Atlanteax
08-04-2010, 10:14 AM
I considered this STRATFOR article to be well informative about the current state of Venezuelas' economy.
32% inflation? (cited by Venez's own central bank) Wow...
.
http://www.stratfor.com/analysis/20100803_special_report_venezuelas_unsustainable_e conomic_paradigm
.
Special Report: Venezuela's Unsustainable Economic Paradigm
August 4, 2010 | 1208 GMT
Despite being a major energy exporter, Venezuela is currently mired in economic recession and suffering from record-high levels of inflation, a dismal condition known as “stagflation.” As the country’s economy deteriorates on a number of fronts, the government continues to struggle with an electricity crisis and worsening food shortages that are threatening to undermine support for the ruling party in the lead-up to September legislative elections. The Venezuelan government has tried to impose a range of currency controls, from currency devaluations to parallel market crackdowns, in an effort to resuscitate the economy. But the country’s distortionary and unsustainable currency regime not only is forcing more of the economy underground (leading to higher inflation and shortages of basic goods), but it is also catalyzing an elaborate money-laundering scheme that now appears to be spiraling out of control, thereby weakening the regime’s grip on power.
Analysis
From the energy and food sectors to banks and steel mills, Venezuela has been on an aggressive nationalization drive over the past four years in order to draw more money into state coffers while increasing the number of Venezuelan citizens who are politically (and economically) beholden to the state for their livelihoods. While this policy has brought a number of short-term benefits to the government, it has come at the cost of gross inefficiency, mismanagement and corruption, leading to an overall decline in Venezuelan productivity. In an attempt to redress the extreme macroeconomic imbalances, Venezuelan President Hugo Chavez was forced to make a substantial adjustment to the country’s fixed peg to the U.S. dollar. On June 8, the Venezuelan government devalued the bolivar against the dollar by 17 percent and 50 percent, simultaneously creating a dual exchange-rate regime.
The Currency Regime
An exchange rate of 2.15 bolivars per dollar was established for “essential goods,” such as food and medicine, while all other items used a weaker rate of 4.3 bolivars per dollar. The parallel market that used to exist in tandem (and where, unregulated, the dollar recently cost upward of 8 bolivars) is now strictly regulated by the Venezuelan government in a trading band of 4.2 to 5.4 bolivars per dollar, making the parallel market the third official exchange rate. For all intents and purposes, that parallel market was the closest thing to a genuine exchange rate that the country had because the other two rates were subsidized and access to them was restricted by the government.
Clearly there are problems with the current arrangement. Although dual or multi-tiered exchange rate regimes do provide the government with the ability to impose tighter capital controls, address economic imbalances and make imported goods more affordable, they are inefficient and difficult to manage. In most economic systems, the cost of capital is the single most important factor for determining growth and development, and when the cost of capital has three different values, entire sectors shift (and even disappear). For example, the ability to import food for a third of the real market price via the “essential” exchange rate largely destroys incentives to produce food locally. Unsurprisingly, countries with such regimes most often experience lower growth and much higher inflation than countries with a single, unified exchange rate. To mute the very high reported inflation (about 32 percent annually, according to Venezuela’s central bank), the government has militantly enforced price repression, which is beginning to cause shortages of even the most basic goods (since it makes more financial sense for businesses to stop producing altogether than be able to sell only at artificially low prices).
Second, since the parallel rate was upward of 8 bolivars per dollar before the government began regulating the market, even the weakest possible official rate — the 5.4 at the weakest end of the official trading band — would still be overvalued. With dollars becoming harder to obtain in the regulated markets, more of the economy is being driven underground, and it is probably only a matter of time before another black market emerges (assuming that such a market has not already emerged). The existence of another parallel currency market would bring the total number of foreign exchange rates in Venezuela to four — the subsidized rate, the petrodollar rate, the now-regulated parallel rate and a new black-market rate — the consequences of which would be dizzying.
Moreover, because multi-tiered exchange-rate regimes skew the value of money, they also reward particularly creative individuals and companies who can figure out ways to shuffle goods back and forth through the exchange regime (for example, by placing an import order for a good at one rate, importing it at another and selling it at a third). The various and intricate incentives that arise from distortionary currency regimes invariably lead to spiraling corruption and fraud. Venezuela’s currency regime is no exception, especially since practically all public-sector entities have the ability to import via the most subsidized rate by virtue of their being public enterprises.
