“Erm, Mr. Ramírez, I think when they told you nothing attracts investors more than greenbacks they had something else in mind…”
In the midst of social crisis, an airline boycott and massive amount of bolivar liquidity Ramirez announced that SICAD II will be launched on Feb 24th. Not many details available yet as they will be disclosed tomorrow but here are the bullet points of what we know:
- Rate will fluctuate with government intervention with fix amounts sold each day. According to Ramirez: “it will make economic sense” #NOT.
- Companies, public entities and people will be able to access it through brokerages.
- SICAD II will use a combination of cash and bonds.
- Airlines will be able to use SICAD II.
No less, no more. All this was announced in the Venezuela-Cuba summit. So behold a new devaluation with no plan for either fiscal or monetary policy available. And amid all this insanity, nobody even registered that they’re more or less floating the bolivar. Under this conditions, the rate will sink the bolivar to new depths.
Caracas Chronicles 
The Bolivar has long sunk into a deep abyss. It started with the shortage of subsidized-official-rate dollar and the hike of Voldemort. The Bolivar devalued long ago and keeps doing so with each point the black market raises.
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I think the floating Bolivar was going to happen sooner or later, be it 1 year or 5 years, no matter what. The real problem for us as a country is how to become less dependent on imports. At least that would mitigate a devalued currency. And I’m not even advocating for diversified exports as another source of more hard currency because we know that won’t happen any time soon.
But of course, reduced imports in reality means more reliance on the productive local private sector, and I think we all know how that’s going to work out. It’s a catch 22.
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The problem is not the floating. I am no economist but my sense of timing for this is that the Bolívar will float just enough to keep Venezuelans trying to swim for a while but getting more and more water into their lungs and never enough time or even space to learn to swim (tied up hands).
Without real fiscal policy and with all those other restrictions, we will go on from devaluation to devaluation.
If the government let the bolivar float really freely but also allowed for further liberalization, we would see a terrible time initially but then the country would become more competitive. Of course, that won’t happen during Chavismo because that would be the end of it.
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“… That would be the end of it.”
It would be the end of any administration governing Venezuela. All I hear middle class and well off Venezuelans complain about how “high” the exchange rate is at 11.5. It boggles my mind how someone could think this when a floating exchange rate would probably be around 30-40bs/$.
It leads me to be believe that no one in Venezuela is willing to make the sacrifices needed to actually improve the country.
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My understanding (correct me if I am wrong) that the imputed rate is somewhere around 65/$.
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Now-a-days the parallel rate is ~89/$, but if it were to float it would be much less than that after the dust settled. My figure of 30-40/$ was being extremely gracious.
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A band-exchange rate system was implemented briefly during the Second Caldera’s Administration in the mid 90’s and It miserably failed. According to controversial neokeynesian Nobel Economic Laureate Paul Krugman, such a system of mingled fixed-floating exchange rate of bands must me credible enough in order to work…Mmmm credible,another scarce commodity on our grocerie’s shelves.
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from what I understood it seems like they are going to let float and offer a limited amount of dollars per day.
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I don’t understand, Rodrigo. If you intend to let the exchange rate float, how can you limit the supply of dollars? Wouldn’t that just artificially increase the BsF devaluation?
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I am not saying it is smart. Maybe they want to protect the reserves? Maybe that’s what it will happen but it will eventually settle down?
This may be a transition mechanism.
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Hey Chuck, you were the one who wrote about cops in Venezuela, didn´t you. I think your should probably read this: http://es.panampost.com/fergus-hodgson/2014/02/19/policia-de-venezuela-se-pronuncia-esto-esta-peor-de-lo-que-creen/
I think that this article touch briefly your position (who’s gonna put his rear end at risk for a fistful of dollars!?), but the vibe is more gritty, more “hombre de la etiqueta”… From my experience, this piece POV is closer to reality than yours…
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It’s called the Impossible Trinity for a a reason and anyone attempting it cannot be credible.
