Keys and Perspectives of the Exchange “Liberation” (Game of Thrones Exchange II)

As it is already public knowledge, today Monday, May 13, the new exchange scheme approved by the BCV and the national government starts. In the first part of this text, we explained, in general terms, how we arrived at this point, in our view of the culminating stage of the process of dismantling the currency exchange control that was initiated since mid-2016, together with the struggle, for control of that market and therefore of the national economy and the country, in which we find ourselves involved since 2013, although its origins go back at least a decade more.

In this respect, it is worth repeating the following: we are not ad portas or in the middle of a liberation of the exchange market, as economic common sense leads us to think. In fact, we are facing a relay of the control of that market, in which the constitutionally established exchange authority (BCV) gives it to banks, especially private banks.

A control that has been in dispute since the first day in power of President Chávez’s government, who governed his first 4 years without public control of the exchange market, until the coup d’état and the oil sabotage of 2002-2003 led him to apply it. This scheme of control of the State on the exchange market was maintained until 2012 and early 2013, when, to use the language of the current government, it was “perforated”.

Now, during the time of President Chávez, the public exchange control did not have homogeneous behavior, since in fact in 2008-2009 (in the middle of a context similar to the current one, although not so serious or prolonged, of crisis caused by the bankruptcy of the US financial system), the exchange control of the State was “relaxed” with the creation of the so-called swap market, within which the exchange houses and banks could operate with bonds and perform another set of foreign currency transactions.

But that flexibilization did not bring the expected positive results. In practice, it ended up generating more problems than solutions, among them, the deepening of capital flight, the indebtedness of the Republic, and the generalization of a very varied range of illicit exchange rates. That led the government of President Chávez to intervene in the swap market, close the exchange houses, and even, there was the need to rescue several banks that were involved in a speculative dynamic and put at risk the entire financial system of the country. For all these, in parallel, the government created the SITME, an alternative mechanism to CADIVI, with the aim of expediting the delivery of foreign currency, especially for non-priority imports, savings and travel.

At the beginning of 2013, and with President Chávez convalescing in Cuba, SITME was eliminated and replaced by SICAD. Thus began the replacement of exchange control focused on CADIVI, with a series of institutional experiments that in addition to the creation of CENCOEX and CORPOVEX, ended up creating the current DICOM. Always in each of these cases the same thing was argued: the need to fight the parallel dollar, to make the foreign exchange market transparent, create favorable conditions for private investment, etc. But the truth of the case is that, as is evident today, in none of that was (control) advanced. In fact, it lost ground, with the aggravating circumstance that the State lost in practice the governability not only of the exchange rate policy and by extension of the price policy, but that now it is “forced” to cede it formally and legally.

Foreign Dealing Desks (FDD): the legalization of the “corporate” dollar
In its typical Newspeak, the BCV exposes the objectives of the new exchange scheme as follows:

“With the purpose of favoring economic development in an orderly exchange market, the Central Bank of Venezuela (BCV) has issued Resolution No. 19-05-01, as part of a strategy on foreign exchange policy that has been adopted jointly with the National Executive, in which the institutions of the national banking system are authorized to carry out purchase and sale operations in foreign currency through their FDD’s, with their clients from the private sector and interbanex operations. This strategy is consistent with the institutional efforts to provide a greater degree of confidence, transparency and depth to the foreign exchange market.”

From this, let’s see:

Although in the strict sense the resolution does not eliminate DICOM, under this new scheme it is irrelevant. In fact, this morning of Monday the 13th that the new scheme starts to operate, there are no usual calls to auctions on the DICOM website.
In view of this, the resolution of the BCV focuses on the FDD’s. All these do not create exactly but rather whitewash their existence, because they have been operating for several years under the shadow of banks in what justifying analysts call the “corporate sector” This market -before black, as of today legal- is basically destined to the operation of large-scale currency or volume, for which operators and financial intermediaries trade on behalf of claimants and bidders the amounts involved (a function for which they charge important sums). Usually excluded from these tables for obvious reasons are retail operations, for which there are mechanisms of purchase and direct sale more known by the public.
Two fundamental characteristics of these exchange tables, recognized by their apologists, are, first of all, their extraterritorial nature, in the sense that foreign currency transactions are usually carried out outside our borders, including through off-shore label firms, and in that respect are not foreign currency that are directly added to the national market. And second, its strong concentration, since the high volume of the operations involved (estimated at 80% of the total parallel market), does not translate into a larger number of participants, but rather the opposite. Which is not a minor detail, since it implies that the possibilities of cartelization and collusion to impose favorable prices on the bidders (that is, a high exchange rate and at the convenience of those who sell) are quite high. If to this is added that what is expected, the number of claimants is greater than that of the bidders but also in a context of scarce foreign exchange and the uncertain political context, these possibilities are even clearer and higher.

Will it work this time?
Strictly speaking, and although the specific modalities of operation will be seen in the week and probably vary between banks and exchange houses involved, for the common people this scheme will work as a kind of DICOM, perhaps with fewer entry requirements and in any case without the mechanism of the auctions. What will continue to exist are maximum amounts to trade daily and / or monthly, which is expected given the aforementioned about the scarcity of foreign currency and the high concentration of supply.

Regarding the question of whether it will work or not, the answer(s) depends on what is thought or expected to work.

