Head in the Sand

How long can Venezuela's president pretend not to see the economic ruin his policies have created?


LA VICTORIA, Venezuela — Old campaign posters for Venezuela’s late president Hugo Chávez still flutter above the state-owned Mercal grocery store that Roberto Briceno runs in a working-class neighborhood in this industrial city of 150,000.

Briceno says he should post another sign: "Closed."

He hasn’t opened the store, which sells cooking oil, powdered milk, chicken, and other basic foodstuffs at deeply subsidized prices, for more than 10 days.

"I have nothing to sell," he said in February. "I have been calling the Mercal warehouse everyday and they say they have nothing. I don’t know what they expect us to eat."

Briceno isn’t alone. Many storeowners throughout Venezuela are facing the same predicament, thanks to uncertainties about the country’s new foreign-exchange policies.

In January 2014, Venezuela revamped its currency system — one historically riddled with corruption and an overvalued bolivar that only stoked a raging black market. The official exchange rate is now 6.3 bolivars to the dollar for food, medicines, and goods that the government deems priorities. But the government has transferred other foreign-exchange transactions, like travel and remittances, to the Sicad exchange rate — Venezuela’s other rate in its currency-control system — to 11.7 bolivars to the dollar. The black market rate is now 84 bolivars to the dollar.

The government has dramatically reduced access to dollars to protect its dwindling international reserves. Consequently, some retailers, like Briceno, don’t have any inventories at all, while others are finding it difficult to import goods. Meanwhile, exasperated consumers grouse about the lack of products, while spending hours each day, trudging from store to store. And to make matters worse for storeowners, President Nicolas Maduro has made retailers lower prices or face expropriation — a move he put in place in November 2013.

Maduro asserts that the country’s new exchange system will go a long way to alleviate shortages of food, toilet paper, medicines, and other daily necessities. Critics, however, argue that by transferring many transactions to the Sicad rate in Venezuela’s dual-rate system, this is nothing but disguised devaluation and it will only spur inflation.

Since Maduro’s announcement in January, thousands of students have taken to the streets throughout the country to protest against the deteriorating economic situation and the government’s economic policies. On Feb. 12, violent clashes between the president’s supporters and opponents left three dead. Violent protests have continued.

The country’s current foreign-exchange woes started in the 1980s, but were cemented when the late President Hugo Chávez took office in 1999. The system that he put into place laid the groundwork for what remains today. Facing a nationwide strike in 2002 and 2003 that led to capital flight, Chávez implemented rigid foreign-exchange controls to brake the outflow of dollars. The government limited access to dollars, and fixed the bolivar’s exchange rate to the greenback. In doing so, Chávez played into a system beset by corruption and a burgeoning black market.

Maduro, who promised not to devalue the currency during the 2013 elections, has blamed the country’s "parasitical bourgeoisie," who, he says, is waging an economic war against his government by withholding inventories and inflating prices to boost shortages and damage his presidency. To combat those actions, Maduro has tightened up access to dollars by creating the National Foreign Trade Center, a new agency that will supervise imports, and has decreed a new law that limits companies’ profit margins to 30 percent. And in a show of good, old-fashioned Bolivarian populism, he also raised the country’s minimum wage by 10 percent in January 2014.

"The question is do we give dollars to speculators, or do we bring in medicine," said Rafael Ramirez, the vice president for economic affairs, oil minister, and president of the state oil company, Petróleos de Venezuela SA. "Do we give dollars to travelers or do we bring in food?" The health and needs of Venezuelans, he said, take precedence over all else.

Many overseas suppliers, who are owed upward of $14 billion by Venezuelan companies, are reluctant to extend more credit. Given that Venezuela imports about 70 percent of the products it consumes, any curtailment is a serious threat to the country’s wellbeing. Food shortages — a chronic problem for the past two years — are worsening.

"I have to go to central Caracas now to find food, as there is nothing, absolutely nothing, in my neighborhood,” said Letitia Suarez, who lives in one of the slums surrounding the Venezuelan capital, in early February. "And when I go to Caracas it’s a constant battle to find food. I spend hours standing in line, and fights always break out." Getting to the city center isn’t an enjoyable trip: Her bus line is rampant with thieves. Crime has increased with the economic crisis, and the city now has the third highest murder rate in the world.

