F-Rod Pitches a Rabo’e’Cochino

"No, no, the other guy..."

“Not me, the other guy…”

Every few months, Francisco Rodríguez lobs a conceptual hand-grenade at the center of the opposition Conventional Wisdom about the Venezuelan economy.

The series of papers he’s written for Bank of America are growing into a corpus of contrarian analysis of the Venezuelan economy that’s not quite like anything else out there.

His writing is not for the faint of heart: jargonny, data-driven, and wonky, F-Rod writes for Wall Street fund managers, and doesn’t much seem to care whether anyone else gets it.

The jargon tends to obscure an analytical playfulness I’ve always found really appealing, though. The real wonder is that the guy manages to draw a quince-y-último for having this much fun.

His latest effort is once again aggressively at odds with what everybody thinks they already know about the Venezuelan economy. If you speak even basic macro, it’s well worth a read. If you don’t, well, that’s what Caracas Chronicles is for, isn’t it?

The roster of sacred cows he barbecues is rather long, so let’s start with the headline idea:

The hardest part is over. For Rodríguez, what’s hardest is external adjustment – shifting from the crazy rate of imports we had in 2012 to a more sustainable level.  But that part is basically done. The painful, wrenching switch away from a higher to a lower consumption plane was achieved in 2013. It sucked. You saw it in your daily life in the form of bare shelves and enormous queues to buy the basics. But something like it was inevitable. In 2012, Venezuela was consuming way beyond its means. Now it isn’t.

Sure, our chavista overlords didn’t adjust in the normal way. The textbooks say if you want people to consume less, you do that by raising prices. And yes, higher prices were a feature of adjustment, but not the main feature. The main feature was scarcity. “Instead of being frustrated at not being able to afford the goods they could find, Venezuelans were frustrated at not being able to find the goods they could afford.” To a macroeconomist’s way of looking at the world, it’s six of one, half a dozen of the other.

So that’s the first big, bold claim he makes: the tiger of external adjustment is well and truly slayed. Now we’re just having a bit of a fright over the hide.

Internally, though, the economy is still very far from balance. This turns up in the form of a still sprawling public sector deficit that the government is financing in the most irresponsible way imaginable: just printing up money.

But here comes the second big bold claim Rodríguez wants to make: in fact, reaching internal balance isn’t as hard a problem as people think it is. They just need to end the control the cambio – Venezuela’s crazy-dysfunctional forex control regime – and really devalue, across the board.

Such a devaluation would not, as I mistakenly argued, need to be followed by a painful fiscal adjustment because devaluation is a painful fiscal adjustment: by yielding more bolivars for the government per dollar of oil exports, devaluation itself balances the government’s books.

“But, but,” you’re thinking, “the inflation!”

And here comes the third big bold claim Rodríguez wants to make: the inflationary cost of devaluation is one the government already paid because – big bold claim number four coming up – they already floated the bolivar last year.

This last one is especially counterintuitive, and showcases Rodríguez at his most provocative. Since yesterday, oppo types have been saying SICAD II amounts to a major devaluation. But that’s not quite right: all the government really did yesterday is publicly acknowledge the enormous devaluation in the black market rate that has taken place over the last year.

For F-Rod, what we saw in 2013-2014 was a highly unorthodox partial flotation. From 2009 until early last year, the government had played a bizarre game of both refusing to acknowledge a dollar black market existed but then also intervening in that market, sporadically flooding it with dollars to bring back the parallel exchange rate.

Early last year, though, the government stopped supplying dollars to the black market on the sly and just letting the black market exchange rate go as high as it needed to go to match supply to demand. Meanwhile, its decision to monetize the deficit vastly expanded the pool of bolivars out chasing the tiny number of private dollars on offer in the black market. That, and not SICAD II, was the real devaluation: all SICAD II does is make an honest woman out of the black market.

The result was a tiered system – Tier 1: CADIVI, Tier 2: SICAD, Tier 3: the black market – with just one of the tiers absorbing the entire burden of adjustment. As the black market skyrocketed, inflation passed through the system, though concentrated in markets that use Tier 3 as a marker. That’s not like any kind of flotation they’ll teach you about in grad school, but Rodríguez wants to argue it has many of the same effects as a flotation, at least from a macro-point of view. In particular, the big inflation spike you expect from flotation is now in the past, not the future.

This week, the government already decided to “sincerar la flotación” on tier 3 by opening a legal alternative to the black market – Sicad 2. A much more significant step, though, would be to “sincerar la devaluaciónby announcing big devaluations in tier 1 and 2, with a view to unifying the three tiers in the not-too-distant future. It’s that move that would really move the needle as far as internal balance goes: by turning the same number of petrodollars into many more bolivars, it could wipe the fiscal deficit out almost completely, ending the need to keep printing money.

