Latin American Currency Devaluation: Old Trick, New Deficits

Argentina and Venezuela are again trying to wiggle their way out of spending deficits by devaluating their currencies. It’s a short-term fix with long-term consequences.

Banco de Venezuela in Santa Ana de Coro.
Banco de Venezuela in Santa Ana de Coro.
Farid Kahhat*

LIMA — Surely there have been sufficient experiments in Latin America with exchange and price controls, enough to foresee their consequences. Just cross the supply and demand curves on a Cartesian plane to see what happens when prices are fixed for a long time, at rates notably below their level of equilibrium: There are shortages, as demand begins to exceed supply. Meanwhile, the goods in question are only plentiful in illegal markets — but at a considerably higher price.

The same tends to happen with dollar rates. There is sufficient historical experience to show that indiscriminate subsidies do not necessarily lead to a progressive redistribution of incomes in favor of the less fortunate.

For example, selling a liter of gasoline for two cents (as happens in Venezuela) benefits those with cars more than it does public transport users. Subsidizing electricity is more beneficial to companies than to households. Worse, when subsidy levels become unsustainable and corrections necessary, the inflation these adjustments generate tends to be harmful to those who have less, as fewer properties can keep their value over prolonged periods of rising prices.

This seems to be the scenario currently facing the Argentine and Venezuelan economies. The Argentine government recently allowed the devaluation of its currency and announced it would cut subsidies on gas, electricity and water.

On the one hand, devaluation helps preserve foreign exchange reserves as the Central Bank sells fewer dollars to maintain its currency’s exchange rate. On the other hand, cutting subsidies helps reduce the fiscal deficit, which is a potential source of inflation.

In the short term, however, both decisions create economic problems, with an increase in the price of imported goods and services and of the subsidized services. So while necessary in the long term, such measures can be problematic.

The protest effect

It’s no accident then that these measures are being taken in the political context of distant elections, not due for more than a year in Argentina and with sitting President Cristina Kirchner unable to run for another presidential term. It is also arriving in the context of an approximate two-to-one difference between the official and unofficial rates.

The difference with Venezuela is that while no elections are due there for more than a year, the government faces the most significant opposition protests since 2002, and a referendum to end the presidential mandate is a technical possibility in two years’ time.

There is also a 13-1 difference between the official and free-market dollar rates, while the inflation rate is at a record high. In Venezuela, subsidies for some goods and services are singularly abnormal, so Caracas authorities would have to undertake more serious adjustments than Argentina, and in a more complicated political context.

While devaluation of Venezuela’s currency, the bolívar, would help moderate the trade balance and spending deficits, it would have a much greater immediate impact on prices than in Argentina, as Venezuela imports around 70% of the goods it uses in its economy. A bolívar devaluation would be less of an incentive for local exports than in Argentina, as oil and gas constitute 96% of Venezuela’s exports and demand for them is relatively inelastic.

Venezuelan bolivars — Photo: Jorge Andrés Paparoni Bruzual

For these reasons, instead of devaluating the official exchange rate (of 6.3 bolívars to the dollar), the Venezuelan government has opted for a more surreptitious devaluation, creating a parallel dollar market that would compete with the informal market. The first bid to do this was called Sicad 1, in which some business groups were allowed to participate in a weekly dollar auction worth up to $220 million. But since rates reached in that market were around 10-12 bolívars to the U.S. dollar, it was not enough to impact the informal market’s rates (which reached a peak of 88 bolívars to the dollar last February).

The government created another dollar auction market (Sicad 2), in which the dollar reached rates of 51.85 bolívars. The new mechanism managed to bring down the informal dollar rate to 58 bolívars.

The ultimate goal of this scaled exchange system is to modulate the transfer of currencies from one mechanism to another, and allow a gradual reduction of distortions in the Venezuelan economy while minimizing possible social conflict. While a step in the right direction, the magnitude of distortions and proven incompetence of Venezuela’s rulers make this a risky bet, with an unpredictable outcome.

*Farid Kahhat is an international analyst and professor at Pontifical Catholic University of Peru’s Department of Social Sciences.

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Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money for a blockchain-powered e-commerce app. But the simplest of errors exposed the scam and limited the damage to investors. A cautionary tale for the crypto economy.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.

Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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