The Devil's Excrement

It is not easy to know how much is
out there, by moving funds out of the Central Bank and into the development
funds one does not have regular information as to the assets available. Thus,
we can only look back at most numbers as of June 1^st.

Venezuela currently has US$ 39
billion in reserves, which corresponds to roughly 9 months of imports. I have
never liked to use this number, because panic begins way before the money looks like
it is dwindling down.

I prefer to leave international
Reserves outside the calculation, so that I can look at how much money the
Government has in Bolivars as well, otherwise I would be double counting because those
Bolivars came from the backing of those same reserves.

Thus, we look at the dollars and Bolivars held by various institutions and later we add them up

Fonden: As of
June 30^th. Fonden had US$
14.7 billion between cash and investments. However US$ 7.7 of that has been committed
to projects that are being executed and US$ 2.51 billion have been spent or are
due, leaving US$ 4.41 billion. We know Fonden has left about US$ 1.4-1.5
billion in Argentinean Boden 15’s purchase at 65%, but which currently trade
around 25%, representing a loss of US$ 560 million. Additionally, Fonden had
US$ 525 million in Lehman Brothers instruments, which are simply unavailable
for use. Thus, Fonden has no more than US$ 3.3 billion available, some of which
may be invested in Sovereign debt, which is at lower prices.

Total Fonden: US$ 3.3 billion (Not all of it may be in US$ but given the law
regulating Fonden I would assume it all is)

Bandes: According to its financial
statement Bandes
has more or less US$ 2.7 billion a number that has changed little in the
last six months. However, other Government funds different than Fonden, keep
their foreign assets in US$ at Bandes, in June this amounted to US$ 7.9
billion

PDVSA:
Reportedly PDVSA has US$ 3 billion
in cash and Bs. 3 billion in
cash.  

FIEM: FIEM
has US$ 0.8 billion

Banco del Tesoro: US$ 0.3 billion

Bs. The Government has in the
banking system Bs. 18 billion

Bs. The Government has at the
Central Bank Bs. 4.6 billion

Various Bs., Bs 3 billion

—Total Assets in US$

            Fonden                   US$ 3.3
bil.

            Bandes                   US$
10.6.

            PDVSA                     US$
3.0 bil.

            FIEM                       US$
0.8 bil.

            Tesoro                    US$
0.3 billion

Total dollars                     
US$ 18.0 bil.

—-Total Assets in Bs.

            PDVSA
                     Bs.    3.0 bil

            Banks                        Bs.
18.0 bil

            Central
Bank             Bs.
4.6  bil.

          
Various                      
Bs. 3.0 bil

            Total                          Bs.
28.6 bil.

Let’s look first at the budget,
which is US$ 89 billion, with no salary increases, additional expenditures and
the like:

Local Revenues                US$
38 billion

Oil Revenues                    US$
38 billion (Assuming
average US$ 80 per barrel)

Local Debt Issues            US$   5 billion

Deficit                            
US$ 8 billion

This can be compensated with
Bandes and Fonden funds. Alternatively, a 30% devaluation would yield US$ 10
billion. Thus, the numbers don’t look terrible at US$ 80 per barrel. At US$ 60
there are problems because you need and extra US$ 10 billion, thus you would
deplete Fonden and Bandes and have to devalue.

It thus looks like we will see a
devaluation, use part of the Bandes and Fonden funds and I suspect there will
be an increase in both the value added tax as well as the implementation of a
debit tax.

Before you think I am too
optimistic for 2009, I really don’t think the average price in 2009 will be
below US$ 60 per barrel even if it looks that way right now. Oil prices are
likely to overcompensate on the down side as much as they did on the upside,
given the uncertainty in the future of the world economy. Prices are acting
right now like the worst case scenario is likely. I am not sure that is going
to be the case.

More worrisome is the balance of
payments issue.

Revenues from oil exports (US$80
per barrel)                US$ 38 billion

Other Exports                                                                 US$   6 billion

                                                          Total                    
US$ 44 billion

Imports this year                                                            US$ 54 billion

Deficit                                                                              US$ 10 billion

Thus, this is really a problem, because you would have to use all of
Fonden and Bandes US$ in order to satisfy dollar needs or draw down
international reserves. The problem is that M2 is getting to be US$ 80 billion,
so if reserves drop, people are going to get quite nervous.

Note that this is the optimistic
scenario of US$ 80 per barrel. Things would get really critical at US$ 60 per
barrel.

Even more worrisome, note that the
Government would have no money to intervene the parallel swap market which
could go to stratospheric levels and thus a devaluation looks inevitable.

Finally, I have not included in
any of this Chavez’ folly of nationalizating Cemex, Petrozuata, Cerro Negro,
Sidor and Banco de Venezuela. All of those add up to US$ 14 billion. By late
2009 one may expect one of the two heavy oil arbitrations to come to a close
and Chavez is likely to pay Banco de Venezuela US$ 1.2 billion before the end
of the year.

It certainly looks like things
will get very complicated at these levels of oil prices for the Venezuelan oil
basket. In both the ficsal and balance of payment scenarios a devaluation certainly looks like a sure thing in the first half
of 2009.