Venezuelan bolivars and U.S. dollars in Caracas on March 24. (JUAN BARRETO/AFP/Getty Images)
Summary
The new foreign exchange mechanism implemented by the Venezuelan government March 24 probably will relieve some of the demand for foreign currency, but it is only a short-term solution. The new mechanism, referred to by its Spanish acronym Sicad II, is one of three such currency exchanges used by the government to distribute foreign exchange. Sicad II could provide additional opportunities for elements of the political opposition to negotiate with the government for preferential foreign exchange allocation. Low-key negotiations between the government and the national business sector are already underway. If parts of the opposition become involved in meaningful negotiations over political matters, including an end to the protests, they may further divide the overall movement and cost the protests crucial political support.
Analysis
The Venezuelan government held the first currency auction through Sicad II on March 24. The average exchange rate for the initial auction was 51.86 bolivares per dollar. The mechanism complemented the two existing allocation mechanisms, both of which offer currency at rates determined by the government. These are Cencoex (formerly known as Cadivi) and Sicad I. Cencoex distributes foreign currency at the rate of 6.3 bolivares to the dollar, and Sicad I is currently set at 11.30 bolivares to the dollar but has varied between 10 and 15 bolivares to the dollar. Venezuela has controlled its currency tightly since February 2003, when the government implemented a fixed exchange rate in an attempt to halt capital flight resulting from the 2002 oil strike.
Sicad II is not a lasting solution to Venezuela's economic and financial problems. It is designed to provide an alternate source of funds for the country's private sector; already it has reduced the gap between the official and black market dollar rate. (As of March 25 the black market exchange rate is at 58 bolivares per dollar, but it has previously reached 85 bolivares per dollar.) According to statements by Venezuelan President Nicolas Maduro, Cencoex provides 80 percent of the country's foreign exchange, Sicad I provides 12 percent and Sicad II will provide the remaining 8 percent, absorbing only a portion of the demand that is currently turning to the black market.
The Sicad II foreign exchange mechanism will likely relieve some of the country's foreign currency demand, but it is just a temporary measure and will not solve the overall problem. Most important, it could encourage some opposition businessmen to cooperate with the government.
Maduro's Negotiation Strategy
For nearly a year, the Maduro administration and ostensibly conservative business leaders such as the Venezuelan Federation of Chambers of Commerce, known as Fedecamaras, and Polar Industries CEO Lorenzo Mendoza have held occasional discussions focusing on alleviating Venezuela's economic problems, particularly chronic food scarcities and production declines resulting from dollar shortages. Fedecamaras and Mendoza are considered pro-opposition, and Fedecamaras supported the 2002 coup attempt against former President Hugo Chavez.
Despite these ideological differences, since nationwide anti-government protests began Feb. 12 the pace of these discussions has increased. (Notably, they are being conducted apart from the political opposition and its involvement in the protests.) Increased allocation of dollars for Venezuela's private sector through currency control institutions is one demand Fedecamaras and Mendoza formally presented to the government.
These negotiations are not a comprehensive effort to quell the ongoing public unrest, but they do establish a basis for dialogue on the most fundamental economic challenges facing the country. Furthermore, the Venezuelan political opposition is deeply divided between a more pragmatic wing and a less conciliatory section from the more rightist factions. The pragmatic section of the opposition is represented by centrist parties, such as Accion Democratica, Un Nuevo Tiempo and Primero Justicia. These parties have previously shown a willingness to negotiate with the government. The other section of the opposition is mostly represented by Voluntad Popular, which organized some of the protests that began Feb. 12. A divided opposition is less likely to have coherent leadership calling for protests and could slow the pace of opposition-led demonstrations.
