Venezuela’s New Forex System Sees Steady Results

The new foreign exchange mechanism Simadi, introduced by the Venezuelan finance minister on February 10th, has so far seen promising results. 

By Z.C. Dutka
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(Stock)
(Stock)

Santa Elena, February 25th, 2015. (venezuelanalysis.com)- The new foreign exchange mechanism Simadi, introduced by the Venezuelan finance minister on February 10th, has seen even results.

The Marginal Currency System (Simadi, for its initials in Spanish) replaced the Sicad II rate as the lowest rate in Venezuela’s three-tier forex system. Through Sicad II, individuals and companies could buy dollars through an auction system reportedly based on supply and demand, though the dollars’ value never exceeded 53 bolivars since its launch in March 2014.

Simadi, a less restrictive mechanism whose value is determined by market forces, launched at 172 bolivars this month, causing critics to repudiate the move as another grim devaluation in Venezuela’s contracting economy. However, the new exchange rate was absorbed into the economy without any notable spike in inflation.

According to a Reuters article published Tuesday evening, Simadi has already increased cash flow for select companies. Additionally, official exchange houses stationed in airports and elsewhere will now buy and sell dollars at a rate comparable to the black market, providing a sorely needed alternative for incoming tourists while dealing a deft blow to the illicit dollar trade.

On Monday, Finance Minister Rodolfo Marco Torres praised the system’s “excellent performance” in a weekly meeting.

For the time being, Simadi is under “test trial,” Venezuelan authorities say, and only account for 3-5% of foreign exchange.

The Black Market

On the day that Simadi launched, a website that tracks the black market rate (BMR) had placed the street value at 186, just 14 bolivars higher than the new official rate. But for years, the BMR websites have reflected the highest attainable price -usually sampled from the Colombian border city Cúcuta- while parallel prices across the country are subject to absurd speculation.

Depending on one’s luck and street sense, a person can sell dollars anywhere from 120 to 170 Bolivars, and purchase them for a similar amount. Moreover, due to the business’s illicit nature, the exchanges are rife with scams such as fake bills and feigned arrests.

“No matter what rate you’re getting, you know the house always wins,” explained Ivan Soto, a tour operator in Canaima National Park to Venezuelanalysis. 

“It’s a lucrative business, and one of the ugliest byproducts of our revolution. These currency controls were put in place to protect us from the whims of the global market, not to fill the pockets of any aspiring con artist.”

Soto expressed the hope that the Simadi rate might pop the black market bubble. “In my line of work we need this option,” he explained. “We cannot be expected to advise our tourists to change at the official [Sicad I] rate of 12; that would make the country outrageously unaffordable. But neither can we tell them in good faith to approach the shady looking man waiting outside baggage claim upon their arrival, and hope he gives them real bolivars.”

Without a doubt, Soto reckoned, the Simadi exchange houses will be the preferred option of incoming tourists.

The new system also permits Venezuelans to buy dollars at exchange houses at the free-floating rate.

Without any proof of international travel, and minimal paperwork, citizens may now purchase up to $200 in cash daily, and a remaining $100 is available by transfer to a foreign bank account.

Previously, only Venezuelans planning to travel abroad, or those with credit cards, were able to access dollars legally.

Increased Cash Flow

About a dozen foreign energy companies operating in Venezuela have also been authorized to exchange their currencies at the Simadi rate, meaning more bolivars for each dollar in their budget.

According to a high-level source from the state oil company PDVSA, the government has approved this new rate for the following corporations; China National Petroleum Corp (CNPC), Chevron, Gazprom, Perenco, Repsol, Eni, Rosneft, Total, Statoil and Petrovietnam.

"This will increase the bolivars they have for capital expenditure and operational expenditure. It is a huge incentive and drastically affects cash flow," the PDVSA source told Reuters.

"Those companies are the ones who have continued to bring in financing,” he explained. “This change will decrease hugely the amount they need to bring in for operating and capital expenditure.”

However, it will also decrease the amount of dollars entering the country.

But the government seems to have determined that the move will pay off in the long run, by boosting cash flow and speeding up projects that have slowed over the past year. Production efforts may likely be concentrated on the heavy-crude Orinoco Belt, where Venezuela is reported to hold the largest untapped reserves in the world.