In post-deval Venezuela, SICAD takes SITME’s place but is more restrictive
Last month, on February 8, Venezuela’s government announced a 32 percent devaluation of the official bolivar fuerte (VEF) rate, from 4.30/USD to 6.30. It also rendered the SITME market – which traded at about a 5.30 rate – outlawed by way of a redefinition of these bond transactions as “foreign exchange” transactions, which are illegal unless done through the Central Bank-managed CADIVI (the exchange commission). On March 19, 2013 Venezuela announced the formation of a new exchange mechanism called the SICAD (Sistema Complementario de Administración de Divisas), to absorb some of the pressure on the (illegal) parallel market which recently peaked at around 24, according to a Citi Market Commentary report (March 27, 2013).
SICAD’s rules, though not entirely clear at this moment, appear to be more akin to the CADIVI process than the less restricted SITME, both as regards eligibility and procedures. In a departure from the rules governing SITME (the only legal channel for non-priority payments and estimated to amount to somewhere between 20 and 35 percent of conversions to hard currency), SICAD will be more similar to CADIVI in that it will deal in cash instead of dollar-denominated bonds as with SITME, funded by the government (i.e., essentially by PDVSA, the state oil company). Priority will be given to imports of “medical products, food and machinery and equipment,” implying that most of what was previously processed via SITME will either be ineligible to bid for or will receive low to no allocations.
In contrast to CADIVI where transactions are at the official 6.30 rate, SICAD rates will be determined “via Vickrey-type auctions,” according to a Deutsche Bank research note (March 20, 2013) which described them as “sealed-bid auctions in which the highest bidder wins but the price paid is the second highest bid.” Finance Ministry officials implied that the auctions would not be daily, and did not give any indications of a reference rate. Deutsche Bank also interpreted official remarks to mean that only “firms registered in the official Rusad system would be eligible to participate in the auctions, and only after receiving authorization from the Central Bank.” Further restrictions include a procedure by which companies will not receive USD to settle their payables themselves; instead the Central Bank will make the payment directly to the payee. As with everything run by the government, operational efficiency could be a concern, Deutsche Bank observed in its note.
SICAD had its first auction on March 25 when $200 million were sold to 383 companies. The Finance Ministry has declined to announce the resulting exchange rate but speculation on Twitter puts the rate as high as twice the official rate. Easter week and the short time since the announcement to get registered for SICAD transactions may have contributed to lower bid volumes than can be expected going forward.
After the expected Chavista victory in the presidential election on April 14, it is possible that SICAD can become less restricted over time. Venezuela government and PDVSA USD debt service levels are manageable relative to reserves, and oil-price levels are supportive of continued current-account surpluses, according to Citi. However, it’s also possible that CADIVI could offer even less hard currency via CADIVI and instead fuel SICAD in what would effectively become a devaluation in disguise, as Citi put it.
The shuttering of SITME and the restricted access to SICAD is bad news for MNCs operating in the country in anything but the prioritized categories. Their cash balances are building up from non-repatriated royalties and dividends and there are few viable places to invest them (plus some banks now cap deposits). As a result, purchases of assets like real estate are on the rise, for example. Meanwhile, US multinationals are pondering which exchange rate to use to account for their balances and other assets. With no access to CADIVI, some used the SITME rate before. For those without access to any (legal) market at all, now what?