For Rodríguez, such a move is all gain no pain by now, because, remember, the bulk of the “pain” is in the past. Sure, there would be a brief upward spike in prices right after the measure is implemented, but he sees no reason to think that would shift the economy into a permanently higher inflation trajectory, or even a medium-term one.

So far, so good: Rodríguez has told a contrarian tale and told it with unusual flair.

Where he gets into trouble is in trying to account for the final anomaly: if devaluation is such a panacea, why haven’t they done it already? As he admits, it’s easy to see why they didn’t do it before December: nobody wants to devalue just before an election. But it’s the end of March now. It’s been three months. What’s the hold up?

One possibility is that they’re just wrong, and are failing to calculate the almighty inflationary mess they’re going to get themselves into if they keep printing money instead of devaluing.

Another possibility is that they like the tiered system and are determined to keep it.

The adjustment through a multiple tier system could help minimize the distributive costs of price adjustments, shifting the burden of the devaluation to non-essential goods, though at the cost of maintaining sizable differentials between tiers with the associated perverse arbitrage opportunities.

This, however, is not a preference Rodríguez thinks they’ll be able to hang on to for long. In a paragraph that is, I think, the lynchpin to the whole paper, he says,

Nevertheless, even if the government chose not to devalue (…) we believe that sooner or later it will be forced to do so. As inflation accelerates, the costs of deficit monetization are easier to see, and the error of choosing monetization over devaluation becomes increasingly evident. The fiscal sacrifice from the subsidy and the associated transfer of rents to importers at the cost of lower revenues for government expenditures also becomes greater. Arrears of the FX control agency continue to grow, introducing a strong incentive to erase them by paying them at a depreciated rate.

It’s too bad this argument is so central to his thesis, because it’s the least convincing thing in the paper. Why? Because the political economy of chavismo is heavily stacked against this kind of reform.

The tiered system isn’t something chavismo is free to walk away from when it stops serving its fiscal purposes, because the tiered system embodies the deep structure of chavismo’s distributive model.

Not for nothing is this a leitmotif in Simón Andrés Zuñiga’s writings in Aporrea. Exchange controls are central to the way chavismo channels petrostate resources at the two key constituencies that keep it in power: the enchufado elite of importers and arbitrageurs – many of whom dress in olive green – and a mass constituency of barrio voters whose livelihood strategies depend on the deep CADIVI discount on imported food and medicines.

Is the tiered system an even vaguely efficient way of channeling resources towards these groups? Come, now, this is chavismo we’re talking about: they don’t speak efficiency.

But in its own messy, scattershot way, the tiered system does shift resources – lots of resources – into the pockets of those whose support chavismo depends on to hold power. The system has lots of dolientes. And some of those dolientes are very well positioned to stymie any attempt at reform.

Even if devaluing and unifying (or almost unifying) the tiers doesn’t have much of an inflationary impact overall, shifting relative prices can have serious political consequences. Remember: unifying the tiers amounts to devaluing the exchange rate for CADIVI-eligible imports while you revalue the exchange rate for stuff that gets imported with parallel dollars.

In Rodríguez’s words, “although there may be changes in relative prices, the absolute price level will not increase as the average cost of buying imported goods for consumers will not increase” (emphasis added.) But this comes perilously close to arguing that there’ll be no political price to pay because the rise in the price of canned sardines will be offset by the fall in smoked salmon prices.

The more important relative price adjustment is between domestic and imported goods, though. In fact, to make the framework work, Rodríguez has to “assume that the government will substitute domestic for imported goods in order to leave the provision of public goods and services constant.”

Assumptions don’t come much more heroic than that one. After 12 years of deepening overvaluation, the domestic economy’s capacity to produce tradable goods is in tatters, and to bring it back you need to do more than click your ruby shoes three times and say there’s-no-place-like-devaluation. The public sector has shown itself useless when it comes to production, and to get any kind of private sector response the government would need to undo much of its micro policy framework – starting with a politically damaging U-Turn on the highest profile policy initiative of Nicolás Maduro’s short tenure. In short, if our strategy for ending food shortages hinges on substituting domestic production for the no-longer-affordable imported stuff, we’re going to be waiting a good long time.

But the logic of devaluation doesn’t just depend on persuading people to buy from domestic producers that no longer exist. It also hinges, crucially, on screwing over the enchufado elite, which has made a living for years now from the fat arbitrage profits that tiers build into the system.

This is the reason it’s proven so hard for the government to agree a policy that to a guy like Francisco Rodríguez looks like such a no-brainer: there is a powerful, extremely well-connected constituency of enchufado businessmen – not a few of whom moonlight as military officers – actively resisting the end of the tiered system for the same reason the Sicilian mafia lobbied hard against the end of prohibition: they’re uniquely positioned to capture the rents.

To devalue with a view to ending the tiered system, then, would mean filling up the coffers in Carmelitas by picking pockets in Antímano and in Fuerte Tiuna.

