Archive for April, 2010

Harder to write about Venezuela as its leader and the country become more bizarre by the day

April 11, 2010

If I had to characterize Chavez’ speech today, the only word that comes to mind is simply:


He told a story of April 11th. 2002 that even included his heroism that day! He talked as if in his brief departure those days, he was in control all the time, as far as choosing to go to the island of la Orchila because there would be communications and Jose Vicente Rangel would be in touch with him. He is now the hero of that evening, after the murderers of Puente El Llaguno who saved his butt, saying he decided to resign in order to save lives, as if the bodies were not already cold by the time he resigned that night.

And then he says the “people” want to be armed and that on the 13th. he will distribute rifles to the “people”. (Do I get one?) By now, he says that if the opposition threatens again, he will become even more radical. Read this as: if the opposition has any sort of victory in September I will become more radical, find parallel ways to deal with legislating and become even more non-democratic.

Which goes to the point of this post: It becomes harder and harder to write about all this. The country is being destroyed? We all know that. The Government has divided the country into two classes? We all know that. There is no justice? We all know that.

So, it becomes harder to write, to get enthusiastic about writing. Venezuela is simply facing economic collapse. Just this week, Veneconomy estimated that PDVSA needs $117 billion to develop the projects of the heavy oil crudes of the Orinoco. That is how nutty the whole PDVSA strategy is. But these guys gloat when they talk about it. Is it that they do not know how to add? Where do they expect that money to come from? Half those projects have to be canceled and the rest given to the partners, increasing their stakes. For free by the time it is done.

The same with the elections. The opposition so far has disappointed me, but even if it had not, what will happen if it succeeds in September? More repression? A parallel system in which the communes receive the money instead of the States? Looks bleak if it loses, bleak if it wins.

And then there is the ever deeper penetration of the country by the Cubans. Venezuela is supporting Cuba, but Cuba has invaded Venezuela silently. And I can’t help but fear that if the Cubans need it, they will get rid of Hugo and simply take over. And you know what they will have to do if they do this…

It has been a while since logic has served much in Venezuela. The swap rate soars, the Government does nothing, inflation pushes up. Tomatoes went up 120% in March, I guess I will eat a Capresa only with cheese which only went up 30% (Its controlled). Went to the supermarket today with a list of eight items, after visiting three of them, found half my items only. It wasn’t even pay day or weekend. Have had water rationing for two weeks now. Despite many personal measures to save electricity at home, my electric bill says I spent more than a year ago and got hit with a 75% penalty on my Bill. Should I just stop the measures and see what happens?

I feel like going and stealing you know whose bust in front of the Capitol building as a symbol of protest. I am sure I could get away with it easily, but I worry that I would get mugged getting there or back, so, I will leave it at that.

In some sense, it is easier these days to write about the Guri dam level, or deficits, than to write about an incomprehensible Government and its demential strategies. But, I end as I began, Chavez seems deranged, changing history, blaming all his failures on someone else, but not realizing he has no successes to boast about. It is all failures, except for the fact that he still there talking about a revolution that is not. A process which is a failure. A sovereignty that he is giving away long term with his actions. A country that he is destroying economically, socially and morally, one step at a time.

And he gloats and talks about it, as if he lived somewhere else in another dimension…


One day, Hugo Chavez will have to pay for the deaths on April 11th.

April 10, 2010

(Puente El LLaguno from above (top) and from below (bottom) on April 11th. 2002)

I was going to write a post about April 11th. , but just read Caracas Chronicles, where Brian Nelson author of The Silence and the Scorpion tells his point of view and “aha” moments on his research about that terrible day.

Hopefully there will be justice and one day Hugo Chavez will have to pay for being responsible for so many deaths and injuries that day and for his total disregard for the human rights of Venezuelans, no matter what their political views may have been, then or now.

Two mysteries about foreign currency in Venezuela

April 8, 2010

Mystery Number One:

-Oil is up

-Cadivi gives less than it did last year

-Government seems to be intervening less in swap market

But international reserves fall US$ 7 billion in three months, US$ 5 billion transferred to Fonden, but US$ 2 billion is very real. International Reserves are at a 52 week low today.

