Archive for July, 2011

Hugo Chavez announces he chooses to be treated in Cuba over Brazil

July 15, 2011

This afternoon, President Hugo Chavez announced that he will be going to Cuba to receive chemotherapy for the cancer that affects him. This is a surprising decision that reportedly goes against the wishes of his daughters. It was our understanding that the doctors from the Syrian Lebanese Hospital in Brazil were not clear on what precise treatment to follow, while the Cuban had already made a decision when he left that island.

It is unclear what tipped the decision. From a technical point of view Chavez would be better off in Brazil, Venezuela or a country like Canada, the quality and size of cancer treatments in these three countries is considered to be much more advanced than that of Cuba, even if in Cuba, he could be taken care off by doctors of other nationalities. It is likely that in the end ideology tipped the decision Cuba’s way. I am sure that Fidel Castro and Chavez’ brother Adan put a lot of pressure on the Cuban choice. An isolated Chavez in Havana is much more under control than one in Sao Paulo in a private hospital. Those that have the most to lose, will now control the day to day life of the Venezuelan President and, indirectly, over the country.

Chavez gave hints of the severity of his illness when he said he underwent two “complex” operations in Havana, which contradicts his earlier stories of a single well defined tumor the size of a baseball earlier this week. He also said he had given “ample” details about these operations, which contradicts reality. We still have no idea what type of cancer the Venezuelan President has.

Chavez apparently will not  leave Vice-President Jaua in charge when he leaves tomorrow. This and the fact that he is going to Cuba bodes badly for the possibility that there will be a smooth transition with or without Chavez. The Cubans will control what is said, who says it and when it is said. Their favorite and trusted successor Adan is with them. This could hide the truth in the same way it has been hidden for weeks and leaves the country unattended and without a President or under the hands and control of a foreign State that has the most to lose if Chavez were to be defeated in 2012 or is too ill to continue being the President of Venezuela.

In the end, Chavez’s fate may be sealed by the same factors that have made his Presidency so impractical and ineffective. He may have taken a decision to be treated in Cuba, based on ideology and emotions, rather than on the facts and on the capability and preparation of those that will treat him.

In the end, we may never learn the truth…


Case Study: A Rejected Fishing Project For The People or The Destructive Abilities of the Bolivarian Revolution

July 14, 2011

To Guillermo and to so many other dreamers…

Calle Real, Chuspa

In Spanish here

I “met” Guillermo Mantovani (@cplpesca) via Twitter, the same way he “met”the Head of Insopesca, the fishing Institute that has to approve the technical aspects of his project for him to obtain financing from the Government. The Head of Insopesca asked him to resubmit his rejected project, which was rejected again. I just asked him to send me the material on his project. While it is easy to write about macroeconomic numbers and distortions in the economy, it is the micro stuff that really tells the story about what is going on in Chavez’ Bolivarian Revolution. But in the end, both lead to the same conclusion, the revolution destroys in the name of ideology, but it is that same “ideology” that does not allow it to build anything. Everything is stuck in the empty and impractical minds of bureaucrats, who have never managed anything, but live comfortably on their Government salary and perks. Meanwhile, Guillermo and the people who could benefit from his project, wait the eternal promise of a non-existing revolution and the ever evolving and distorted ideology that is behind it.

Mr. Mantovani saw the town of Chuspa in the Coast of Vargas State for the first time in ’99, right before the mudslides that destroyed that State (another failure of reconstruction, even if the destruction can’t be blamed on the revolution). He liked the town and the area and felt moving to Chuspa would provide a good balance, an active retirement in a place that needed everything, a change of pace and a cleansing of the mind, far from what people call civilization. Slowly, he became an accepted resident of Chuspa.

His diagnose of the town was clear: Low levels of education, no healthcare, huge unemployment, sub-employment in fishing and few opportunities for women, which destroys their self-esteem and their lives. Mr. Mantovani got involved. He helped improve telephone services. Helped get some “Info-Centros” set up there to give people Internet access. He talked to hundreds of people, including Chavez who visited Chuspa in 2003. He participated in Mision Sucre and Mision Ribas. The road was improved after Chavez’ visit, but unemployment and under employment in fishing was pervasive. He started organizing the fisherman in the town and those nearby. When the Government invented coops, they already had two, the number reached eight. The interest in the coops on the part of the Government died, it was another Bolivarian fashion, he had to leave for two years, resources never arrived, the coops died. They are no longer there.