Worse still: the pockets they’d be picking in Fuerte Tiuna belong to the very same officers they’re going to have to call on to repress the protests that are sure to break out in Antímano when those pockets get picked as well. And this is the solution that’s being sold to us as not having much of a political cost!

To sum up: is ending the tiered system the technocratically correct solution to the government’s fiscal woes?

I’m sure it is.

Are there good reasons for chavista policy makers to fear going down that path?

There sure are.

Ending the tiers will set off a political crisis for the government. That’s why they’re going to wait until the last imaginable minute before they act.

Reality might just drag them kicking and screaming towards a saner exchange rate system, but the kicks are going to be hard, and the screams ear-splitting.

76 thoughts on “F-Rod Pitches a Rabo’e’Cochino

  1. Nice piece Quico, even though I don’t agree with you about how to define the Chavista disgrace; I admire your talent to summarise very complex stuff into more digestible reading.
    I think chavismo will keep the current systems until they can simply because they use it both as a repression tool and a “golden goose” where the can take enormous profits without actually working.


  2. Awesome post! It will take some chewing over, though. It is counter-intuitive, but probably correct, that a huge spurt of inflation will not happen because most imports already have the black-market rate baked in.

    I have thought for a long time that those who can purchase from the petrodollar inflow at 6.3 would fight long and hard to insure their massive subsidy would continue, and now SIcad II gives them an entirely legal way to realize incredible, overnight profits.

    This, incidentally, is what is wrong with Dorothy Kronick’s FiveThirtyEight article you praised last week; it assumes that the economy, and regime policies of redistribution, are reflected in publicly available data.


  3. Questions:

    I can see how a devaluation balances the government’s books, but isn’t that a momentary balance?

    Won’t they need to keep printing money once they start to adjust the VEF-denominated cash transfers to the chavista base (increased scholarship amount people receive from misiones, increased wages for public sector workers and other increased expenses)?


    • Your mommy and daddy gave you 94.2 bn. dollars to import lemons and sugar at an artificially appreciated exchange rate, but you’re having trouble making sure the interest parity condition holds…fuck, I give up…


  4. Francisco Rodríquez gave a cogent explanation of his views during this panel discussion at AS-COA in NYC last month. http://www.as-coa.org/articles/summary-venezuelas-2014-economic-outlook
    Just before the discussion section at about 46:30 minutes he gives a narrative (including about Pdvsa investment)ñ but, especially, see his long answer to questions beginning at 104:05 for a nice overview of his pov.

    You make a lot of points to think about in this post. One comment for now: I’d say Sicad 2 is indeed a ‘devaluation’ -if- they keep CADIVI and Sicad 1 sufficiently small. Indeed, they won’t give them up, and probably no government could completly. But, it is not only for bolibourgeoise and other domestic businesses importing ‘necessities’. My information is that they have been guaranteeeing foreign oil companies Sicad 1-rates to get them to invest and boost production.


  5. I don’t think they will eliminate the tier system. It is a very efficient method of achieving their goal.

    I wouldn’t make such a distinction between printing money and devaluation. Printing money is a devaluation. What you are calling a devaluation is merely letting the new value be official. If a nation has X total amount of money, and the printing press doubles it to 2X, then the value of each coin has been halved. Not only that, if the initial amount X was in the hands of the market, then, by printing money, 50% of the value of the nation’s money has been redistributed to the government’s hands. (This, Quico, is the taxation method we’ve discussed in the past, which rubbed you the wrong way then and apparently still does.)

    By having a tier for different industries or groups of products, the government, in effect, is “taxing” all wealth in the nation to pay for its subsidy of those industries or groups of products.

    The problem does not have to do with the tier structure, nor with the money printing. It has to do with the amounts of subsidy and the amounts of printing. If they subsidize more than value of money being printed, or “tax” more than the market is willing to “pay up”, then debt must goes up and/or protests go up. The solution lies in controlling spending, not necessarily in changing the structure.


    • Daily “correcção monetária” would remove the EFFECT of inflation. However, as long as there were money printing the inflation would carry on. Only the EFFECT would be removed. It, however, would be as if there were no inflation.

      Normally it is not debt that goes up: the volume of printed money goes up.

      The problem is neither the amounts of subsidy nor the amounts of printing. The problem is the absence of DAILY “correcção monetária”. Ask Brazil.


      • N Smith, we’re talking about two separate things here.

        If you, the people, have 90USD in your pocket and I, the government, have 0USD in mine, and no one else has any USD, then you have 100% of USD value. If I print 10USD, then you will continue to have 90USD, but suddenly your same 90USD are now worth 90% of the total USD value, and at the same time I’ve gotten 10USD which are now worth 10% of the new total USD. By printing 10USD, I’ve taxed you 10% of your value, without having to set up a taxation system.

        If your 90USD could initially buy 100 of one item, then my printing 10USD, would make it so your 90USD would only buy 90 of the item, and I’d be able to buy 10 of the item. The price of the item would have gone up to make up for the devaluation.