The Gaming Process
Conspicuously enough, warehouses have recently been discovered in Venezuela containing mountains of rotting food, expired medications and unusable electricity-generating equipment — at a time when Venezuela is ostensibly suffering from severe food and power shortages. However, there’s a very logical reason why the warehouses are filled with “essential” goods. The most apparent is that the mismanagement of state entities responsible for the purchasing and distribution of these goods renders them unable to keep up with the logistical demands of their trade. The state-run entity Bolipuertos (of which the Cuban government holds a significant stake) that runs Venezuela’s ports, for example, is years behind on its repair schedule. As a result, goods arriving at Venezuelan ports will often sit for weeks and months without the necessary electricity and refrigeration to preserve them. But the less obvious — and more nefarious — reason is that many of the ports are also mafia-run, and Venezuela’s state-owned companies and their subsidiaries are exploiting their privileged access to the subsidized exchange rate in order to enrich themselves. Simply put, there may be deliberation behind many of these shortages.
Before the government began regulating the parallel market, which more accurately reflected the forces of supply and demand (and thus the bolivar’s genuine value), private Venezuelan companies would finance anywhere from 30 to 40 percent of their imports through a dollar/bolivar rate of about 8. However, all state-owned enterprises can exchange just 2.6 bolivars for one U.S. dollar, provided that the dollar goes toward importing a good on the government-determined list of essential goods. So, the game is this: maximize the bolivar amount exchanged at the subsidized rate, minimize the dollar amount that has to be spent on importing the goods and pocket the difference.
Overstating the price, or intended amount, of goods to be imported — be they actually essential or simply deemed essential for the sake of participating in this racket — would provide the importer with extra U.S. dollars, as would directing the import business to friends in return for cash or favors.
For the importers to earn the “inefficiency premium” they charge on this process, they would want to be careful not to kill their golden goose by actually meeting the market demand for goods. So long as there exists a “shortage” of that particular good, the importers can make a strong argument for why they need to import even more of the goods — hence the “inexplicable” warehouses of essential goods containing unusable power-generating equipment and rotting food.
The Food Example
While any item on the government’s essential goods list is a potential candidate for the scam, food is perhaps the best “vehicle” simply because it is perishable, people have to eat and there will always be demand. The drawback to food as the vehicle, from the government’s point of view, is that bare shelves in food markets can quickly present an insurmountable challenge for even the most resilient of regimes. Venezuela imports about 70 percent of its food, most of which now comes from the United States, Brazil and Argentina (Caracas has sustained a de facto trade embargo on Colombian food imports over the past year). Since 2003, the government has placed heavy price controls on foodstuffs and has steadily harassed private food companies with charges of speculation and fraud to justify the state’s unwavering nationalization drive.
In Venezuela, the state-owned energy firm Petroleos de Venezuela (PDVSA) — the country’s main revenue stream — is also responsible for much of the country’s food distribution network, a primarily cash-based business that makes tracking transactions all the more difficult. PDVSA subsidiaries work to restrict food supply in the country, thereby increasing demand and increasing their own profit when they turn around and sell food on the black market. Those that have squirreled away vast amounts of food can, for a hefty profit, supply the overwhelming demand for food on the black market. The fact that PDVSA is responsible for much of the country’s food distribution makes it much easier for those subsidiaries to corner the food market — they can both create the shortage (by hoarding food) and be there to satisfy the pent-up demand (with the food they’ve hoarded).
The two main PDVSA subsidiaries that operate in this particular money-laundering scheme are PDVAL and Bariven. PDVAL was created in January 2008 with a stated goal to correct the speculation of food prices through its own distribution network. Bariven, the acquisition arm of PDVSA, is tasked with obtaining materials for oil exploration and production, but it is also involved in managing inventories for PDVSA, a responsibility that extends into the food sector. From its headquarters in Houston, Bariven will place an order for food imports from American exporters in Texas and Louisiana. PDVSA Bank, a murky new entity whose creation was announced in the summer of 2009, was set up to facilitate banking agreements between PDVSA and Russian state energy giant Gazprom, and is believed to provide loans for such food-import transactions. (Bariven is also known to secure loans from major U.S. banks and is one of a select few state entities that has preferential access with the Commission of Foreign Exchange Administration in Venezuela to trade bolivars for dollars to facilitate these exchanges.) Bariven will then sell the food to PDVAL at a hefty discount, yet will report an even transaction on the books. The food will then sit on the docks until it is close to its expiration date, thus restricting supply in the state-owned markets and building up demand. When the food is already rotting (or close to it), it is sold on the black market for a profit (it’s no good to sell the food to the normal government distribution network, where the price of food is tightly controlled). Since PDVAL is the entity that collects all the revenue from state food distributors, the bolivar-denominated proceeds from its food sales can then be discreetly recycled back into PDVSA Bank, where the bolivars can be used again to place ever-increasing orders that will require more dollars and more imports.
The orders have increased to the point that the distributors are throwing out thousands of tons of rotting food. This is the root of a scandal that broke in Venezuela in May, when state intelligence agents began investigating the theft of powdered milk and found between 30,000 and 75,000 tons (estimates vary between state and opposition claims) of food rotting in warehouses in Puerto Cabello, La Guaira, Maracaibo and other major ports.
