Archive for February 26th, 2011

The mystery of Giordani’s 18% Debt/GDP ratio

February 26, 2011

Everyone was a little puzzled by Minister of Finance and Planning Jorge Giordani emphatically saying that Venezuela still has a low debt to GDP ratio of 18.6% and that it has actually improved in the last few years.

This one is only one of many puzzling things he said, he also suggested this Government inherited high inflation from its predecessors, ignoring the fact that not only have 12 years elapsed since then, but the “structural” and “inertial” factors invoked by Giordani to cause the current 27% inflation, were apparently absent when during his tenure as Minister of Planning in 2002, inflation was 12.2% for the full year, the remainder 15% then has to come from other sources, related to the irresponsible printing of money by the Venezuelan Government. The money supply has increased by a factor of 15 (Yes, 1,500%) since 2003. So much for structural or inertial.

Structurally Incompetent perhaps.

But going back to the Debt/GDP ratio and Giordani’s 18.6%, let’s look at some simple numbers:

1) Venezuela’s GDP in 2010 was estimated to be around US$ 355 billion, before the January devaluation. Since the currency was devalued from Bs. 2.6 to Bs. 4.3, this says that Venezuela’s GDP in foreign currency opened the year 2011 at US$ 233 billion.

2) Venezuela’s total debt as of Dec. 2010 was composed of two parts: 1) Bonds outstanding in the amount of US$ 31.1 billion (my calculation) and US$ 5.6 billion in debt with multilateral organizations. bilateral organizations and banks. This gives a total of US$ 36.7 (31.1+5.6) billion for the Republic’s debt, ignoring debt held by Government companies.

If this is all Minister Giordani was talking about, then the ratio is 21.3% (36.7/172.3), using the current “official” exchange rate.

But given the relationship between the Government and PDVSA, one can not separate the two. Thus, we need to take into account PDVSA’s debt:

3) PDVSA’s debt as of today, after the issuing of the PDVSA 2022 bond and ignoring (for now) other debt held by the company, amounts to US$ 20.5 billion.

Thus, between the two PDVSA and the Republic, Venezuela’s debt is US$ 57.22 billion.

But, whether you use last year’s number (which yields 20%) or this years number, which yields 24%, you still can’t get 18%.

But it gets better. First of all, Giordani has this unconventional interpretation that the US$ 20 billion borrowed from the Chinese is not debt.


Imagine you borrow money from someone and agree that you will pay for it working for them, it may not be debt, but you are a slave, or not?

Same here, PDVSA has to ship oil to pay for the US$ 20 billion, we Venezuelans own PDVSA, and we have to pump oil to pay that, we are the slaves. It’s pure debt.

But let’s agree with Jorge for a while. Venezuela owes only US$ 57.22 billion, except that PDVSA, besides its bonds has liabilities in long term debt of about US$ 4 billion more, which is owed to banks. (We are ignoring employee liabilities, just straight debt)

Thus, the total debt is US$ 61.22 billion or 26%% of GDP

But wait, is the true exchange rate Bs. 4.3 per US$?

Or is it the SITME rate of Bs. 5.3 per US$. If we use the SITME rate, GDP goes down to US$ 189 billion, so that Debt to GDP goes up to a Debt/GDP ratio of 44%.

And yes, if you let the Bs. float, the equilibrium rate would be more like Bs. 6.5 per US$, thus GDP would drop, this time to US$ 113 billion, which would mean Debt/GDP ratio would go up to 33%. But if you add the 20 billion Chinese loan, then it goes up to 71.7%, which is quite high, very high. In fact, The Economist has taken notice.

And God forbid, the World Bank rules against Venezuelan in arbitration.

From all this, the only thing that is clear is that Giordani’s value is simply wrong. In fact, for a man that likes to talk about equations (Deputes are apparently scared of them) which are simply algebraic sums of factors like the Gini Index, throwing that mysterious 18.6% number out is simply irresponsible. He is simply ignorant or a big liar.

Take your pick.

What is clear is that “the man in charge” is either full of hot air, or has no clue, neither of which is encouraging for those of us concerned about the future of the country.