        What you suggest attempts to reverse the effect of the 90USD only being able to buy 90 items after 10USD have been printed, buy indexing your income so that you could continue to buy 100, as if there had been no printing.


  6. One thing I didn’t understand in the original paper: on page 15, he points out that government debt to private importers under CADIVI is huge, $27 billion dollars. On the face of things, that would substantially undermine the comparatively rosy picture he draws.

    Then he says that he classifies CADIVI debt as internal debt because Venezuelan legislation defines it that way. So, he says, it does not impact Venezuela’s external position; presumably internal inflation could reduce this debt substantially.

    But what impact would that have on the importers’ ability and willingnesss to continue? Are they really going to accept payment in devalued bolivars?

    He seems to suggest that they will, if bolivars become fully convertible. But we’re some ways away from that, aren’t we?


  7. There is.something i dont see.mentioned. The interest rates control. Your thesis would be pallatable if all other monetary variables were normalized, but they are not. Even though some devaluation is.sinked in the price controls, its only past devaluation, not expected devaluation which increases by the interest rates arbitrage. I think much of the build up to armaggedon will come from.that.


  8. It will be interesting to see how long the SICAD 2 experiment lasts. At the risk of overestimating the logic behind their economic policies, I see it as a trial run of how to migrate towards a less distorted system as they will eventually be forced to do. I’m still in the camp that says the experiment won’t last long and will reinforce Giordani’s mantra but I’m looking forward to seeing what happens.


  9. Is not that difficult to reduce the distortions of the exchange control, without having to eliminate it outright.
    The government just needs to:

    1.- gradually reduce the gaps between the different tiers, including the black market.
    2.- eliminate or not actively enforce prices controls (and the new profit law)

    The gradual shift would softens the blow for the people and also reduces the friction with the enchufados, as they will slowly see their golden eggs get smaller and smaller.
    This doesn’t eliminate all distortions, it is always going to be inefficient and they will be graft, and most importantly for Giordani it will maintain the death grip on the private sector.


  10. I read somewhere that the now infamous tarjeta de abastecimiento seguro was also going to include unconditional cash transfers (adding some credit to the card to buy stuff at a PDVAL), if this is true it would be a effective way of diminishing the political impact of a devaluation.


      • I can’t find the link to the news I read, but this was said by Maduro when he introduced the card:
        “En cadena nacional de radio y televisión el jefe de Estado, Nicolás Maduro, presentó la Tarjeta de Abastecimiento Seguro para la compra de productos en todas las redes de comercialización del Estado. Aunque dijo que el uso de la misma es opcional, indicó que eventualmente solo con ella se tendrán beneficios de oferta y “premios”.
        It’s optional and you will get some special offers and prices, it sounds more like a subsidy card than a tarjeta de racionamiento.


        • See, this fits in well with F-Rod’s hypothesis. If you devalue-and-end-the-tiered system, you end up with:

          1-The government sitting on a lot of money
          2-No more shortages
          3-The poorest consumers unable to afford the newly available goods.

          El librito tells you that you can transfer some of the government’s new cash to the poorest to mitigate the impact without paying an inflation cost. (What’s known as a lump-sum transfer.)

          If they do devalue-and-end-the-tiers, the Tarjeta de Abastecimiento makes no sense as a rationing mechanism, because that reform ends the shortages. But it could make very good sense as a subsidy mechanism, precisely because you need to make it up to your key constituency somehow if you’re going to avoid another caracazo.

          I’d be shocked if chavistas implemented a policy this smart. But crazier things have happened, I suppose.


          • The price of many stapled goods were raised considerably this week, Corn flour went up from 7 to 22, vegetable oil from 10 to 30, powder milk from 30 to 80, among tohers. Unless chavismo wants to compromise the support of its base, they must be thinking about a subsidy mechanism fro these increases.


          • Hm, interesting.

            For years now many street vendors were going to the supermarkets of better-off areas and queuing up there to get as much of the controlled stuff as possible and resell it elsewhere.

            The situation had turned really extreme by December-January and it was incredible in February: queues were getting longer and longer. Those who could afford, would just buy alternatives or go to the street vendors later on, not even bothering to go to the supermarkets for certain products.

            It seemed to me as if more poor – more of their children, elderly – were spending more time on those queues in the function of street vendors. How many? It would be so good if we could use some hard data at least from some areas to extrapolate.

            It seemed like a way of distributing some of the money of the better off (think Northern Valencia, Chacao, Baruta) and of those in the lower-middle class with some kind of productive work – think Isabelica and Naguanagua people in Greater Valencia, Candelaria and the like in Caracas- to those with no work at all or just some money from the Misiones.

            So when the guarimbas started I wondered how many street vendors were pissed off those areas where they “worked” by queuing up were now off limits – vans were not delivering there.

            Then I read from some relatives in some poor areas that the distribution mechanisms – private and state – started to send the goodies to other areas such as Guacara, which became the new “queue centres” for the poor to buy and later re-sell in central Valencia.

