Archive for February 10th, 2010

Even the “best” economic scenarios for Venezuela in 2010 are grim

February 10, 2010

Predicting what the Venezuelan economy will do in 2010 is becoming harder and harder. The Government relished the fact that the country’s CPI only grew by 1.7% in January (2.4% in Caracas), still at a pace to become the second or third largest inflation rate of the world in 2010, but the truth is we ain’t seen nothing yet. Simply put, the absence of known rules made January a wash out month, with many producers and manufacturers not selling anything, waiting to see at what rate CADIVI will given them raw materials before remarking up prices. (Hopefully the 5% increase in January in alcoholic beverages and tobacco says nothing about the mental state of Venezuelans)

But the picture emerging for 2010 is not pretty. By now, the financial crisis has taken out 8-9% of the financial system without taking into account stock brokers. New ones are intervened daily (two today) becoming simply non-news. If we round it to 10% of the financial system (it will be more) we are talking about the rip-off or disappearance of some 24 billion Bs., roughly US$ 10 billion at the lowest official rate (bs. 2.6 per $), US$ 5.58 billion at the second official rate (Bs. 4.3 per $) and US$ 3.7 billion at the swap rate (Bs. 6.5 per $, still going up, despite CD’s and supposedly US$ 130 million per day in CADIVI outflows in February.

And the financial crisis alone (which is not over, some banks still have holes) will have an important cost. First of all, the Government has refloated some of these banks, without replacing the losses with money. Most of this has taken place under the Banco Bicentenario umbrella (Fogade barely had money to cover the first two or three interventions), which only had one healthy (not really, just when you compare them) partner: Banfoandes. As people withdraw their money from Bicentenario, the funds are coming from Banfoandes’ money, the hole is still there, but the Government is willing to throw lots of money at it. This will be, of course, more inorganic printing, more inflation. To say nothing of the unemployment created by the whole crisis. People are being fired daily, as the centralized operations are all moved to Banfoandes and only the people at some branches survive (Other branches are being closed due to proximity to other ones of the integrated entity).

But the pain in the Guayana region, where heav industries are, is very high. Sidor, nationalized barely two years ago from Argentina’s Ternium (And a payment by Venezuela to that company mysteriously missed yesterday) has been asked to cut 60% of its liquid steel making capacity to save electricity. Given that the company lost US$ 400 million lat year at full output of 2.9 million Tons, you can imagine what this means financially for a company already bleeding money. And aluminum companies Venalum and Alcasa, already running deep in the red had to cut 36% and 24% of their production capacities for the same reason.

And in the hot iron briquette sector, nationalized only last year (not compensated yet!), Venezuela’s output is known to have dropped 45% in January from the already low levels of last year when one of the nationalized companies Matesi, was shutdown by the Government. The lower output can not be blamed on the electric crisis, these plants run on natural gas, so it is either that the Government is not providing the required iron ore from Ferrominera del Orinoco or the natural gas is being used elsewhere. We are inclined by the latter given the reports that Venezuela’s deficit of natural gas production has increased from 1.5 trillion cubic feet to 2 trillion cubic feet due to the reduction in production of oil in better quality oil fields with their associated natural gas.

And in the nationalized oil pipe company Tavsa, not a single pipe has been produced since nationalization a year ago. Way to go for the revolution!

All of these companies are under the umbrella of CVG, almost bankrupt last year when it planned to float a US$ 2 billion bond to continue operations, until the hard reality that the yield would have to be near 35% for it to be sold, forced the company to withdraw it from the market. Had it come to market it may be doing worse that Blockbuster’s September issue now trading at 92% yield. But its President says he plans to invest US$ 440 million to generate 880 MW of power at Sidor. You have to wonder where he will get the money and by the way, he should really talk to Diosdado Cabello about this, Cabello announced that he would spend 1.4 billion euros to produce 1,000 MW of power. One of them is lying or scamming. Only in the Chavez robolution do Government officials differ by a factor of four in the cost of a MW of generating electric power. Maybe that is why the electric system is in shambles.

Today, economist Jose Guerra was saying that in the industrial area of Valencia, manufacturing companies miss more the raw materials from these companies than the flow of dollars from CADIVI. They could always use their own funds to operate (at the swap rate, of curse), but without the raw materials, many metal, slab, billet, wire and beam plants are still shutdown five weeks into the new year. Cuban “experts” were brought in to see if they could replace some of the raw materials from Sidor and when they saw the plant at Sidor, they said they had nothing even close to that size in Cuba and could not help. Nice trip though…

And we have yet to see the real effects of the contraction of demand due to the devaluation. Demand had already contracted sharply last year in the fourth quarter, but will certainly contract even more now that inflation will shoot up, no matter how much additional money the Government throws out into the streets. In fact, on the inflationary front, it is this contraction in demand which becomes the most perversely positive effect on inflation.

And even the so-called expropriation of gold center La Francia will leave people without jobs, if you can call the Government expropriating from the Government an expropriation. While some suggest there was a racist component to the decision, one of its merchants told me today he is leaving the country and shutting down operations. To him, it is clearly a racist decision by Chavez, no other interpretation (think Star of David!). Meanwhile the rightful owner of the building, the Universidad de Oriente. also thinks this a political decision, to take away an independent source of funds from a university which Chavez considers to be in the “enemy” camp. As evidence, the University insiders note that the Minister of Higher Education used to directly managed the rent from that specific building and he is part of the Chavez Cabinet and was actually present in Plaza Bolivar on Sunday. Thus, Chavez kills or threatens two groups with a single stone.

And we come back to the original question, a damaged economy that shrank by 2.9% in 2009, is likely to do worse now in 2010. Even the more positive economists, who were forecasting a positive or flat GDP for 2010 are already changing their estimates to saying at least the 2009 number, if not worse.

Not a pretty picture, even if you dream with the best (negative possible scenario). This in a country whose President was saying a year ago that “we are shielded from the world’s crisis”. Has anyone noted to him the US economy grew by 5.7% in the 4th. quarter of 2009?

Yeah, but capitalism is dead, the robolution may be alive, but Venezuelans are feeling very pessimistic!

A Venezuelan’s Week

February 10, 2010