VenEconomy // SITME has been an almost insurmountable barrier...

VenEconomy: Just recently, in response to a question on the System of Transactions in Foreign-Currency-Denominated Securities (SITME), the president of the Central Bank of Venezuela, Nelson Merentes gave some good news: that the swap market would be restored in two months' time.

This is welcome news, as SITME has been a tremendous flop. While it has been allowing the government to maintain the lie of a strong bolivar fuerte (strong bolivar), as far as importers, merchants, and other businessmen are concerned, SITME has been an almost insurmountable barrier and has failed to meet their foreign currency requirements.

The volume of foreign currency being traded via SITME is no more than $25- $30 million a day, on average, compared to an average of between $80 million and $100 million a day that was being traded on the swap market last year. That means that, at the moment, there is repressed demand of some $60 million to $70 million a day.

The main reason for the scant volume being traded via SITME has nothing to do with the system's rigid and complex procedures; it has to do with the fact that the government does not have sufficient foreign currency to satisfy the market. If the Central Bank, PDVSA or Fonden had the foreign currency, they would be releasing it to the market, as this would help bridge the fiscal gap while stimulating economic activity.

It is said that the exchange rate on the illegal market has remained "high but stable, with scant volume." If that is true, the explanation for that stability would be that there is scant supply at a time when demand continues to be repressed.

The reason? Fear. No responsible company is going to resort to the illegal market, because it is being strictly monitored and is subject to stiff penalties that go from heavy fines to the closure and confiscation of the company. Faced with such a risk, companies' managers prefer to stop production or to stop selling.

Now then, what would happen if the Central Bank were to honor its offer of October and the swap market is legalized and revived?

On the one hand, the Central Bank will continue to be without sufficient foreign currency to meet demand. In other words, there will be no change in the present situation. On the other, when the swap market starts up again, without the restraints of repression and penalties, repressed demand will be unleashed and prices will shoot up.

And there is something else. Bearing in mind the huge fiscal deficit, it is highly likely that the government will decide to devalue the bolivar again in October, the second time this year.

Given this panorama, the only thing businessmen can do is to refrain from incurring debt in dollars and put their bolivars in tradable assets, as those are the assets that will maintain their value after the currency is devalued once again. As long as the march towards communism allows them to, that is.