            Well: we will learn in a few weeks how this whole queue madness will evolve.
            I think shortages might become a way for Madurismo to have people really employed, not as in “so they won’t think about protesting” but as in “so they can re-sell things and get some money as
            part of the economía informal”


          • I think the Tarjeta is intended as a subsidy mechanism for the basic D_E Chavista base. The rub will be in the traditional Chavista incapacity to make it workable/available/effective.


        • “it sounds more like a subsidy card than a tarjeta de racionamiento”

          The Cuban rationing card IS a subsidy card.

          Cubans can purchase the allowed rations for something like USD 1. But buying food in private stores (at international prices) is prohibitively expensive for a country where the average wage for a state employee (virtually every Cuban before Raul Castro succeeded Fidel) is USD 20.

          I’m thinking Venezuela can end up in a similar state. Mercal puts a limit on how much food anyone can purchase, but as the dollar surges and salaries stay behind, Mercal will become a neccesity even for professionals (who will still style themselves middle class even as their monthly wage in real value plummets), while privately owned stores become a place for diplomats, top executives and inner party members can buy their scotch, salmon, peanut butter and other “delicatessen”.

          It all hinges on how many people can afford to snub the “subsidy card”.


  11. Thanks, Quico, for mining this information from F-Rod/BofA. Might have been good to see brief mention of the success/failure rate of F-Rod’s earlier crystal-ballings on the Vz economy.

    Otherwise, I like and agree with this nugget of yours: Worse still: the pockets they’d be picking in Fuerte Tiuna belong to the very same officers they’re going to have to call on to repress the protests that are sure to break out in Antímano when those pockets get picked as well. And this is the solution that’s being sold to us as not having much of a political cost!


  12. A weighted, fluttering piece of yellow laundry comes swirling down onto the playing field. A man dressed like a zebra turns his face to a distant camera and announces, “Personal foul, unnecessary confusion, 15 yards from the spot of the foul.” The confusion being,…what about the readjustment of those INTEREST RATES? (read previous blogs on the matter) With everyone pulling their accounts from the banks to trade for dollars, won’t this factor cause the maximum economic chaos to Venezuela? Sorry, I couldn’t think of a baseball analogy. I never like A-Rod anyway…..


    • He actually has a good answer to the interest rate problem.

      1-The thing that would drive capital flight is a big gap between inflation (+ or – 50%/year) and interest rates (about 15%)

      2-BUT the whole point of devaluing is that once you do that, the government no longer has any need keep printing money to cover its fiscal deficit.

      3-It’s the money printing that keeps inflation so damn high. Stop printing money, and inflation is going to come down relatively quickly.

      4-But if inflation comes down, you no longer have to raise interest rates to erase the gap between them and the inflation rate!

      It all hinges on his argument that devaluing doesn’t require a fiscal adjustment because devaluing is a fiscal adjustment.


      • But we have seen devaluations before to 2,15 then 2,60 then 4,30 then 6,30 then 10 and it hasn’t made a dent on inflation, because the government hasn’t halted expending, instead they have printed more money for brand new public expenditure.

        The governement has temporarily slowed the traveler dollars hemorrhage, but there’s the subsidized US imported gasoline, Mercal, the misiones, the chinese trinkets for the military and some other people, etc.

        Though I agree, SICAD 2 is merely a legalization of the black market rate, I don’t think inflation will be slowed down until the government greatly slashes some social programs.


      • I think there is a big “If” around number 2 in your list. That assumes that government spending in Bsf terms does not also continue to increase. The Chavistas might just take the extra cash and spend at an even higher rate (this would be their natural instinct I believe). If this were the case, then money printing would need to continue. The Chavista model has become accustomed to increases in spending (in Bsf terms) year in and year out. Will they really choose to slow down the growth of spending?


    • I’m thinking banks won’t suffer “runs”, but will rather undergo a dollarization. They’ll have more USD denominated accounts, and will suse those funds to purchase USD denominated bonds and securities.

      They’ll still VEF funds from public accounts, and people who keep their paycheck in the checking account while they spend it (since they can’t afford to save).

      At some point, we might even see USD denominated credits for cars and other non-subsidized and non-essential loans, maybe even Venezuelan travelers will have incur USD denominated credit card debt when traveling abroad.


      • technically this would be legal, since the reforma of the “Ley de Ilicitos Cambiarios” currently does not contemplates the purchase and sale of good in other currencies as illegal. In fact the reforma says that does interested in purchasing currency (divisas) may do so from oferings made by “Natural and Juridical PErsonas from the private sector” (Among others). the only restriction it imposes is that these have to be donde “in the terms contemplated by the Convenios Cambiarios issued in that matter between the BCV and the Executive.

        on your last paragraph, some venezuelan banks that were already opening accounts in US dollars were issuing debit cards, that you could use abroad, although they would only issue them to people who received funds in that account after a succesful SICAD I request.


