That Time Of The Decade

 The next installment of Venezuela : Down The Rabbit Hole will be more like the news feed…all over the place and we’ll get to it in a bit…but first…the headline in Caracas Chronicles said it all, “That Time Of The Decade.” We all knew it was coming October 1st but now it’s official. Chavismo has lopped another six zeros off the hapless bolivar making this the third redenomination in 13 years. Since this one is billed as “The Digital Bolivar” there hasn’t been any talk yet about details regarding printing new currency. That’s probably because all of the major printers of currency around the world don’t want to do business with these guys so we’ll have to see what’s ahead, if anything.They did mention that 1 bolivar today was 100 billion bolivares in 2007. They also said in the article that the redenomination was unavoidable but will ultimately be useless as Maduro and the Chavistas refuse any measures to fix the economy they have destroyed. (As we’ve said before, they haven’t even followed the advice from their allies,Russia and China,who are keeping them afloat)

 Aljazeera had a few interesting things to say in their piece on this redenomination. The new currency will feature a 100 bolivar note as the highest denomination available and is currently worth less than $25. The previous bolivar had a one million bolivar note, although they were hard to come by, and it was worth less than 25 cents. They also mentioned that the bolivar has lost over 73% of it’s value this year alone and that the IMF estimates inflation in Venezuela this year should be about 5,500%. In any other nation that would be an absolute disaster but in Venezuela that’s an improvement.

 Black Market site Dolar Today has the new bolivar trading at just over 5 bolivares to the dollar. (note: the rate in Cucuta at the border, usually a good predictor, was at 5.57 bolivares to the dollar). It’s also worth noting that on 9/30 the bolivar was trading at the equivalent of 4.46 new bolivares to the dollar so it’s already devalued about 10% in a couple of days.

 In other financial news we have Law360 reporting that an international committee has lifted the stay of enforcement so Conoco Phillips can start enforcing it’s 8 and 1/2 billion dollar arbitration award from Venezuela. This raises the question, what assets does Venezuela possess outside it’s borders that are worth 8 and 1/2 billion? Something else to think about is that there are cases floating around all over the world relating to Venezuela’s illegal appropriations that have yet to be ajudicated.

 Then we have the Irish Independent (and others) reporting that 94 and 1/2 % of Venezuelans currently live in poverty and 77% of Venezuelans live in extreme poverty. Here’s a little poverty perspective for you. In 2012, the year before Maduro took power, 32.6% of Venezuelans lived in poverty and only 9.3% lived in extreme poverty. Encovi tells us that Venezuela is the poorest country in Latin America …. Duh. Only 50% of the population is active in the economy and if all the income in Venezuela was distributed throughout the population each citizen would still only receive about a dollar a day.

 It’s worth remembering that when Maduro announced his last economic/currency reconversion, just a few years ago, he emphasized that the entire plan was conceived without any input from anyone in the areas of business,economics, or finance so the plan was free from the influence of right-wingers. So, how’s that working out for ya’ Nico?

 And Argus Media had a great headline…”Fighting For Crumbs” about a Dutch court awarding the right to sell shares of Propernyn (Venezuela state owned) to Curacao’s RdK, which is owed $52 million. It also mentioned that Venezuela’s outstanding debt is around $160 billion. (There are higher estimates out there)

 So…time to head Down The Rabbit Hole….

 Chapter 17/ Scatter Shot

 So far we’ve covered major categories,each deserving an in-depth look, but the extent of the destruction,corruption,and outright lunacy that is Chavismo has hit and is hitting every aspect of life and society in Venezuela. There is a host of subjects and issues that may not require an entire chapter to themselves but nevertheless deserve to be mentioned. Be warned,this will be all over the place and will seem a bit (or a lot) disjointed.Kinda’ like life in Venezuela.

 Let’s begin with one of my personal favorites. I call it the magic number and it’s $4 billion. That seems to be the number that each major industry had to hit before they finally cried “Uncle!”. Allow me to explain.

 As I’m sure you know, each industry has a group or association which is useful to track issues and trends whether it’s the airline industry,the pharmaceutical industry, the auto industry etc.Let’s use the airlines as an example but remember, the other industries followed the same pattern.

 International companies doing business have traditionally had to sell their products and services in the local currency,the bolivar (worthless outside Venezuela), deposit the funds in  a Venezuelan bank, and wait for the government to allow them to convert their bolivares to dollars so they could transfer the money outside Venezuela. Aside from today’s hyperinflation, Venezuela has historically had high inflation (by international standards),typically in the mid-twenties.It’s not hard to see where this is going huh.

 The longer the companies were forced to hold the bolivares the less they were worth. As the money piled up in the banks so did the currency exchange backlog.It was common to wait a year,two years, or longer to convert the bolivares to dollars. If you had to wait two years to convert your bolivares they bought you half as many dollars (remember, this is before today’s hyperinflation). That’s quite a financial hit. I won’t get into the accounting but doing business in Venezuela was lucrative enough and the tax advantages of writing off these losses were substantial enough that the airlines would hang in there as long as the numbers were manageable.That’s the big question. At what point do the numbers become unmanageable? I can’t speak to individual airlines but I have a pretty good idea of what the number is for the group as a whole. When their association announced that their group as a whole was owed $4 billion by the Venezuelan government everything began to fall apart.

 To be continued….

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