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VenEconomy:
For now, as long as the dollars last

This Wednesday, June 9, saw the startup of the new Foreign-Currency Securities Transactions System (SITME after its initials in Spanish), through which the Central Bank, complementing CADIVI, is to handle the buying and selling of currency as established in Foreign Exchange Agreement No. 18.
After nearly a month with operations on the swap market suspended, trading was slow, slight, and full of improvisations amidst great expectations and rumors given the lack of information and sketchy game rules.
According to Central Bank President Nelson Merentes, the system worked “to perfection” (at 98%) with a supply of $17 million (expected demand was around $80 million). The average exchange rate was Bs.F.5.27:$.
The urgency of implementing this new system stems from the government's insistence on establishing a country model based on Castro-communism, which involves dismantling the private productive apparatus and the State taking over everything. And that “everything” includes having sole control over the trading of currency.
From 2003, when a “temporary” exchange control regime was implemented, until today's fierce foreign exchange control system, endless distortions have been generated that will now be extremely difficult to correct. On top of that, the government has been incapable of managing the state-owned companies efficiently and transparently, in particular PDVSA. Today, the country's main source of revenues has dried up and there is little likelihood that it can be revived in the short and medium terms. So, the shortage of foreign currency started to cause havoc in the country's economy.

Now, the government has unfortunately chosen to take the hardest path to try to postpone the inevitable outcome of the tremendous foreign exchange mess it finds itself in.

Instead of opting for Nelson Merentes's proposal, which while it would not cure the patient could bring down its temperature, and continuing with the exchange bonds, issuing PDVSA bonds in the short term, auctioning off the structured notes and handing them over directly to the financial system, and demanding that CADIVI speed up the release of foreign currency, it strangled the stockbrokerage and broker-dealer firms and forbid any swap market operations not supervised by the Central Bank.

The fact of the matter is that the country has run out of foreign currency, the reserves are plummeting, and PDVSA and the private productive apparatus do not have the capacity to generate reserves in sufficient quantities. Besides, there is no way that the State can borrow permanently to meet the demand for foreign currency in an economy that is dependant on imports. What is even more serious is that it seems highly unlikely that the government will correct its attitude.

So the scenario in store is higher inflation and more widespread shortages. Tomorrow, when the new foreign exchange system collapses, the government, who takes responsibility for nothing, will cast around for new scapegoats. Could it be the turn of the banks this time?

VenEconomy has been a Venezuela's leading specialized publisher on financial, political and economic data since 1982. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Veneconomy , June 10, 2010. Petroleumworld reprint this article in the interest of our readers

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Petroleumworld News 06/10/2010

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VenEconomy: For now, as long as the dollars last

VenEconomy:
For now, as long as the dollars last