        • I know about the USD debit cards. But once they start issuing USD credit cards, they close the loop on USD banking (deposits and credits).


  13. Something truly depressing about the piece is the fact if we had a minimal rationality, accountability and clarity in the manner in which we manage our international reserves we wouldn’t have to borrow money at credit card interest rates.


  14. OT: The opposition and its eternal extemporaneity (being late to the party).

    According to Cecilia Sosa:
    1. Since the Bolivarian National Armed Forces Organic Act states that only active members of the Armed Forces can receive promotions,
    2. Since it also states that active members of the Bolivarian National Armed Forces can’t run for office or engage in political acts other than voting
    3. Since, on December 27th 2013 Nicolás Maduro promoted Diosdado Cabello, Francisco Arias Cárdenas and Ramón Rodriguez Chacín, while claiming to have readmitted them into the armed forces.

    THEN Diosdado Cabello, in particular, can’t keep his parliamentary seat; and the other promoted coupsters in general, can’t keep any popularly elected office.

    This would have been a great declaration to give on December 28th 2013. It would still be great by say, any day of January 2014. But right now, it reeks of “pataleo” given the illegal attempt to strip MCM from her seat.


    News of the promotion http://www.eluniversal.com/nacional-y-politica/131227/maduro-ascendio-a-diosdado-cabello-a-capitan-del-ejercito


  15. FT: Really the best you’ve done since self-imposed isolation in the Sudan, and in a long time. The FR thesis that effectively the devaluation effects have already been baked into the economy by the (80+ until recently) parallel rate is probably incorrect, since this was an extremely thin market, which affected, in large part, such non-essential discretionary goods such as your smoked salmon analogy; as an example, a kg. of rice in Venezuela today costs Bs. 3 in Mercal, Bs. 8-20 depending on quality in an abasto/supermercado, and Bs. 120 jn Colombia; 80+% of Govt.-available $ have been allocated at the Cadivi 6.3 rate, and not even 10% at the Sicad 1 rate during its short existence to date. Sicad 2, contrary to my Govt.-managed 20 expectation (remembering that Sicad 1 was managed down from a real 20-30 to only 11-12), at 51 is a tremendous embarassment to the Regime, but really isn’t a true rate yet, since PDVSA, the large-majority supplier, did not participate; perhaps the goal is to manage the Sicad 2 rate down from here as long/far as scarce official $ permit.The tiered system is unlikely to be abandoned for the reasons you mentioned. Meanwhile, the new 30% Profits Law is progressively bankrupting many small-medium businesses, including many big mall shopping centers..


    • “Meanwhile, the new 30% Profits Law is progressively bankrupting many small-medium businesses, including many big mall shopping centers..”

      DAILY “correcção monetária” would maintain the REAL (CONSTANT PURCHASING POWER) VALUE of all profits at any rate of hyperinflation.

      [We get it, you like DAILY “correcção monetária”. No reason to spam up the thread. -ed.]


          • You replied to “inflation”, not to indexation.

            You make the normal mistake of thinking that inflation erodes/destroys the real value of salaries, wages, rents, capital, profits, taxes, trade debtors, trade creditors, etc.

            Inflation has NOTHING to do with that.

            It is IMPOSSIBLE for inflation to erode/destroy the real value of the above items. Inflation can ONLY erode/destroy the real value of money and other monetary items – NOTHING ELSE.

            The real value of salaries, wages, rents, capital, profits, taxes, trade debtors, trade creditors, etc. are eroded/destroyed by the stable measuring units assumption – a Generally Accepted Accounting Principle, and not by inflation. The above values are eroded/destroyed by the implementation of the Historical Cost Accounting model in Venezuela. It has nothing to do with inflation.

            Daily indexation of all constant real value non-monetary items stops the real value eroding/destroying EFFECT OF the stable measuring unit assumption. It does nothing to actual inflation.

            Daily indexation of all monetary items (with the exception of actual Bolivar notes and coins) stops the real value eroding/destroying EFFECT OF inflation ONLY in these daily indexed monetary items.

            You make the mistake of thinking that only by bringing down inflation can you bring the eroding/destroying effect on the real value of the above mentioned constant real value non-monetary items. Brazil had a relatively stable non-monetary economy for the 30 years from 1964 to 1994 DURING high and hyperinflation of up to 2000%. They used first monthly and then daily indexing. Their Unidade Real de Valor Daily Index as part of their Real Plan in 1994 is famous for the way they stopped hyperinflation overnight at no cost.

            It appears that you may not yet understand the economy wide stabilizing effect of daily indexation of the above constant real value non-monetary items in the Bolivar economy. It may be because you dismiss taking it into account because of your mistaken belief that their real values are affected by inflation.

            Inflation has nothing to do with their real values. It is the implementation of the stable measuring unit assumption.


