Venezuela’s latest addition to its byzantine foreign exchange system may be designed to ease some pressures on the local economy but the jury is out on how it will work, when trading will begin and how much hard currency will actually be available for trade there.
The latest FX entrant, Sicad 2, joins Sicad and Cadivi, the two existing regimes largely panned for sewing confusion and creating shortages. Sicad and Cadivi (which will remain in place) offered different exchange rates to importers depending on the importance of the goods. Priority and a lower rate, 6.3 bolivars to a dollar, were given to food and medicine while a higher rate, 11 bolivars or more, was given to other non-essential goods. However all the first two regimes did was create shortages for things like toilet paper, corn flour and a host of others basic items.
The original Sicad, which was introduced about a year ago, was supposed to be auction-like in that participants would bid for dollars. However, it was heavily controlled by the Venezuelan government, and not just anyone was allowed to participate (read more about the first Sicad, “MNCs Stuck Between Exchange Rate Rock and Hard Place,” here). Sicad did not bring much clarity or ease to MNC treasurers so many are suspicious of this second version.
Sicad 2, while also an auction and offering different rates depending on the goods (6.3/11+), has somewhat more of a free-market feel, where US dollars will be allowed to be traded daily and more freely. “There will be no pre-set band or rate, it will be a market with a free supply of foreign currency,” Rafael Ramírez, Venezuela’s vice-president for the economy, has reportedly said.
But the new system still leaves corporate treasurers with headaches and wondering whether they should use the new system, or stick with the others, or juggle all three. Most companies there now have some stake in each system, so tracking what’s owed, what rate, and what’s next remains a challenge. At least one member of The NeuGroup’s FX Managers’ Peer Group (FXMPG) said at a recent meeting that his treasury management system won’t be able to handle more than one exchange rate at a time. He added that he was going to use the higher rate of 11.8. Complicating matters for this MNC FX manager was that some goods the company imports and some it makes in Venezuela. “It’s going to be a lot of learning,” he said.
Although the Cadivi system seems like a lost cause – many treasurers report approvals but no payouts (not to mention dividends or royalties, which have not been approved in years for most, and in many cases go back to 2007), according to a recent The NeuGroup webinar on Venezuela – treasurers still utilize it. They still submit and get the approval – and even payouts, depending on their industry and also depending on the relationship they have with the authorities. Others just submit and hear nothing.
One fear among corporations is that the government will not be able to honor any Cadivi payments, especially for foreign MNCs, which are not a prioritized segment. According the Financial Times, quoting figures from analytics firm Ecoanalítica, Venezuela owes private companies about $9bn in in undisbursed authorizations. Participants in The NeuGroup Venezuela webinar on February 28 put the amount at closer to $15bn.
Most participants in the recent Venezuela webinar use the 6.3 rate for accounting and Cadivi submission purposes. But approvals continue to be sporadic. Another participant at the FXMPG meeting said his company wants to use the 6.3 rate but that auditors have said to use the higher non-priority good rate. This wasn’t acceptable, he said, however he was hopeful Sicad 2 will offer a more legitimate exchange rate or one closer to the true value of the bolivar. The company will wait until the end of the March “to see if this new auction process … makes the analysis easier; and allow for a net debt position to be revalued at 11 or 15 or 25 whatever the new SICAD rate is,” he said.
For more information about The NeuGroup’s Latin American Treasury Managers’ Peer Group (LATMPG) or either of the FX Managers’ Peer Groups (FXMPG 1 & 2)), please contact Anne Friberg at [email protected]