32% inflation? (cited by Venez's own central bank) Wow...
.
http://www.stratfor.com/analysis/20100803_special_report_venezuelas_unsustainable_e conomic_paradigm
.
Special Report: Venezuela's Unsustainable Economic Paradigm
August 4, 2010 | 1208 GMT
Despite being a major energy exporter, Venezuela is currently mired in economic recession and suffering from record-high levels of inflation, a dismal condition known as “stagflation.” As the country’s economy deteriorates on a number of fronts, the government continues to struggle with an electricity crisis and worsening food shortages that are threatening to undermine support for the ruling party in the lead-up to September legislative elections. The Venezuelan government has tried to impose a range of currency controls, from currency devaluations to parallel market crackdowns, in an effort to resuscitate the economy. But the country’s distortionary and unsustainable currency regime not only is forcing more of the economy underground (leading to higher inflation and shortages of basic goods), but it is also catalyzing an elaborate money-laundering scheme that now appears to be spiraling out of control, thereby weakening the regime’s grip on power.
Analysis
From the energy and food sectors to banks and steel mills, Venezuela has been on an aggressive nationalization drive over the past four years in order to draw more money into state coffers while increasing the number of Venezuelan citizens who are politically (and economically) beholden to the state for their livelihoods. While this policy has brought a number of short-term benefits to the government, it has come at the cost of gross inefficiency, mismanagement and corruption, leading to an overall decline in Venezuelan productivity. In an attempt to redress the extreme macroeconomic imbalances, Venezuelan President Hugo Chavez was forced to make a substantial adjustment to the country’s fixed peg to the U.S. dollar. On June 8, the Venezuelan government devalued the bolivar against the dollar by 17 percent and 50 percent, simultaneously creating a dual exchange-rate regime.
The Currency Regime
An exchange rate of 2.15 bolivars per dollar was established for “essential goods,” such as food and medicine, while all other items used a weaker rate of 4.3 bolivars per dollar. The parallel market that used to exist in tandem (and where, unregulated, the dollar recently cost upward of 8 bolivars) is now strictly regulated by the Venezuelan government in a trading band of 4.2 to 5.4 bolivars per dollar, making the parallel market the third official exchange rate. For all intents and purposes, that parallel market was the closest thing to a genuine exchange rate that the country had because the other two rates were subsidized and access to them was restricted by the government.
Clearly there are problems with the current arrangement. Although dual or multi-tiered exchange rate regimes do provide the government with the ability to impose tighter capital controls, address economic imbalances and make imported goods more affordable, they are inefficient and difficult to manage. In most economic systems, the cost of capital is the single most important factor for determining growth and development, and when the cost of capital has three different values, entire sectors shift (and even disappear). For example, the ability to import food for a third of the real market price via the “essential” exchange rate largely destroys incentives to produce food locally. Unsurprisingly, countries with such regimes most often experience lower growth and much higher inflation than countries with a single, unified exchange rate. To mute the very high reported inflation (about 32 percent annually, according to Venezuela’s central bank), the government has militantly enforced price repression, which is beginning to cause shortages of even the most basic goods (since it makes more financial sense for businesses to stop producing altogether than be able to sell only at artificially low prices).
Second, since the parallel rate was upward of 8 bolivars per dollar before the government began regulating the market, even the weakest possible official rate — the 5.4 at the weakest end of the official trading band — would still be overvalued. With dollars becoming harder to obtain in the regulated markets, more of the economy is being driven underground, and it is probably only a matter of time before another black market emerges (assuming that such a market has not already emerged). The existence of another parallel currency market would bring the total number of foreign exchange rates in Venezuela to four — the subsidized rate, the petrodollar rate, the now-regulated parallel rate and a new black-market rate — the consequences of which would be dizzying.
Moreover, because multi-tiered exchange-rate regimes skew the value of money, they also reward particularly creative individuals and companies who can figure out ways to shuffle goods back and forth through the exchange regime (for example, by placing an import order for a good at one rate, importing it at another and selling it at a third). The various and intricate incentives that arise from distortionary currency regimes invariably lead to spiraling corruption and fraud. Venezuela’s currency regime is no exception, especially since practically all public-sector entities have the ability to import via the most subsidized rate by virtue of their being public enterprises.