  16. I think it’s been said, but this amounts to decreasing imports by empoverishing the population. Here is an example from a tweet from Willy McKey:

    “Un pastelito [35 Bs.F] + Un café grande [30 Bs.F]+ Agua [5 Bs.F]. Alguien con salario mínimo desayuna más de medio día de salario.”

    And then there’s this


    El paquete ya comenzó…


    • De bolas. In a way F-Rod’s argument is obviously inconsistent: we’re going to balance the budget through a massive tax hike targeted directly at poorer people and the enchufado elite, but that’s not going to have a political cost. #AhOk


      • and that’s why it’s important to underline that inconsistency, perhaps others, by mentioning a couple of F-Rod’s misses. It would help enormously to deflate what I sense is a relatively unchecked ego, and more importantly, hold F-Rod more accountable for his pie-in-the-sky wand, naturally intended to flog sovereign paper among institutions, when the time comes…


  17. So basically what I get from Quico’s post (great summary btw) and all of the comments (specially Juan Nagel’s about how prices of regularized products are already rising) above, is that the government might actually know what they are doing now? is this possible? or can this all be some kind of extremely weird coincidence?

    Just having a hard time picturing Chavismo doing anything related to economics actually “good”.


  18. Lots of things to chew in this piece from Fco , which provocative and insightful and yet with some bits with are not easy to swallow except for people with cannibal teeth and an iron digestion ..

    If I understand the text correctly the black market was unofficially tolerated by the govt which used it to get USD into the system which otherwise it could not provide on comfortable terms , this included the selling by Pdvsa of USD through the black market system . this latter injection of Pdvsa funds helped maintain the black market rate at a lower level . Then early in 2013 they stopped injecting those funds causing the black market rate to skyrocket. I guess this also had an effect on Pdvsa finances which stopped recieving the extra Bs income from these sales. wonder how they made up for these shortfalls? .

    Interesting observation from FR that in 2012 Pdvsa begun hiking its investments in maintaining it productive capacity from 16 billion USD a year to 25 billion USD per year which meant taking 8 billion from Fondem . The govt realized that if investments were no increased to standard levels production would start to fall precipitously with very awful consequences for the govt finances .

    Nothing is said about Pdvsa ambitions to increase production which would need the investment and operating participation of carefully chosen foreign oil companies in joint venture projects . These investments also involve loans to cover Pdvsas own part of the investment on the projects which loans I suspect will not appear as loans but disguised in some legally obscure fashion . To the extent these projects are advanced the amount of these disguised loans will rise exponentially . We must consider that where Exxon , or Shell or any other reputable Oil company spends 1 billion USD on a project , Pdvsa peculiar magagement style requires 1.8 or 2 billions dollars to be spent on exactly the same project , so that investments numbers dont tell the full story.!!

    The govt is currently claiming that SICADII dollar transactions account for only 8% of total Forex needs of the country so that on average it doesnt imply a wholesale devaluation of the Bs . Evidently if this claim were to remain true for the future then FT’s arguments would not work . The whole thing functions on the basis that a large percentage of the govt dollars income will be sold on the SICAD II system . Wonder who the govt will explain this shift of govt dollars to the SICAD II system in future , unless of course the CAdivi and Sicad I systems rates are brought much closer to the Sicad II system rates which of course many people doubt.

    An example of how the military are benefitting from the govts control of imports is the import of powedered milk through a govt monopoly . know of a case where a company selling powdered milk brought from this monopoly was told that rather than buying it direct from the monopoly it would have to buy it second hand through a business owned by some military groups , the military intermediary did nothing but send an marked up invoice for whatever milk was phisically supplied by the monopoly . A year later the monopoly stopped supplies claiming that the company had not paid for milk supplied in past months . The company supplied the cancelled invoices paid the intermediary military owned group . The monopoly claimed that the money had never been paid and that unless it was all supplies would be stopped , this was a few years ago .
    Imagine that there are many more cases out there where there is a military group intermediating some govt monopolized import purchase.


  19. “For Rodríguez, such a move is all gain no pain by now, because, remember, the bulk of the “pain” is in the past. Sure, there would be a brief upward spike in prices right after the measure is implemented, but he sees no reason to think that would shift the economy into a permanently higher inflation trajectory, or even a medium-term one.”

    True, but the inflation problem in Venezuela is much more elementary than that. The inflation issue is currently unsolvable for a very basic reason: we are witnessing more and more firms getting out of the market every day (no longer selling a needle) with any intention to return soon. And you need a web of those companies competing against each other and distributing goods (it really doesn’t matter if the goods are domestic or imported) all over the country if you want inflation under control. So, all those “reforms” won’t even scratch the root of the problem. And we know that Mercal is irrelevant to reduce any inflation.

    Even if Venezuela joins NAFTA today, inflation will remain out of control just like an airplane in a graveyard spiral. Example: there was only one big market in San Diego (Carabobo), and the colectivos burned it to ashes. Who will build another one? No one. Venezuela’s inflation is not different from the inflation caused by hurricane Katrina in New Orleans. The difference is just the name: “hurricane Chavismo”.


