EVEN TOURISTS CANNOT escape Venezuela’s propaganda barrage. "Get to know Venezuela, where dreams are reborn" is one of the latest slogans from the People’s Power Ministry for Tourism.
Dreams or nightmares? With the consumer price index at more than 20%, the Bolivarian republic has one of the world’s highest inflation rates. Access to foreign currency is limited by the state, so in the parallel market dollars normally cost two to three times the official exchange rate.
The "land of contrasts" cliché does not apply in this context. Venezuela is more like a land of parallels. And it is not only in the foreign exchange market (with all the influence that has) where the country is divided. The chasm extends throughout the nation’s economic and political life. Now, as president Hugo Chávez pushes for the revolution to be deepened, divisions seem to be widening even within the government.
The quirks are evident even as you pick up a local newspaper when boarding the plane in Europe. Half the back page celebrates the anniversary of the failed coup Chávez instigated in February 1992. There is a painting of a uniformed and stern-looking Chávez wielding the Venezuelan flag, and the style is reminiscent of Soviet agitprop. Yet on the other half-page, a private-sector bank advertises the names of customers who have won Chevrolet SUVs by using their credit cards.
The plane is packed with Venezuelan tourists returning from splurging their overvalued currency abroad, and, when Euromoney flew, there was a group of migrating Iranian engineers on board.
For now
On arrival, hordes of black-marketeers descend, intent on offloading their increasingly worthless money on to foreigners. On the way down the valley into the capital, Caracas, a huge banner says "FOR NOW..." like a warning, repeating what the President said both in 1992, and after he lost a referendum to change the constitution late last year. The banner is joined with a host of alternative tower-top advertisements from such brands as Pepsi and Nescafé.
Inequality that by some accounts is worse here than in Brazil or South Africa is shown in the contrast between valley-bottom skyscrapers and makeshift barrios creeping up the hills. But some of the newest city-centre buildings now house new state-owned banks.
It is ironic that during the near 10-year rule of a government that has proclaimed itself anti-capitalist, financial services have grown faster than any other industry.
One of the main causes of the boom has been the foreign exchange controls. These prevent capital from leaving the country, while artificially inflating the currency. They also provide an abundance of business opportunities in the gap between the official and parallel exchange rates.
One of the principal actors here is Guillermo Clamens, a Venezuelan who left for New York 14 years ago. Clamens now owns FTC Securities, which is based in the US but has a broker-dealer subsidiary in Venezuela.
FTC completed three private equity deals in Venezuela in 2007 in the telecoms and insurance industries. But the company in Venezuela earns its bread and butter by buying and selling exchange-rate swaps, which are the most common unofficial method of changing Venezuelan currency. "Swaps are the engine that runs the capital market in Venezuela. They are like a conduit to get in and out of Venezuela as you need," Clamens says.
Venezuelan foreign exchange swaps function by exchanging Venezuela’s dollar-denominated bonds for bonds denominated in bolivares. The method is basic, but price spreads between bid and offer on the swaps are around 5%. Profit margins are so wide that one Caracas-based employee at a global bank estimates that the number of brokerages has trebled since foreign exchange controls were introduced in 2003.
But the swap market is by no means the only way in which money is being made from the gulf between the official and the parallel exchange rate. Until recently, for example, every Venezuelan had an allowance of $3,000 to spend on credit-card purchases abroad via the internet. But most Venezuelans did not possess credit cards. So enterprising countrymen would literally recruit people from the street, offer them a slice of the profit, and use their allowance to gain dollars at the official exchange rate, selling them back into bolivares on the parallel market. With exchange-rate differentials of more than 60%, recruiting just five people a day in this manner could result in a profit of about $30,000.
The government caught on to this ploy and lowered credit-card allowances to $400 at the end of 2007. But there are still many cunning methods of using some of the official-rate $165 million granted on an average day by Cadavi, the state foreign exchange administrator. Invoicing over the required amount for imports, and using a black market in gambling chips from offshore casinos are among the wiles. For those with sufficient capital, one scheme could be to ask Cadavi for permission to import a $50 million boat, sell it through an SPV in Panama, and if necessary resell the dollars back on the parallel market. You could make about $100 million by doing this, and then start a similar process again. Fortunes are being made.
The banks are having fun too. Total assets managed by banks have roughly quadrupled in the past four years. "It’s unbelievable. I’ve never seen anything like it before," says a banker who used to work in Europe.
Venezuelan oil production, which makes up about a third of GDP, is today more or less at the same level as it was just before Chávez came to power in 1998: about 2.5 million to 3 million barrels a day. But prices for Venezuelan crude have risen from about $13 10 years ago to $65 last year. At the same time, government spending has risen from about 21% of GDP in the 1990s to 26% now. So annual GDP growth has shot up to between 8% and 10%, and unemployment is about 8%, compared with about 15% 10 years ago.