Venezuela Update: New FX Market Leaves Many Scratching Heads

By Anne Friberg

Recent Venezuelan government actions with its FX market have treasurers looking for answers.

Venezuela is always a source of concern, so much so that the name itself has become almost synonymous with treasury headaches. But the recent changes to the foreign exchange system, starting with Chávez’s apparent takeover of the parallel market and new threats of government appropriations of private-sector firms have reached another level. Companies that continue to seek to do business in the country are thus scrambling to determine how the new FX regime will work, both in word and in deed.

What’s happened

Here is what is known: After Venezuela’s parallel bolivar rate hit all-time highs in the spring, the Chávez government in mid-May “intervened,” arresting several securities brokers and halting transactions.

Then, on June 9, new FX rules took effect, including a new Transaction System for Foreign Currency Denominated Securities (SITME) replacing the prior parallel market. Thus, treasurers are faced with the two official fixed rates (the same 2.60 and 4.30 categories which took effect in January and that are subject to Venezuela currency administrator CADIVI approval; see IT, Feb. 2010) as well as the SITME rate set by the central bank (BCV). Originally, it was said that this new rate would be allowed to fluctuate between 4.30 and 5.30 based on “supply and demand,” which is much lower than the parallel exchange rate that had been set by the securities (e.g., permuta bond) market. In reality, since trading began, the demand has been such that the rate for “BCV dollars” has hit 5.30 every day except the first five when confusion about the process held it back. There are also new limits on the USD equivalent exchanges permitted per day ($50K) and per month ($350K), neither of which is remotely sufficient for most firms’ needs.

Burning issues

If you find this a tough move to swallow, you’re not alone. At a recent NeuGroup Latin American Treasury Managers’ meeting sponsored by HSBC, treasurers sought to understand the new rules:

• How will it work? One member thought that the new market would work from a mechanical point of view, and the first three weeks of trading indicate he was right. For documentation, it appears that little more than presenting invoices for payment is necessary. After the meeting, another member said in an email: “We actually did present $50K in invoices on the first day and the amount was received within 6 days.”
• Will the new FX market have any liquidity? The bigger concern is that there simply won’t be dollars available at any price. Not only are the daily/ monthly maximum amounts very low but a meeting participant also observed that banks and brokers will have little incentive to sell bonds at below-the-(real-)market prices, Of course, on the other hand, if they are perceived as hoarding bonds, they might “get intervened,” i.e., invite government management or oversight.
  Published statistics from the BCV show that the daily transactions have steadily risen and hit $44 million on June 25 (a drop in the ocean…).
• How to interpret the 90-day rule. Depending on how risk-averse you are, members of the LATMPG had two interpretations of the rule that says you may not use SITME if you have had CADIVI-approved FX exchanges in the past 90 days. One interpretation is “per invoice,” meaning after an invoice has been sitting with CADIVI for 90 days, the company can take it out of the CADIVI approval process and use SITME instead. The more conservative—and much less attractive—interpretation is “per firm,” meaning if the company has had any CADIVI approvals at all in the last 90 days, the new market is off-limits. For companies with large amounts of trapped cash in the country, $350,000 per month is neither here nor there, and there is a great degree of unwillingness to jeopardize any future CADIVI approvals by bending the SITME rules. Based on the more conservative interpretation, noted one member who recently migrated from the more aggressive one, “we cannot risk losing [our] current $4 to $5 million in monthly CADIVI approvals.” For more, see Guidelines for SITME box at bottom.
• Will the limits increase? Given the low limits on daily and monthly conversions, the speculation is that these limits will have to be raised in order to make the new system workable for multinationals that the government still wants to have do business in Venezuela. It will also need higher limits for the market to function from a liquidity standpoint. If they do increase, by how much, for whom and when is what treasury managers want to know. One concern is that with higher limits will come more documentation, making the exchange process not unlike that of CADIVI.
• Exit stage left? While expropriation is not an immediate threat, LATMPG members reasonably fear circumventing the new rules or overly- enthusiastic use of the SITME market may invite scrutiny and reputation risk in an environment where Chávez is openly confrontational in his language against “speculators.” But business failures in local firms and affiliates starved of foreign exchange may open the door to government takeover if Venezuela becomes even more Cuba-like. Historically, rich profit margins have been enough to tolerate conversion hassles, but near-total strangulation of conversion would be the last straw. This is particularly true for software and services companies who rely on license fees/royalties and dividends to get any money out (these categories are consistently held up in the CADIVI queue), but even companies that consistently get CADIVI approvals for imports of raw materials for local production admit to high-level internal conversations about a potential exit.
• So how to limit the risk? While one member company operates a Miami sales unit and sells to Venezuela via distributors, who then take the burden of FX risk and trapped cash, this alternative is not applicable to all types of businesses and it asks distributors to take on a lot of risk. Thus, the most viable option is wait a bit to see how Chávez lets the new FX market evolve.