Archive for January 31st, 2010

Venezuelan Economic Notes: From some magical accounting to some magical predictions

January 31, 2010

There is always something happening in Venezuela such that it is almost impossible to keep up with the news or report it all. From the lights going out at the end of both the last two games of the Venezuelan Championship (which Chavez has already said was sabotage), to Chavez calling day after day for a recall vote and the opposition ignores him, to the fact that Chavez’ Russian and Chinese buddies did not bid for the Carabobo heavy oil field, proving that for these New Age capitalists, the conditions were not attractive enough, i.e. profits did not look very good to bid for them. And how about Lula’s advisor Marco Aurelio Garcia saying that Venezuela’s electric network is quite deteriorated and Brazil would send advisors to help. Doesn’t he know this is not true and it’s all due to El Niño? El Niño Chavez, of course…

But as usual, something is happening behind the headlines in the economic front that needs to be reported:

1) Magical dual accounting

Only 21 days after the Government imposed a dual official exchange rate system, the Central Bank finally issued rules on how financial institutions will account for their assets in foreign currency. Think about it, usually you have an official rate and a parallel rate, all your assets in foreign currency, whether they are cash, bonds or even property, you account for at the official rate of exchange, i.e. until January 8th. you kept everything in foreign currency in your balance sheet at Bs. 2.15 per US$.

But now, we have a dual system and when the Government devalued it did not say how it should be done. People expected one rate or the other, but the Robolutionary Government in all its creativity and magical realism decided to have dual accounting rules, which not only make little sense, but should allow for some very creatve accounting.

So far the rules apply only to financial institutions, but we suspect they will be the same for all companies, financial or not:

i) All assets held in foreign currency will be accounted for at Bs. 2.6 per US$, except Venezuelan Sovereign bonds or other bonds issued by public entities, which will be accounted for at Bs. 4.3 per US$.

ii) The exception to the second part will be the so called TICC’s, inflation adjusted bonds which are denominated in US$, but whose capital and interest is paid in Bolivars at the official rate of exchange. The Government decided to this in order to save itself lots of money when making payment on these bonds which were supposed to “protect” you precisely from a devaluation. Thus, all companies that have no access to dollars at Bs. 2.6 per $, will have to value their bonds at this rate.

And you can bet (we don’t know yet) that dividends for those same companies will be repatraited at the higher rae of Bs. 4.3 per $ (i.e. they will give you fewer dollars). Thus, the Government as we say in Spanish “se pago y se dio el vuelto” (The Government paid and made change for itself at the same time)

But in an economy full of distortions, here is a new one, you can do a lot of creative accounting with these rules. Let me give you an example: Suppose your company lost money in 2010, say 1.5 million Bolivars, but you have one million dollars in an account abroad in cash. That million dollars is accounted for at Bs. 2.6 per dollar. Well, two days before the end of the year you buy two million dollars worth of Venezuela or PDVSA bonds and voila, you just made Bs. 1.7 million in profit by doing that since the bonds are valued at Bs. 4.3 per $.

Or suppose you are a bank and you made what Chavez would think is “too much” (i.e. a profit). Since banks have a nice portfolio of Venezuelan bonds, they can sell it and lose a bundle to “erase” some of the profits. (They go from bons at Bs. 4.3 per dollar to cash at Bs. 2.6 per dollar, weird, no?)

It’s magical accounting, courtesy of the revolution. In the end another distorsion…

2) And Giordani’s magical modelling

And Minister Giordani said that he expected GDP to gro wby 3 to 4% in 2010. Scary stuff, no? In 2009, when oil prices were low, he said Venezuelan GDP would grow by 4% in 2009, an error of some 170% given that the economy shrank by 2.9%. Well, if he is using the same spredsheet or model, then we could be shrinking by even a larger amount. Even worse, he is now Minister of both Planning and Finance!!!

3) More brokers intervened, more to come

Last week, three more brokers were intervened for losing their equity. Thus despite the assurances that the financial crisis was over, we have had three banks and four brokers intervened so far in 2010. I understand that more brokers are being examined with a magnifying glass and some may roll in the next few weeks. Additionally, I am still waiting for the bank Chavez said was in bad shape to fall.

And the guy in charge of intervening U21 said that there are no assets there to compensate anyone, but somehow nobody complains. Who had money there?

Stay Tuned!