti told Reuters he had expected annual trade of about US$11.6 billion, or around US$63 million per day on Sicad 2. However, Maduro’s comments over the weekend implied that the offer would be about half that.

“We see that as a concern,” he said.

Grisanti estimated that Sicad 2 had the potential to give the government additional revenues equivalent to 12 percent of GDP. However, he admitted that “lower FX sales… would imply a smaller average devaluation, smaller fiscal improvement, a more limited capacity of this new market to stabilize the exchange rate.”

Worse still, by maintaining a multiple-tier exchange rate system, the massive incentives to set up phantom, basic-goods import companies — only to obtain US dollars at the 6.3 rate and sell them at the outrageously higher black market place — are still intact.

Of course, unifying the various exchange rates would not only force the government to halt the horribly inefficient mechanism by which it subsidizes the price of food and other essential items for the poor.

Most crucially, it would also end the artificial arbitrage scheme by which most of the regime’s cronies, many of them suspected to be among the higher echelons of the armed forces, have become filthy rich.

So even if Sicad 2 is the first step towards a single exchange-rate regime, the arrival of economic sanity will probably threaten so many powerful people at the helms of the state, that unfortunately, a political earthquake of epic proportions cannot be discarded.

And last, but not least, any measures taken in the foreign exchange arena won’t suffice to restore the level of economic growth that the country needs in order to genuinely pull most Venezeulans out of poverty.

There’s simply no use to painful adjustment measures in the macroeconomic side of things if the government stubbornly decides to forge ahead with price, profit, and the other controls in a policy agenda that has the Cuban communist dictatorship as its guiding star.

For the Maduro regime to step back on the total nationalization of Venezuela’s economy, it would have to backtrack on the very backbone of what the Bolivarian Revolution is all about.

It is one thing to backtrack on the decision to harrass the international press. Or on the refusal to pay debts owed to the country’s trading partners. It would be an entirely different thing to accept the fact that all the regime stands for is what it is: a chimera.

So yes, the whole thing might merit some celebration. Uncork the bottle, have your glass of champagne. Just don’t get too drunk, because after all, more than the end of economic and political turmoil, Sicad 2 may very well just bring it to a whole new level.

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