Mystery Number Two:

-The Government said in January when the swap rate was near Bs. 6 per $ that it wanted to lower the swap rate to Bs. 4.3 per US$

-The Central Bank began selling US$ zero coupon bonds to “aid in lowering this swap rate. First sale was at a fixed price equivalent to Bs. 5.2 per dollar. Second to fifth sales at Bs. 4.8 per dollar. Sizes are small, few people get the bonds, swap prices soars hitting an all time high last week above Bs. 7 per US$.

-Today the Central Bank calls for an auction in which people can bid between 110 (Bs. 4.7) and 112 (Bs. 4.8)

What’s the idea? Essentially the Central Bank is giving away dollars, very cheap ones, for an unknown purpose, since these sales do not lower the swap rate.

Your guess is as good as mine…

What do investors think of Venezuelan dollar debt? How does it compare to other countries?

April 5, 2010

In the next to last post I showed some graphs from Morgan Stanley that seemed to unnerve some people, both pro and against Chavez. As I have tried to explain the job of these guys is to guide their customers in the minefield of Venezuela’s debt, thus their report is an economic opinion of what they are seeing, with no intrinsic political bias. At the end of the day these guys will do well if their recommendations work out.

It has been the standard view in Wall Street that “Venezuela (and PDVSA) have the ability to pay” its dollar denominated debt. However, it seems to me as if the devaluation in January made people realize that Venezuela’s GDP measured at Bs. 2.15 then, was not quite right, and thus the fact that Venezuela’s debt was “reasonable” compared to the country’s  GDP is being brought into question now that the Government has decided there are two exchange rates, Bs. 2.6 for the Government and essentials and Bs. 4.3 for the rest. At Bs. 4.3 the Venezuelan economy is simply half of what people thought it was in December and given that the parallel swap rate is now at Bs. 7, then people worry that in US$, the Venezuelan economy is even smaller than they previously thought.

So, let us ask the question from a different angle. Ok, Wall Street is negative, but what are Venezuela’s and PDVSA’s bond prices telling us? What do investors think? A reader attempted to talk about that using sophisticated language in the comments in the next to last post, but I know that such technical language is above the knowledge of the average reader of this blog, so I will try to address it differently.

First of all, let me tell you that since late last year the world of bonds has changed quite a bit. Investors who could not find yields (returns) in safer investments drove prices up (yields down) of almost all bonds in Emerging Markets…

Except Venezuela.

Yeap, even the Ukraine that was yielding (returning) the same as Venezuela in November, rose so much that Venezuela is the lone high yield in the Emerging Market world.

In fact, lets take Argentina. A populist Government, a country that defaulted in 2000, the same country that for a while had to sell debt directly to Chavez every time it needed money. What is Argentina yielding now?

Well, the floating rate Boden maturing in 2012 yields 7.012% today and the fixed (7%) rate 2015 yielded today 10.8%


Argentina 2012  7.02%

Argentina 2015 10.8%

How does this compare to Venezuela?

It depends. If it is Venezuela issued under international law, it is very similar:

Venezuela 2013 11.19%

Venezuela 2014 11.95%

a bit more really, than Argentina, thus investors perceive higher risk.

But if you look at PDVSA the difference is much larger

PDVSA 2011 (zero coupon) 10.35%

PDVSA 2015 14.65%

Now, there is a huge difference (14.5% versus  10.8%!) suggesting investors are not very comfortable with PDVSA’s ability to pay compared to Argentina. I disagree with that perception, but that is besides the point. My opinion is just one opinion, the people who buy the bonds vote with their pockets.

But Argentina should not be like Venezuela, it has no oil, should be a worse risk. But it isn’t.

What about Colombia?

Well, there is no comparison:

Colombia 2012 1.58%

Colombia 2015 4.28%

This is a HUGE difference!

You get 10% more on PDVSA than on Colombia, a country that a few years ago, people were worried about its dollar commitments. But it’s “oil opening” has generated nice oil revenues (Helped in part but Venezuelan oil ex-pats, fired from PDVSA). And Colombia’s economy is booming, even if Hugo does not want to import anything from there.

