The Ripping-The-BandAid-Off-Sloooooowly School of Devaluation

/ May 26, 2014

pulling-bandaidsToday, International Air Travel was “switched to the SICAD II rate” – a wonderfully euphemistic way of saying the bolivar was aggressively devalued in the international air travel sector. In for-dummies terms, the cost of airline tickets for bolivar holders just went up about five-fold. And, just like that, one of the most cherished chavista era giveaways to the middle class went up in a puff of smoke.

It. Stings.

This, in case you were wondering, was the whole point of SICAD II all along: it’s a clever institutional mechanism to allow for devaluation to happen in a stepwise, sector-by-sector fashion. It makes sense, coming from people who made careers, a generation ago, our of attacking Carlos Andrés Pérez for eschewing “gradualism” in economic adjustment.

Time to get used to the alternative. It’s not actually any less painful. It just stretches the pain out over time. Like ripping a BandAid off sloooooowly instead of doing it all at once. Which, everyone realizes, is the best way to rip off a BandAid.

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41 thoughts on “The Ripping-The-BandAid-Off-Sloooooowly School of Devaluation”

  1. This just in, protests in Miraflores!

    A group of soldiers from the parachute division that participated in the February 4th (4F) coup were protesting close to Miraflores, they bombed with tear gas and then moved to Mirflores to receive some more gas! They were protesting their rights to be absorbed back into the Armed Forces. Details are few yet so some of this stuff could be off.

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    • Rights to be absorbed!!!

      What a malarkey!, these guys should be set and square behind bars.

      Hope civil society does not try to align itself with these scoundrels.

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    • Sicad 1? A ticket to Europe (if you can find one) was about 70.000 Bs from months now. That’s 6363 USD at Sicad 1 and 1400 USD at Sicad 2 . For reference a Bogota Madrid ticket goes around 1300 USD. Recently ,I found a ticket to Brazil in 30.000 Bs. that would be $2727 at Sicad 1 and around 600$ at Sicad 2 . A Bogota-Sao Paulo flight costs around 600$. Airlines have been charging Sicad 2 prices from some months now, are they now going to sell a ticket to Europe at 6363 USD at 318150 Bs? Or this is just making official what was already a reality?

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  3. I prefer to rip the bandaid off quickly but can’t help but wonder if this decision is conveniently timed to align with the airline payment issues. They may blame the huge increase on the airlines or the world cup or some other such bullshit.

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  4. I can’t wait to see how this gradualism works for the government.

    Not only do I think gradualism is more painful than stock therapy. I think it adds an extra layer of logistic complexity, as the government has to start making decisions on what do adjust, when and at what rate.

    It’s schadenfreude time

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      • There was a time, I. E., up until yesterday; when I could visit Vzla 3 times a year. These days are so gone.

        I’m just saying I find it quite amusing that the guys that criticized the paquetazo so much now have the opportunity to make adjustments gradually. I can’t wait to see them become a mess

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        • What Francisco might have wondered, I think, is whether you know a single human being in Venezuela for whom you care. The mess is also (and rather more often) for them.

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  5. SICAD II was a massive devaluation, but still a currency control system. Instead of SICAD II it should had been called SITME II. At 50 Bs/$ we are still looking at a preferential rate in comparison to the black market rate (currently 1.5x larger). It basically made the sweet deal of CADIVI less sweeter, but it is still a sweet deal. At the end it is the Venezuelans financing all this.

    As a side note, here is a Chavista Bureaucrat (did you mean a chavista burrocrat?) when confronted with the fact that now prices will go up, he appeals to no other than free market!

    “eeerrr, as we make currency more readily available for airlines theeeen the offer will increase theeen prices will go down”

    Se fundio el tipo.

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  6. Let’s say you need to fly from Caracas to Atlanta. At the new rate, a single ticket will cost you somewhere in the region of 75,000 bolivares. Oh, by the way, there aren’t any seats left for the rest of 2014.

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    • There will be plenty of seats at those prices. Airlines will cut the supply of seats because demand will evaporate. And when the cupos are switched to the same rate the planes will be even emptier.

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    • Er, ah, does that flight come with airline restroom toilette paper, or must one bring some along? Oooh, this could get bad….

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  7. A fantastic professor at Duke U (Dan Ariely) suggests that in terms of human pain there are two important variables to consider: (1) is maximum pain, and (2) duration of the pain. According to his work (and his own experience), human traumas associated with painful situations are directly related to the first variable (max. level of pain) and barely with the second (duration).

    Maybe (if the objective is to avoid “social traumas” ) ripping the bandaid slowly can be considered as the smart political choice.

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  8. Protests in Miraflores with more people coming in to join apparently ,motorizados blocked the autopista del este or whatever its name is. I just saw a military plane here in Maracaibo near the URBE university where colectivos,state police and Nazional Guard are now shooting live rounds,tear gas and rubber pellets to protestants since 2pm at least.