But it’s not only local merchants and the public that are feeling the bite. Company officials have also said they may have no choice but to curtail operations until dollars become available.

Empresas Polar, the country’s largest privately owned food processor, warned on Jan. 22 that it may have to reduce operations and production because a lack of foreign exchange has crimped its ability to import raw materials. The company announced that it owes $463 million to overseas suppliers, who refuse to send more goods until they are paid. "Our credit lines are exhausted, and they won’t send us orders until we can cancel our debts."

Most international airlines — such as American, Air Europa, and Air Canada — have also stopped selling tickets to Venezuelans in local currency, arguing that they are owed millions of dollars by the government’s foreign-exchange agency, which has accepted the airlines’ bolivars but has not given them dollars in return. One airline — Ecuador’s Tame –suspended flights to Venezuela altogether.

The foreign exchange agency now owes the air industry up to $3.6 billion, according to the country’s airline association. But even in the best possible scenario, the airlines won’t be able to recoup the currency’s true value; thus, they want to be paid in the bolivar exchange rate in place at the time of ticket sales. Airlines are hoping that they will force the government’s hand by refusing to sell tickets for bolivars, but the government has so far balked, offering to repay airlines in jet fuel and bonds. The airlines, of course, want cash.  

Judging from his actions, it doesn’t appear that Maduro sees the trouble this has caused. On Jan. 22, the president tweeted that the new system will help the government "defeat definitely and structurally the economic war," while increasing "the efficiency in administering these dollars."

The new measures — which had been delayed for five months while the government sought to avoid unpopular actions before December’s regional electionsmay make foreign-exchange regulations clearer and end some abuses of the system, but don’t go far enough to fix the country’s financial disaster, analysts say. The likely outcome will be higher inflation and more shortages, especially in areas — such as automotive parts, retail clothing and shoes, and home appliances — not considered a priority by the government.

"It is really too little to stabilize the forex market,” said David Smilde, a senior fellow at the Washington Office on Latin America. "The bolivar is still seriously overvalued, and demand will still far outstrip supply. Furthermore, the Sicad mechanism is opaque and ripe for favoritism."

Following the announcement on Jan. 22, the black market rate soared more than 10 percent to 75 bolivars to the dollar, or more than 12 times the official exchange rate.

"The official exchange rate of 6.3 to the dollar is unsustainable," said Alejandro Grisanti, an economist at Barclay’s in New York, adding that a fair exchange rate is closer to 13 bolivars to the dollar. "But so is the black market rate."

Concerns about Venezuela’s economy led both Standard and Poor’s, and Moody’s Investors Service to downgrade Venezuela’s debt in December 2013. Moody’s warned that the country’s unsustainable macroeconomic imbalances, as government policies, mean that "the risk of an economic and financial collapse has greatly increased."

Maduro, however, seems content to bury his head in the sand. So far, he’s been summarily unwilling to reverse any of Chávez’s economic policies. Maduro sent his finance minister, the pragmatic Nelson Merentes, back to the central bank in a cabinet reshuffle in February, strengthening the hand of Planning Minister Jorge Giordani, who many see as a Marxist.

"The hard-liners had their positions strengthened in the reshuffle," said César Aristimuño, an economist with Caracas-based Banca y Negocios. For Aristimuño, the government’s chief challenge isn’t the exchange rate, but the lack of hard currency. A drop in oil prices has reduced the amount of dollars that Venezuela receives for its oil. Such sales make up 95 percent of the dollars the government receives, and the average price of the Venezuelan market basket of oil products fell 3.4 percent in 2013 compared with 2012. The fear is that they will fall even further. The international oil companies that should be investing aren’t, he said, adding that an increase in the price of crude would ease the government’s stress.

But not everyone is carping about Maduro’s policies. The president’s decision to order stores to cut prices or face military expropriation late last year created opportunities for the wealthy, as they prepared for what they knew was the inevitable.  

Eduardo Morales and his family bought two refrigerators, one stove, five air conditioners, two plasma-screen televisions, and a handful of microwave ovens and assorted smaller appliances days after Maduro ordered stores to lower prices. This mad rush depleted inventories within a few short days.

"I’m sitting pretty," said Morales, a 42-year-old electrician. "You can’t find these appliances anymore, and I have them. And who knows when they will reappear and at what price? They’re like money in the bank. When I need money, I’ll sell one."

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