But Colombia is the rule not the exception. Look at all these issues:

Ukraine 2012 6.3%

Bulgaria 2015 3.9%

South Africa 2012 2.33%

Panama 2012 2.07%

Peru 2012 1.33%

Brazil 2012 1.2%

Now, let me clarify that this is very sloppy. I should show you the coupons (amount to be paid yearly per face value) to make a proper comparison. But why bother? The differences are so large that it does not matter.

The truth is that PDVSA is yielding roughly ten times more (10x) than Brazil until 2015. Investors are saying they have no fear in buying Brazilian bonds at 1.2% until 2012, but they are worried (really worried!) with PDVSA bonds which yield 10.35% if you keep them for the next 16 months. Whatever their reasons, these investors are agreeing with Morgan Stanley, there may be a cash crunch in foreign currency and Chavez may decide to tell investors to bag it.

Will he do that?

I doubt it. There are too many measures he can take, from increasing the price of gasoline, to another devaluation to shrink demand. The problem is that these measures should be taken today, not next year or in 2012. Except we have elections…

But the point is that international investors are voting with their money against Venezuela. They are asking Venezuela to pay through the nose to have them use their money to buy Venezuela and/or PDVSA bonds.

But it should not be that way. Venezuela’s oil and current world’s oil prices should make Venezuelan debt very attractive to foreign investors. Venezuela has comfortable maturities (US$ 1.5 billion in 2010, US$ 4.5 billion in 2012, US$ 1.5 billion in 2013…), Venezuela has CITGO, the German refineries. But

But it also has Chavez-risk, non-transparent numbers and, much like Morgan Stanley, other people have made their calculations and the probability of a bad ending can not be dismissed. If oil prices stay here or drop, watch out! So, why bother.? I will take Ukraine’s 6.3% until 2012, that country may be a basket case, but at least they are trying to fix things and they are talking to the IMF. Thus the difference.

So, you may not like Morgan Stanley’s conclusions, but if you have some savings then put your money where your emotions or intuition is and buy PDVSA’s 2014’s and get a 15% yield to maturity.

Just pray that Morgan Stanley’s guys are wrong, otherwise you may not get paid for quite a while…

(Note and disclosure: This is what the markets are saying. I don’t fully agree with it and currently hold PDVSA 2014 bonds)

Another Guri update: Corpoelec presentation

April 4, 2010

The last few days, the OPSIS website has not been updating the data, all we know is that there was a sharp drop in the inflow into the Guri dam, as on March 30th. inflow dropped to as low as 430 m^3/sec, the lowest level all year.

As usual, our friend Moses sends us some very interesting information in the form of a link to a Corpoelec presentation, which is now on the web right here.

The first conclusion from seeing this is that there is no doubt that Corpoelec is considering the operation of the Guri dam below the magic 240 meters above sea level, based on this graph:

I do not understand the details of this plot, but there is clearly a “range of operations” which goes as low as 234.9 meters, well below the “critical” level of 240 meters above sea level. This region has a higher risk of vortex formation as the water level drops, but the graph suggests that there is some leeway in allowing it to drop below 240 meters, which would be good news as we will see below.

The next plot shows what Corpoelec estimates will happen in time, showing that it does not expect the 240 meter level to hit until May 23d. very similar to the model I presented and those in the comments using higher order fits:

Finally, there is this plot that estimates the current trajectory, comparing it to historical values.

From all this data and if Guru can be operated down to 238 meters, it would only be June until we have a problem.

Thus, I continue to be optimistic that in 2010 Guri will not reach the critical level and has to be shut down. Of course, the problem is that first, we need rain, but more importantly, the starting level for 2011 will be low and we will need a lot of rain to start the dry season for next year at a high level.

