The Devil's Excrement

Today’s El Nacional (A-6, by subscription) has an article about Ecoanalitica’s calculation of how much the Chavez administration had in the parallel funds in October 2009, as well as how much money the Government has available in both Bolivars and US dollars in various accounts. The article compares this to what was available a year earlier.

This is, of course, a lot of guesswork on the part of Ecoanalitica, as there are no periodic reports on how much is available, but this is interesting, because it shows whether the Government can really manage to hold the swap rate down.

According to the report, neither Bandes, nor Banco del Tesoro, nor the National Treasury have any foreign currency, a total  drop of US$ 10.1 billion from a year earlier. The rest in US$ is as follows:

Fonden            US$ 4.8 billion (down from US$ 9.3 billion)

Chinese Fund US$ 4.5 billion (same as the previous year)

PDVSA             US$ 0.3 billion (down from US$ 0.9 billion the previous year)

Thus, there is a total drop in these funds and PDVSA of US$ 10.2 billion, for a combined drop of US$ 20.3 billion. This does not mean that the Government spent this amount, it actually spent much more from the funds in 2009, because Fonden received US$ 12 billion from the so called “excess” international reserves in 2009, the Chinese added to the Fund some US$ 4 billion and PDVSA and the Republic issued US$ 11.3 billion in debt during the year. Thus, between all these the Government drew down like US$ 40.6 billion from the funds and new debt (plus however many billions PDVSA generated that were also spent)

Which means that for 2010, the inventory of financial weapons is significantly reduced for the Government to be able to keep the swap rate down as it will like. First of all, it will not be able to give Fonden US$ 12 billion like it did in January, but more like US$ 6 billion. Second the Chinese fund is not money freely available to intervene in the swap market. Finally, under current conditions, it will be difficult for the country or PDVSA to go back to issue new debt in the first few months of the year. On top of it US$ 1.5 billion come due in August 2010, when the Venezuela 2010 bond matures.

Additionally, not all the money left in Fonden can necessarily be used, as some of it may be in investments or money already committed but not spent. We assume all of it can be used.

Then, the Government needs to spend around US 3.4 billion a month to sustain the current level of economic activity and maintain the swap rate down. Average oil prices will likely be higher in 2010, which should help the Government. This means that things will be tight, as in more or less three months, the Government will run down what is available in Fonden now plus the US$ 6 billion it is likely to transfer to Fonden in January. (Yes, higher oil prices help, but it is not a huge difference) A very limited arsenal indeed to keep the swap rate down unless there is spike in oil prices.

In Bolivars, the Government has around US$ 31.5 billion, the largest fraction coming from official deposits of the Government in the banking system. Since this calculation is for the end of October, some of those deposits have been wiped out by the banking crisis, but in any case these funds can’t be used to fight the swap rate and their magnitude is roughly equal to that of a year earlier.

Given that economic activity has contracted significantly and that despite all the efforts the swap rate rose in 2009, it is difficult to envision that it will not rise in 2010. In fact, these numbers suggest that it may rise sharply in the first half of 2010.

The Government has two choices. The first one is to devalue the official rate, which will alleviate some of the pressure from the swap rate as consumption of imported items goes down, or to cut down sharply on dollar expenses, like travel allowances and the like. Of course, the optimum solution would be a combination of both.

I would tend to believe that the Government will devalue, except that Chavez has refused to do so in the last three years. But give it four months and unless something unexpected happens in oil markets, reality will simply force him to do it. Politically in fact, the sooner he does it the better as the inflationary impact will slow down as the November elections arrive.

This entry was posted on December 27, 2009 at 5:23 pm and is filed under Venezuela.