In our view, if what is expected is that with them the exchange rate stabilizes, the possibilities look quite low. If there is not a bullish rally the first day or week, which will always be because of adequacy, familiarization, etc., it is most likely that sooner or later the rate of exchange will rise. We assume that to avoid this the government will continue to press the road to restrict liquidity in bolivars to avoid being exchanged for foreign currency, but as we have been commenting, this has a huge cost since it contracts even more the already highly contracted national economy.
On the other hand, we must take into account that although the government seeks to build bridges with the private sector by inviting them to join development, recovery, etc., or as the deputy Jesús Farías says “to fulfill its role”, the truth is that these always respond to such bridges with dynamite or, in any case, cross them to the point that serves their interests. In fact, if the opinions of the main influencers of common sense are reviewed and the conventional economic imaginary of right-wing oppositionists, from the outset they already condemn the new scheme even though they theoretically agree with it. The appeal in this case is to call it extemporaneous, that is, they say it is a good measure but that it is late and the government takes it because it has no more options and it is a desperate measure.
In addition, it may be based on an erroneous assumption: and it is at this point of things that the holders of foreign currencies are interested in changing them to bolivars. Surely there will be those who have that need to cover certain costs and operations. But given the advance of forced dollarization in which not only is it being counted and calculated in dollars, but openly paying many goods and services, this need is not so clear. This applies for example in the case of those who receive remittances, who unless they have no other alternative, the most logical one is to look for “alternative” mechanisms to get them in foreign currency. The most sophisticated will appeal to cryptocurrencies.
And no less important: the impact of the unilateral measures and the financial blockade against the country, which puts sticks in the wheels to any operation with and from Venezuela.
In this sense, our projections are that this will end up happening in general lines the same as with all the previous experiments of replacing the “perforated” CADIVI : it will not stabilize the exchange rate nor will it incentivize productive investment or stop the flight of foreign currency. In fact, the opposite is likely to happen, with the aggravating circumstance that the foreign exchange authorities deprive themselves of any ability to influence.
With regard to the latter, it must be taken into account that the irrelevance of the DICOM now also involves the BCV. As far as the exchange rate is concerned, it is clear that the latter had long since lost the exchange authority, limiting itself with great difficulty to only fixing the type of official exchange. Under the current scheme it will continue to do so, but not as its decision but simply as a publisher of the weighting of the various markers obtained in the various tables. It seems the same, but it is not. On the other hand, the BCV does not have the capacity to intervene in the market because it does not have a correspondent bank due to the blockade and the sanctions. And due to the same thing, private banks can not operate with the BCV.

Consequences: economic government in its labyrinth

Beyond the exclusively exchange-rate issues, we believe that this measure will lead to another series of consequences : it is evident that the power of the bank to pressure the government to take measures in its favor will increase, so it is expected to demand a rise at any time from the additional interest rate to a relaxation of the monetary reserve.
On the other hand, and given the current low levels of liquidity in bolivars, it is very likely that progress will be made towards greater flexibility for the opening and use of foreign currency accounts within national banks, which would undoubtedly be a firm step in the definitive dollarization of the economy.
It is also possible that there will be readjustments in the banking system: that some banks disappear and be absorbed by others, to the extent that they have less maneuverability to adapt to the context and operate with foreign currency. In some cases this may be due to size, in the sense of those who are small. But in others (due) to the possibility of operating with the outside, an issue that above all applies to banks in the public sector. Needless to say that in the case of a bank failure, the State would not have the possibility or ability to intervene as in 2009-2010.
Regarding the issue of prices, and beyond that they have behavior that is not necessarily linked immediately to the exchange rate (ie, does not necessarily behave in the short term according to the ups and downs of the same, but the long and medium for a theme of expectations), most likely they will tend to adjust upwards in advance of the scenarios to come.
Going back to points 1 and 2, if the government’s bet is for the exchange rate to stabilize and inflation to be controlled, is to maintain the monetary restriction and the wage lags, we should be clear that the contraction of consumption and sales will increase, and therefore, that of economic activity. We have already commented extensively in other texts, such as the one published on the 1st of May.

Can we do something else?

For some time now, the national government seems to have adopted a policy halfway between the dejad haced déjad pasad and fatalism, in the sense in which it is dedicated to simply returning from the right or formalizing what it allows to happen in fact and informally. And this undoubtedly gives it that aura that it can not do anything anymore, because it also seems that it has tried everything and nothing has worked, including the experiments with the petro. However, we think that there are things that can be done, in any case the first of them is to rethink, to use the expression of Professor Pasqualina Curcio in an article that we publish parallel to this.

But the truth of the case, is that without the reactivation of oil production here there really is not much to do, because the truth of the matter is that with exchange control of the State or of the private sector, it is necessary to generate foreign exchange, and beyond the sanctions, that is only possible in the short term where there is increasing oil production, today on the floor. The problem is that the government does not seem to be fully aware of it. And it looks more locked into the dangerous fantasy of opening up to privatize everything that can not-or does not have the capacity to-drive to save itself in that way. In this respect, we already know where these stories end, which begin by considering themselves as tactical movements that do not compromise the strategic ones. But the issue is that tactical and strategic games are not played alone. And the enemies think and know the same thing, who sometimes even seem to be more aware that they are in the middle of a war -although they do not recognize it- than the government that constantly says so.
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Translated by JRE\EF