Hugo plays at being rich, while beggars and strangers bearing gifts visit Venezuela

April 2, 2010

Today Chavez had a couple of visitors, one a beggar, Evo Morales from the Bolivian altiplano, the other one a stranger bearing expensive gifts, Vladimir Putin, from the cold steppes of Russia. Evo was probably taking advantage of Putin’s visit, wondering if in the multi-billion dollar discussions between Hugo and Vladimir, he could squeeze a few million out of his buddy. Vladimir, trying to seal deals and get commitments out of Hugo for weapons and useless trinkets, before Hugo’s money runs out.

Although the more cynical observers suggest that Vladimir came to seal deals precisely because the money is running out. They figure that Vladimir wants oil fields in exchange for trinkets like weapons and power plants, while the oil fields will become Russian property when and if the money runs out. At the same time Vladimir can play world politics, playing buddies with Hugo, making Obama and Hillary cringe.

So, while Chavez and the incompetents surrounding him can’t provide the most basic services to the population, the Russians claimed Venezuela would buy 50 war planes from them, while Hugo signed an agreement for cooperation on space exploration, a $20 billion investment in the Orinoco Oil belt and, of course, how could I have left it for last, Chavez’ dream of having nuclear energy now that he seems to have screwed up all of the country’s power system.

But unless oil prices shoot up to the stratosphere that Chavez wants to help explore, money seems to be getting very short around here, so when Chavez talks about a US$ 20 billion investment in the Junin field, he seems to forget that since by law (his new laws!) PDVSA has a minimum of 60% of all these projects, PDVSA has to come up somehow for its US$ 12 billion in this project and you have to add the Carabobo projects, all of the electric power plant investment needed now (smaller oil exports!). a possible setback in arbitration for expropriating oil and cement projects and, of course, funding all his entitlement projects. (Imagine Chavez telling Evo: Please don’t interrupt, we are talking billions here, so, yes you can have your $125 million, but please shut up Evo)

Because besides the “needs” above, there are signs that money, particularly dollars are not as easily found around the Venezuelan Government as it used to be. The first sign was the January devaluation, while expected, that Chavez would allow a 100% devaluation for most important items took many (all?) by surprise. Other signs have followed: The slide in the swap rate, the 15% decrease in international reserves, the slower outflows from CADIVI despite the higher exchange rate and even Chavez’ lower number of trips abroad.

And I have to wonder if Chavez was shown the somewhat gloomy projections by Morgan Stanley (Thanks to the reader who got me a copy!) in their latest report on Venezuela (Maybe Evo came because he saw them). These are the darkest predictions I have seen so far for the balance of foreign currency in Venezuela in the upcoming years:

The graphs are the result of modeling the country’s dollar balance using the trends in import growth, capital flight, oil output decline, rising local oil consumption using the future oil prices as predicted by the oil futures market. Then, there are two scenarios: In the “severe” scenario” (Top graph), the projection is made using the trends of the last three years, In the benign scenario (Bottom graph), they use the trends of the last twelve years.

In each scenario there are two projections, which reflect simply whether the Carabobo projecst will or not contribute to the dollar balance before 2015. (Note that the first step after the two fields were assigned was not complied with, contracts were supposed to have been signed last week, they weren’t. Apparently the Government is not complying with any of the changes it offered to make in the contracts before the auction took place)

As you can see the dollar balance deteriorates fast in both scenarios, reaching -US$ 180 million by 2015 in the “severe” scenario and -US$ 100 billion in 2013 in the “benign” one. In fact, there is little difference in the overall trend in either case, what changes is how fast they develop. In the severe case, there is a net deficit of US$ 5-10 billion by the end of this year, while in the benign case it only happens in 2011. Thus, the problem is the prediction, the time scale is irrelevant given the numbers. The point is that in both, Venezuela would have to find some US$ 60 billion in financing sometime between 2011 and 2013. At Bs. 4.3 per dollar this implies increasing the country’s debt to an amount roughly like the GDP of Venezuela, a Greece-like number that seems far-fetched to fulfill.

Thus, Chavez should land soon on his true reality that he can’t even meet his local expenses, let alone fancy-schmanzy space and nuclear power projects which would cost billions under his command.

But Vladimir, Evo and yes, Fidel and Ramiro, will take whatever they can get until someone tells Hugo that he is in deep…trouble.