You cannot have at the same time
– A managed exchange rate
– Free flow of capital
– An independent monetary policy
Pick any two of those three. But you can’t have all three of them at the same time. You just can’t. Any policy attempting that is doomed to failure, because of very basic math, simple accounting.
It’s not even a matter of believe this economic theory or that other economic theory. It’s just math applied to accounting on the scale of a country and its trade partners.
https://en.wikipedia.org/wiki/Impossible_trinity
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Yet another Chavista attempt to square the circle.
There’s too many VEF out there and they have too few USD to sell, because they keep printing money.
If they make it easy to get dollars, so things remain cheap in VEF, demand will be huge and we run out of currency reserves. Economic Crisis.
If they make it hard to get the dollars, so they can have plenty of currency reserves, prices will soar in VEF. Political Crisis.
The solution is to stop printing money, and letting the market set the sweet spot. They won’t stop printing money, and have chosen to pass the buck to whomever is in charge of the economy 3, 6, 9, 12 months from now.
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This might be a god send of sorts to companies that have accummulated lots of Bs earnings , cant use them to buy USD in the black market without showing it in their books and are given at least an outlet for buying dollars lawfullyat a price which is higher than the official rate.!! It also allows companies with USD which they must use to buy bs needed for govt projects to sell them at a better rate than the official rate without breaking any laws. It might relieve part of the pressure on the black market but as J N says will not solve the fundamental imbalance that creates the problem .
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What I am thinking is that, given that the max profit you can make out of a certain product, say shampoo is 30%, why would you import using CADIVI? Right?
A product that you buy overseas at $10. If you use CADIVI rate of 6.3 VEF per $ then you can sell it at VEF81.9 making a profit of VEF18.9. Let’s say that SICAD II does a miracle and the $/VEF rate is something like VEF40 per $. Then you bring back to your headquarters $0.47. If you choose to import by SICADII at VEF40 per $, according to the new law, you could sell your product at VEF520 with a profit VEF120 and then buy back $3.
Why someone on their sane mind would use CADIVI or SICAD I (aside from travelers)?
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There’s something really easy you can do: import through CADIVI with huge sobrefacturacion, pocket the difference and sell at 30% profit over the cost of the inflated costs, no one will catch you.
I think legalizing the swap system is a good idea. The problem is that -as people argue here- with price controls and the still insanely large gap between official (be it CADIVI, SICAD, SICADII) and parallel rate it is simply not going to work. Best case scenario they will buy a little time at the cost of more inflation.
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This is a step in the right direction. Floating the exchange rate and doing daily “auctions” is the first step to a crawling peg or a managed float.
As someone else pointed out a managed float can only work with a credible central bank. This is the process that should have started one year ago.
It will be very hard with people already on the streets to do any sort of meaningful economic reform.
And if they can’t enact reforms quickly enough the economic crisis will deepen, which will make people even more angry.
The Chavistas have painted themselves into a corner.
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Im afraid this new system is just going to be a continuous devaluation of the bolivar,a slow one and a sure one.
People will not notice it anymore.Nobody will say “devaluacion otra vez”?!
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well… I guess people are waiting for the first trade on this mechanism to assert that.
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A continuous devaluation is one of the main things holding Venezuela back from making any real correction to their economy. I do not foresee either side implementing it, however, since a majority of the population is concerned more about getting subsidized dollars and going on vacation to Miami than actually improving their own country.
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i dont know if i would say “float the bolivar” or just “bring it to reality” (whatever that reality is: 11bs per dollar, 30 bs per dollar or 50 bs per dollar…) People have been saying for a while that the main issue with the economy is teh uncertainty and the fact that nobody knows the true value of the bolivar (anywhere between 6,3 and 100) the point is that this might bring some sense and certainty in the economy (even if that certainty is that the true value of the bs is around 40, 50 or 60 bs
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