    It’s an exciting day i’m having a heart attack! 6:50pm

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  10. Well, I guess it’s going to Colombia by car now! What a wonderful gift the chavistas gave me, to be able to visit our brother country while enjoying that view during a 12 hour trip! /s

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    • That is a very spoiled thing to say Jose.Here in the US most people hardly have the time or money to travel, and people do not complain.It’s normal.

      Venezuelans have been way too spoiled.

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  11. I’m sorry to say this, because it affects people in Venezuela, but anything that eliminates the crazy distortions and the insane subsidized trips to Miami is a good thing. Party is over folks. It’s painful, but deep down, you knew it couldn’t last. I feel for you, but you’ll pull through.

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    • JCN, you’re right: reality has a way of waking anyone up. The real question is whether after the wake-up we’ll set up the same cycle that brought us this reality, tripping over the proverbial stone once again, or will we make a system change to break the cycle. From what I read in these and other pages, buckle up for another hill on the roller coaster.

      —

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      • “because it affects people in Venezuela”, as he clearly states; in fact, JC is not saying he’s sorry for the measure taking place (the good thing, aka adjustment of prices to SICAD II) but for having to say that it is good when it will make the lives of many Venezuelans more difficult (as the removal of any subsidy tends to do).

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  12. The news here is that they are talking to the airlines one by one starting with the really small regional ones , asking them to calculate their USD fares using the Sicad Ii rate starting as of july 1st and separately giving a schedule for the payment of their past debts in whatever rate they consider appropiate .

    The big hurdle will come with the large international airlines who are not only worried about the US$ exchange rate applicable to calculate their fares for what remains of this year but also about getting paid their past debts at the exchange rate which applied when the fares where sold , these are the airlines owed the 4 billion USD . this is where the real money is and includes those which carry most passengers to the more common destinations . The problem is that until they actually get paid what they are owed they will continue their passive policy of making tickets unavailable except ocassionally and at very large fares.

    The Venezuelan airlines association head has already stated indirectly his skepticism of the matter being sorted out by pointing out that what the regime owes the airlines is more than the operating reserves of the country ( USD 4 billion) so where is the money going to come from to pay this huge debt ?? So far the govt has taken different positions at diferent times , promised to pay part of the debt then failing to pay it , and generally going to and fro like headless chicken .

    Dont think the airlines will move until they see some actual cash on the table . Even the agreement to allow fares to be sold at the sicad Ii rate doesnt solve the airlines problems if there are so few dollars offered through the sicad 2 system that they in practice arent able to get the bs exchanged into the USD they need to continue their business in Venezuela.

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  13. Could have told you this was coming, Conviasa tickets from Bogotá to Caracas cost $440 in May as against $2000 in April.

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  14. It’s painful, but long due.

    Given the demand of flights between, for example CCS-MIA, if the free market reigned, fares would be a lot lower in USD, even if they’re calculated at Sicad2 or even the free-market rate.

    Low cost airlines are more than willing to enter the space, if they could get paid!!

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  15. Hiking the exchange rate to the sicad 2 level doenst make a difference if when airlines go to sicad 2 to exchange their bs for US$ there are not enough of them available or on offer to allow them to purchase the US$ they want to repatriate.

    Right now only 1 in 10 people seeking to buy US$ through Sicad 2 get to buy them , there simply are not enough dollars in the govt coffers to allow the system to sattisfy the full demand and the private owners of dollars arent overwhelmed at the idea of departing from their dollars .

    Having the govt decree a more rational exchange rate doesnt by itself produce the dollars needed to sattisfy the sicad 2 demand for them !! This last is probably the crucial issue on which the whole devaluation scheme depends !!

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  16. The question now is, are airlines going to be able to get their dollars out at the SICAD2 rate? I doubt it, I´ve tried to get SICAD2 dollars for my company for 3 weeks with no success.

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    • Rene I just posted the same thing in Miguel’s blog.

      If they didn’t pay the airlines because they didn’t have any dollars why would anyone think that things will change just because they say the rate is different?

      It’s just a delaying tactic to buy time & prevent all the airlines leaving for good.

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  18. Funny how people insist that exchange control was a subsidy instead of being what it really was: A tool to create the bigges monopoly of the century in this country, which doubled as a political weapon, and served too to seed the idea that “the government was giving cheap dollars to people because they’re good and kind” and that everybody had to be grateful for that.

    It’s not a privilege, it was just the official rate that the government decided to pull from their asses, period.
    And before the morons try to reply me claiming “stop complaining for not be able to raspar cupo anymore” I never did that, I got an actual work to get my paycheck.

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  20. Venezuela is at that point in a crazy party when everybody is waking up from the floor, mid-afternoon, sun in the face, with the mother of all hangovers. They have three choices: 1) Stoically endure the hangover, 2) Be proactive about in, i.e. squeeze some fresh juice, make a trip to the store for some aspirin…, or 3) Pay heed to that old myth of fighting a hangover with more alcohol, because, after all, you can’t get a hangover while you’re drunk! Except there is no more alcohol in the party so this option would mean scavenging for half drunk glasses with soaked cigarrete butts, stale guarapita, … I just hope Venezuela doesn’t chose 3)

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