Archive for October 13th, 2008

Economic Ramblings

October 13, 2008

I haven’t blogged for too many reasons, from travel, to baseball, to simply no compelling reasons to blog on whether Chavez is right or wrong about people trying to kill him, or whether the opposition can, may or not win in November. Hearing the oppo you may think they have won already, but they still have work to do.

But I have read, heard and swallowed a lot of stuff about the economy, most of which is remarkably naive, ignorant and even besides the point.

I did read some remarkable statements from the Minister of Planning El Troudi, who seems to be in charge of the economy in the absence of Minister of Finance. According to this wizard, Venezuelans should bring their money back from the US to preserve its value. I am not sure what logic this man is following, but he certainly is not using math. Because a scant two months ago, the parallel swap rate, the only measure of a “free” market rate stood at Bs. 3.3 per US$ and it is now hoveri9ng around Bs. 5 per US dollar, which certainly does not sound very good. Even the euro has done better than that recently.

Moreover, in the US the deposit guarantee has been extended to US$ 250,000, something like 30 times the local guarantee. But the Minister does not seem to understand many facts:

First of all, if accounting of banks in Venezuela followed US rules, most banks in Venezuela will have gone under (not that they are not, somehow their accounting gets incredibly creative). Because you may have read that in the US you have to “mark to market”, i.e. register your investments at market prices. Well, not in Venezuela. Here, banks can classify investments at will as “held until maturity”. If you do that, you register it at 100%. Thus, if you bought Government bonds yielding 7% two years ago, today with the same bonds yielding 17%, you move them in “held until maturity” and voila, you don’t have to register a 20% loss in their value, which saves the day for all but the six or seven healthy banks in the country, who have no problem.

Then, there are the articles that claim Venezuela will weather the storm easily because it has saved so much in the last few years. I am not sure what type of spring roll, egg roll or lumpia these writers have been smoking, but somehow they add a lot of stuff but subtract very little.

On the addition part, somehow they always include international reserves as “savings: which as Quico has explained in his comments its sort of strange. After all, it is not the same to have US$ 35 billion in reserves, with US$ 35 billion in monetary liquidity, than to have the same amount with US$ 75 billion idity, like it is today.

Reserves guarantee the money in circulation. If you hold reserves constant and add to the money in circulation, you are in trouble. Thus, if you “add” everything, you should also subtract. Things like debt, for example, at some US$ 30 billion, nobody seems to take it into account. Or the money owed Cemex, Sidor, Banco de Venezuela, Petrozuata, Cerro Negro and whatever, a sum that adds up to US$ 15 billion very quickly, killing off almost all the money in Fonden and leaving just some US$ 4 billion in Bandes and FIEM. Of course, the US$ 18 billion in Fonden includes US$ 1.5 billion in Argentina’s Boden 15’s, purchased at 65 but which are worth 45 today. Or US$ 400 million in  Lehman Brothers which are worth about US$ 80 million and/or Venezuela’s bonds which can not be sold, because Fonden holds them at full value, rather than at market value.

But the truth is that foreign investors have little to worry about even if the recent panic suggests that Venezuela is about to default with the country’s 2010 bond yielding 20% in US dollars. Remarkable for a bond with only 22 months left before maturity. Such is the nature of panics.

But Venezuela will not default, because Venezuela only has US$ 1.5 billion coming due in 2010, another US$ 1.5 billi8on in 2011 and a similar amount in 2013. Peanuts for an oil producing country with oil even at US$ 60 per barrel.

The real problem is that Venezuela has been importing US$ 50-plus billions per year as the Government destroys local production. Thus, revenues in US$ are below imports already and it looks like oil has further to go. The problem is that the country can not issue debt to cover the deficit, like it did on 2007 when the average price of the country’s basket was US$ 67, the country ran a huge deficit, which  it covered issuing debt, both by PDVSA and the country.

And the other real problem is that this is hitting you as inflation is at 50% per food, 70% of which is imported by now and 35% in inflation for the overall CPI.

Thus, foreign investors will get paid, because the country needs them and the amounts due are miniscule in the scale of problems. But local survivors, including the mass of “people” that Chavez claims to love, will be obliterated by the upcoming devaluation, which will allow the Government to live another day, but throwing some steroids into the structural inflation to insure food goes up 75% in 2009 (optimsistically) and the general, improved CPI hits 50%.

Of course, the Government will not have the US$ 9 billion it used in lowering the parallel swap rate in the first half of 2008, much of it wasted in keeping it artificially low (Bs. 6 was too high, Bs. 3.3 was too low). So by now, we are at Bs. 5 per dollar, add ten dollars down on oil and a devaluation and can Bs. 7-9 be out of whack?

I don’t think so. In fact, I am sure we will see a devaluation to Bs. 3 in early 2009 which will fuel the swap market even beyond my pessimistic predictions.

And I don’t even think that US$ 60 per barrel is sustainable. I just think that an incompetent Government like the one we have will screw up again and will need another huge boost in oil prices to have them and the “people” survive. And I do mean survive. When money runs out, there will be shortages and all that money spent in buying out existing concerns for ideological purposes will be needed elsewhere. Excpet it will not be available.

And Chavez will blame the Empire, the IMF or whatever. But it is he and his team that should resign after ten years of incredible destructive power.

And as in previous crises, it is the poor that will suffer, as the well to do with savings in US$ will be able to change at the higher rate, proving once againt the perverse effect of inflation on the poor.

But we knew that ten years ago and after US$ 800 billion in revenues, nothing has really changed under revolutionary management.