Archive for January 10th, 2010

Looking beyond the devaluation in Venezuela (Or trying…)

January 10, 2010

(In Spanish here)

As President Hugo Chavez seems to be having an epiphany that most of his economic policies of the last few years were wrong, I do wish someone would explain to him that taking US$ 7 billion from the international reserves simply works against him and insures that next year, he will be forced to devalue again.

Let me explain. Let us assume that oil holds up and PDVSA sells the Central Bank for example US$ 30 billion. PDVSA will get some Bs. 120 billion to spend. This means that monetary liquidity will grow by a similar amount more or less. That represents an increase of 50% in M2, i.e. even if this money does not multiply, like it will, but let’s keep the argument simple. This means that by December monetary liquidity will reach Bs. 360 billion. Assume that the Central Bank will save US$ 8 billion of the US$ 30 billion, international reserves will reach US$ 36 billion.

This means that for each 10 Bs. in circulation in Venezuela there will be one US$ in the Central Bank. In contrast, today, before Chavez removes the US$ 8 billion, the equivalent number is 6.55 Bs. per $ and in a month it will become Bs. 8.24 per $. Well, as you can see this represents too many Bolivars searching for too few dollars, much like today. There will be 50% (it is actually more, but who cares?) more Bs. in December than yesterday. This will drive inflation and devaluation, as simple as that.Nobody seems to have told Hugo, in contrast with Argentina, where a Court has voided a decree to use international reserves to pay debt and stopped the firing of the President of the Central Bank by Mrs. Kirchner over the issue. Gee, if Chavez had done that with reserves, Venezuela would have no international debt by now, but Argentineans realize it would debase the currency and create inflation, precisely what nobody seems to have explained to Hugo.

Meanwhile, the next few days are going to be filled with confusion. You have all seen reports that Venezuelans are out buying everything and they are. But beyond that, I have seen supermarkets with shelves empty of all imported things, even if they did not get dollars from the Government, like soap, or fancy cereals. And as an anecdote, all imported dog food disappeared from Friday to Saturday from the shelves, as the store simply decided to hide the stff until things get cleared up.

And there is a lot to clear up. First of all, what will be approved at the new Bs. 2.6 per $. For example, will veterinary medicines will be included or not? All foodstuffs? It will be days before we find out. The same with the second rate, where nobody really knows what will or not be included.

Beyond that, there is the problem of accounting. Currently, most companies had to register their foreign currency at Bs. 2.15 per $ (There were some exceptions, but I would bore you with that). On top of that there were rules for exporters, mostly that they had to exchange 95% of their foreign currency revenues at the official rate.

Well, now we have two official rates, so that the Government or the accounting board will have to tell companies what to do. We had a dual exchange system in the 80’s, the rules were complicated. Expect the same. Then, some companies with access to the second rate, could register things at the higher rate.

One thing I do expect is for the country’s debt to rally. There are two reasons for that: First, investors will feel the country’s ability to pay has improved. But more importantly, the Government will have many more Bolivars thanks to the devaluation, so that the deficit will be smaller and it will not be until the second semester that the Government may go back to the international markets and issue new debt. Because in the end this was the biggest fear of foreign investors, that the Chavez Government would continue endlessly issuing new debt, flooding the market with new issues that take time for the international markets to absorb them.

Then, there is the likely rise of the Caracas Stock Market. Why? A number of reasons. Even if a company will be affected by the devaluation, businesses have an intrinsic value, a paper plant, a steel plant or even a bank, cost money to set up and build. Thus, ongoing businesses are perceived as being a good hedge against inflation due to a devaluation. But there are other reasons, a plant has a value in dollars, you devalue, the plant still holds value in dollars, even if you can not move it. If you are an exporter (not many left in the Caracas Exchange) then you will get more Bs. for your exports.  Finally, many local banks hold Venezuela’s debt in US$ or the so called TICC’s, bonds whose face value and interest are indexed to the exchange rate. If this value increases from Bs. 2.15 to Bs. 4.3 (depending on what the Government says) some banks will have huge extraordinary profits in Bolivars in 2010, which should translate into nice dividends.

Inflation will be horrible in the next few months, the poor are going to feel it, just the basic foodstuffs will have to go up 20%, but there is a whole range of things that will come at the higher rate of Bs. 4.3 per US$. I do expect the swap rate to go down first, but in a few months it will be higher. Inflation is in the end a monetary phenomenon and there will be a huge monetary imbalance in Venezuela in the next few months. We will be lucky if GDP grows this year.

The sad part is that nothing has been learned from all this. Controls have never worked, because they end up exploding in your face at some point. Chavez has devalued five times. This is his second explosion (The other one was in February 2002). This one did not happen earlier because oil went sharply up in 2008. But the conditions that created are still in place. Some PSF’s have asked periodically about my dire economic predictions, here is the first explosion with more to come. Any gain in the purchasing power of the poor will be decimated over the next few months, but their surroundings, health, crime, electricity, housing, water are worse than when Chavez came to power in 1998. Eleven years and and a huge oil boom lost. As easy as that. That is the price of ignorance and doing things for politics sake. Venezuelans have seen this movie before, this time on steroids.

The problem is that nothing structurally is being done to change the system. The origin of the problems remain, it is the effects that are being attacked. When Carlos Andres Perez came into power he tried an all front attack, he failed politically, but there were real changes. When Caldera first came to power in 1994, he also attacked the effects rather than the causes. Once he realized the country was entering hyperinflation, he changed course, trying to minimize the State and rationalize things like pensions. Oil did not help him in his last two years.

Chavez needs oil and needs to attack the distortions, but will he? I doubt it, which will bring more of the same.

Chavez spewing out his wisdom on the economy today

January 10, 2010

Chavez really at it today with his wisdom:

There is a bank, I have all the reports, that is dangerously close… don’t blackmail me with that stuff that if your bank falls, the system is endangered”

How is that to create some more panic tomorrow? Who needs anyone else to create rumors and panic when Chavez does it alone?

I will expropriate those that speculate

This from a guy that just increased the price of 54% of all imports by 100%.

Airline tickets are not going to double in price

He should talk to Giordani who said that they would go up exactly by a factor of two

We got used to easy money

Chavez has discovered the Devil’s Excrement, it took him more than 50 years alive and 11 as President to make this huge discovery

“Everything is imported here”

(Can’t find link yet) Well, three or four years ago Chavez would threaten the local private sector precisely with importing things if they did not lower prices. And five years with 300% inflation for locals and the Government importing everything made local industry non-competitive and it is Chavez’ and his Government’s fault. He talks like he just got there and is learning the ropes.

We were imposed the model of producing oil and nothing else

Which you have emphasized. You shut down steel and aluminum but not oil to save electricity. Who imposed this model on Chavez for the last eleven years? Wasn’t this an all powerful “revolution” led by you?