An economically driven rapprochement between Venezuela's private sector representatives and the Maduro administration could begin to unravel the fractious coalition opposing the ruling United Socialist Party of Venezuela. The Venezuelan political opposition has always been vulnerable to fragmentation along ideological lines. This is because the current coalition, Mesa de la Unidad Democratica, involves parties from across the entire political spectrum, and most were marginalized from national politics by the United Socialist Party of Venezuela after the election of Chavez in 1999. Centrist political parties such as Primero Justicia and Accion Democratica coexist within the coalition alongside more conservative elements, such as Leopoldo Lopez's Voluntad Popular, and became unified mainly by their complete opposition to Chavez (and subsequently, Maduro). The opposition went from a politically irrelevant grouping (particularly after it boycotted the 2005 legislative elections in protest of the government's lack of electoral guarantees) to competitively challenging the government in presidential elections in 2012 and 2013.
Sicad II's Limitations
The Sicad II mechanism may be a concession to opposition business interests by opening up a new source of foreign currency for Venezuela's cash-starved private sector. However, this flow of currency satisfies only a part of the existing demand for dollars in the country, as evidenced by consistent demand on the black market. Consequently, the private sector, which has long been ignored by the government due to national finances' extreme reliance on oil revenue, requires foreign currency that is not always readily available through government-directed foreign exchange auctions. At a March 12 meeting with the government, Fedecamaras supported the decision to go ahead with Sicad II and asked the government to complement it with additional measures, such as increased liquidity and greater fiscal discipline.
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The Venezuelan opposition has previously split along ideological lines. Voluntad Popular and independent lawmaker Maria Corina Machado began calling for street protests in November 2013, but these did not immediately bring the opposition's supporters out into the street. Lopez and Machado also both publicly called for the Feb. 12 protests in Caracas that sparked the broader wave of unrest. Presidential runner-up Henrique Capriles Radonski, on the other hand, delayed his involvement in any demonstrations for several days after the Feb. 12 demonstrations across Venezuela. This is likely because Capriles' Primero Justicia party, as well as opposition politicians Hiram Gaviria and Henri Falcon, attended several tentative negotiations toward a political rapprochement with the government in December 2013 and January 2014.
Although Capriles has since publicly reverted to supporting the protest movement, he remains the most prominent political opposition figure that the government would have to negotiate with in any eventual political agreement to end the protests. Lopez remains imprisoned in Venezuela, and Machado, who is currently in Peru, was effectively expelled from the National Assembly at the behest of National Assembly President Diosdado Cabello on March 24.
Regardless of any agreements reached at negotiations between the government and business representatives, what happens on the streets will still influence the future direction of events in Venezuela. The potential for violence to derail the conversations remains high. For example, violence by pro-government political activists (who are largely loyal to Cabello) occurs frequently at opposition marches across the country, and several people have been killed accordingly. Members of the political opposition also occasionally attack government forces at makeshift barricades erected across streets. According to the government, these attacks have killed or injured at least 10 people since Feb. 20.
Maduro also likely faces pressure from dissenters within the United Socialist Party of Venezuela and the military, and dissent will only increase as protests continue. The committee of powerful leaders ruling Venezuela may be undermining Maduro's authority, and some could be actively conspiring to replace him. Therefore, Maduro has a strong incentive to stem the tide of protests by encouraging part of the opposition to hold talks.
Despite the potential difficulties, the government will likely try to bring the more conciliatory segments of the opposition into some kind of negotiation. This could weaken the protest movement by isolating the more combative groups among the protesters from the movement's leadership negotiating with the government. If Sicad II effectively distributes foreign currency, it could provide the opposition's business representatives with a reason for continuing negotiations. However, the Maduro government will need to give the opposition's political leaders -- including Capriles -- more concessions to bring them into talks. Even if the Venezuelan government can successfully get the business leaders on board with Sicad II, Maduro may need to make other moves, such as releasing political prisoners, to bring a wider part of the opposition coalition into negotiations. These are concessions he may not be able to afford if the new exchange system fails to satisfy demand for dollars -- a likely outcome given the poor confidence in the bolivar and strong demand for imports.
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