The Gaming Process
Conspicuously enough, warehouses have recently been discovered in Venezuela containing mountains of rotting food, expired medications and unusable electricity-generating equipment — at a time when Venezuela is ostensibly suffering from severe food and power shortages. However, there’s a very logical reason why the warehouses are filled with “essential” goods. The most apparent is that the mismanagement of state entities responsible for the purchasing and distribution of these goods renders them unable to keep up with the logistical demands of their trade. The state-run entity Bolipuertos (of which the Cuban government holds a significant stake) that runs Venezuela’s ports, for example, is years behind on its repair schedule. As a result, goods arriving at Venezuelan ports will often sit for weeks and months without the necessary electricity and refrigeration to preserve them. But the less obvious — and more nefarious — reason is that many of the ports are also mafia-run, and Venezuela’s state-owned companies and their subsidiaries are exploiting their privileged access to the subsidized exchange rate in order to enrich themselves. Simply put, there may be deliberation behind many of these shortages.
Before the government began regulating the parallel market, which more accurately reflected the forces of supply and demand (and thus the bolivar’s genuine value), private Venezuelan companies would finance anywhere from 30 to 40 percent of their imports through a dollar/bolivar rate of about 8. However, all state-owned enterprises can exchange just 2.6 bolivars for one U.S. dollar, provided that the dollar goes toward importing a good on the government-determined list of essential goods. So, the game is this: maximize the bolivar amount exchanged at the subsidized rate, minimize the dollar amount that has to be spent on importing the goods and pocket the difference.
Overstating the price, or intended amount, of goods to be imported — be they actually essential or simply deemed essential for the sake of participating in this racket — would provide the importer with extra U.S. dollars, as would directing the import business to friends in return for cash or favors.
For the importers to earn the “inefficiency premium” they charge on this process, they would want to be careful not to kill their golden goose by actually meeting the market demand for goods. So long as there exists a “shortage” of that particular good, the importers can make a strong argument for why they need to import even more of the goods — hence the “inexplicable” warehouses of essential goods containing unusable power-generating equipment and rotting food.
The Food Example
While any item on the government’s essential goods list is a potential candidate for the scam, food is perhaps the best “vehicle” simply because it is perishable, people have to eat and there will always be demand. The drawback to food as the vehicle, from the government’s point of view, is that bare shelves in food markets can quickly present an insurmountable challenge for even the most resilient of regimes. Venezuela imports about 70 percent of its food, most of which now comes from the United States, Brazil and Argentina (Caracas has sustained a de facto trade embargo on Colombian food imports over the past year). Since 2003, the government has placed heavy price controls on foodstuffs and has steadily harassed private food companies with charges of speculation and fraud to justify the state’s unwavering nationalization drive.
In Venezuela, the state-owned energy firm Petroleos de Venezuela (PDVSA) — the country’s main revenue stream — is also responsible for much of the country’s food distribution network, a primarily cash-based business that makes tracking transactions all the more difficult. PDVSA subsidiaries work to restrict food supply in the country, thereby increasing demand and increasing their own profit when they turn around and sell food on the black market. Those that have squirreled away vast amounts of food can, for a hefty profit, supply the overwhelming demand for food on the black market. The fact that PDVSA is responsible for much of the country’s food distribution makes it much easier for those subsidiaries to corner the food market — they can both create the shortage (by hoarding food) and be there to satisfy the pent-up demand (with the food they’ve hoarded).
The two main PDVSA subsidiaries that operate in this particular money-laundering scheme are PDVAL and Bariven. PDVAL was created in January 2008 with a stated goal to correct the speculation of food prices through its own distribution network. Bariven, the acquisition arm of PDVSA, is tasked with obtaining materials for oil exploration and production, but it is also involved in managing inventories for PDVSA, a responsibility that extends into the food sector. From its headquarters in Houston, Bariven will place an order for food imports from American exporters in Texas and Louisiana. PDVSA Bank, a murky new entity whose creation was announced in the summer of 2009, was set up to facilitate banking agreements between PDVSA and Russian state energy giant Gazprom, and is believed to provide loans for such food-import transactions. (Bariven is also known to secure loans from major U.S. banks and is one of a select few state entities that has preferential access with the Commission of Foreign Exchange Administration in Venezuela to trade bolivars for dollars to facilitate these exchanges.) Bariven will then sell the food to PDVAL at a hefty discount, yet will report an even transaction on the books. The food will then sit on the docks until it is close to its expiration date, thus restricting supply in the state-owned markets and building up demand. When the food is already rotting (or close to it), it is sold on the black market for a profit (it’s no good to sell the food to the normal government distribution network, where the price of food is tightly controlled). Since PDVAL is the entity that collects all the revenue from state food distributors, the bolivar-denominated proceeds from its food sales can then be discreetly recycled back into PDVSA Bank, where the bolivars can be used again to place ever-increasing orders that will require more dollars and more imports.
The orders have increased to the point that the distributors are throwing out thousands of tons of rotting food. This is the root of a scandal that broke in Venezuela in May, when state intelligence agents began investigating the theft of powdered milk and found between 30,000 and 75,000 tons (estimates vary between state and opposition claims) of food rotting in warehouses in Puerto Cabello, La Guaira, Maracaibo and other major ports.