  20. He visto mucha credulidad en cifras oficiales del gobierno en analistas extranjeros. Lo peor es que le dan una credibilidad por encima de los hechos comprobables por otras instituciones y suman y restan bolívares y dolares como que si hubiera un control contable y auditable de las cuentas del gobierno. En fin, con un Contralor muerto todavía despachando, creo que todo se puede legalizar incluyendo lo ilegal.

    Pero al final sus análisis son percepciones sobre bases erradas o con fines de promover nuevas emisiones de deuda para participar en ellas y conseguir clientela. Porque objetivas no lo creo. Demasiados problemas hay con emisiones de deudas oficiales y de perdidas cuantiosas de los inversionistas (eg. UBS) para tomarse estas recomendaciones como ciertas.


    • This reminds me. Two weeks before the 2012 elections, Francisco Rodríguez published a piece saying polling suggested Chávez would win by about 10 percentage points. On cue, El Nacional published a piece accusing him of only saying that to manipulate the bond market – trying to depress bond prices so Bank of America could buy them up cheap, ahead of the big rally to come once Capriles was elected. Good times!


  21. Excellent article
    How about a version “for dummies” and in spanish like the last one published in Panfleto Negro?

    I had the patience to sit last weekend and munch through the entire original paper by F-Rod. In contrast, your article makes a great point to condensate it for people with medium knowledge and short time
    What we need is a translation in “cristiano”… for people without knowledge and a short attention span to forward…


  22. I know I’m a bit late to the comment party, but why hasn’t anybody mentioned DAILY “correcção monetária” yet?

    N Smith knows what I’m talking about…


  23. Bondholders worry about two questions: 1) Will I get paid 2) Will the bonds be stable. Most Wall Street analysts think there is no default in the cards for a couple of years. They seem to worry more about question 2). This paper seems to address 1), but not 2). Venezuela’s Global 2027 is roughly where it began the year, except that it went down 17.5% to the low on February 20th and is back up the same amount in the last month. All of the uncertainties suggest this volatility will stay around with the one step forward, two step backwards style of Chavismo/Madurismo. Maybe that is the only reason why Venezuela has the highest yield in the world. It is fun to gain 15% per year in interest, but not as much fun is you can lose 17% of your capital and make it back every three months.


    • This I can concur with. Investors in general and bond investors in particular hate, hate, HATE unpredictability. Perhaps the high yield/coupon requirements for Venezuela has been a bit unfair, but it is largely a self-inflicted gunshot wound due to the seemingly random policy implementation/diplomatic spats the government creates for itself. Literally, it is a bipolar premium that the government pays.

      The 2+% bounce yesterday on bond prices was nice, but was more of a reaction to the “reasonable” adjustment ongoing in Venezuela to freeing up government capital in the short/near term. What happens next week when Maduro sends troops to the border with Guyana or in a month when the government pulls a Sidetur-type disavowal?

      I wonder how much of the change due to SICAD was because of looming obligations in October, which the BCV doesn’t have currently (short of dipping into OBFs) and would require gold liquidation to complete?


  24. Does anyone have any specific information where the dollars sold at the Sicad II auction came from ?? where they in cash currency or in the form of bonds ?? it might tell us whether the regime still has the actual dollars needed to supply this new market . If the flow of dollars to this market is to be dependent on bonds then there might not be much of them available to continue the supply for a much longer period.


  25. Mucho tiempo y neuronas perdidas explicando tonterias.

    …los cubanos ponen y mantienen a una sarta de incompetentes controlables en todas las posiciones claves y les manejan los hilos para que destruyan la economia.

    Con hambre no hay resitencia.


  26. The more I think about it, the fascinating $20 billion question for me is how many Cadivi-owed companies will take an 80+% writedown on their remitted profits just to get them out of Venezuela? That may, or may not, break the new exchange system if there is a flood to get out. It would be a nifty trick to wipe out a big chunk of that debt owed by the government, but somehow, I don’t think $30mm/day will cut it initially and might push the float up significantly.


  27. El Universal reports today :
    1. As per Maduro 80% of FOREX demand will be covered through Cencoex at a 6.30 rate , 10/12 % thru Sicad I and 10 % thru Sicad II.
    2. The amounts presumably available to meet each segment of demand are : Cencoex 31 billion USD ( SIC) , Sicad I , 11.4 billion USD , and Sicad II , 10 billion USD (including both bonds and cash from Private and Public Suppliers) .
    3.- In both Sicad II auctions demand has outstripped supply very substantially leaving a lot of unssatisfied demand .
    4.- The rate of exchange applied in each auction is set by the BCV using an as yet unspecified methodology (not a straight forward competive market rate) .
    Is this consistent with FR’s assumptions ??


  28. If your paraphrase of FRod is indeed what he is saying, then I disagree strongly with him. I will have to read him directly.


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