Kiosks along the Malecon, Chuspa

He never lost touch and when PDVAL was created, he got PDVAL interested in fishing and its products, they funded a center for stock-piling fish, 100 boats for the fishermen and promised a processing plant. Oil prices dropped, money was spent only in t-shirts, hats and transportation to political rallies. Nothing happened.

Mr. Mantovani decided then to start a company and submitted a proposal entitled: “Recovery and development of the socioeconomic structure of the Litoral central, via the activation of their tourism-fishing towns”. The plan contemplates to start a company that will be in full motion in 120 days, creating jobs, particularly for women, who can only aspire to have cleaning jobs from the regional Government. The goal was to create 700 jobs, between fishermen and the processing plant, including 220 jobs for women.

Juana’s Kiosk, Chuspa

The company would provide fishermen all of the materials, from gas, to bait, to the ice needed. It would set up the stock piling centers to work 24 hours a day and acquire the infrastructure necessary for processing. A turnkey, 5Ton/day plant would be purchased from a Spanish company and the company would set up distribution, including ice making in Chuspa, transportation to markets, a distribution center near Caracas.The company would buy 25 small boats and 15 “palangreros”, the type of boat that carries an array of hooks below it. The proposal details time frames, methods and even a savings plan and independence plans for the fishermen. It looks at the market and all of its possibilities, even the type of fish to be processed and sold, with emphasis in selling to PDVAL, small fish stores and if there is excess production to restaurants and larger markets.

The project requests Bs. 30 million in financing, about US$ 7 million at the official rate of exchange. The company is owned by Mr. Mantovani, but he has agreed to give 20% of the company to the Communal Council of Chuspa, once the financing is obtained. The company will direct 5% of its gross income for social responsibility and 5% to improve the conditions of personnel. The Chuspa communal council backs the project and it has other approvals from Government entities.

The problem?

In order to obtain financing, Insopesca, the National Institute for Fishing and Aquaculture has to give its technical approval of the project. The project was rejected once and Mr. Mantovani resubmitted after the exchange via Twitter with Mr. Gilberto Gimenez, President of Insopesca. Here is an excerpt of the second rejection, denying the “technical” backing necessary for the project to receive financing:

“The project is conceived under the concept of a private company, which leads us to suggest that models aligned with the new economic and productive policies be used. Even if the vision of the project is to administer goods and means of production for the fishermen, it sets up a situation which legally privileges the consortium, which promotes only one Director, as the only shareholder of the consortium (Did they even read the project???), which blurs the current context for the promotion of socio-productive organizations. It also describes a potentially monopolistic model, that is, under this scheme there will be a great power over the market, which will be the only one to own the product, the resources, the service and the goods, with the risk that the fishermen will return to the old scheme of exploitation and dependence on the boss to whom they will have to report”

So much for a technical evaluation of the project. It even sounds like they did not even bother to read it, since 20% of the company would be given to the communal council. The evaluation never even considers any of the parts of the projects proposed, its viability, the fact that it will generate employment in an area that has no sources of employment other than the local Government. It is just ideological “paja” by someone who has no clue as to even start running a project. To hell the inhabitants of Chuspa and the fisherman. Let them continue living a precarious, but ideologically “pure” life. So much for loving “the people”.

I bet those that asked for financing for setting up a red shirt or cap factory, got it. But Mr. Mantovani dared to dream, wanted to help, adapted his structure to the Government’s guidelines, coops then, communal council now. He also adjusted the structure so it would fit the local idiosyncrasies, customs and problems. He tried, but some bureaucrat shot him down in the name of ideology.

But, as Mr. Mantovani more or less said, either in his emails with me or one of the many documents he sent me: “It just seems as when it comes to facts, some of us are more socialist than others”

Drum Square, Chuspa

All pictures courtesy of Guillermo Mantovani

Venezuelan Opposition Politician Sentenced to Two Years in Jail For Giving “False Information”

July 13, 2011

Tonight, former Presidential candidate and Governor of Zulia, Oswaldo Alvarez Paz, was sentenced to two years in prison (Not clear how he will serve it!) for giving “false information” in a TV program. Much like Francisco Uson, the former General and Minister of Finance, who was sentenced to five years in prison for suggestion in TV that some soldiers had been killed by a flame thrower, Alvarez Paz is sentenced for saying something the UN says. (And so says the US, which directly involves leading Chavista Generals and even Chavez’ brother)

But if you get in Chavez’ eyesight, there is no chance you will get Justice in Venezuela. Alvarez Paz was stating the obvious, not lying, but in the worst case, he was giving an opinion, something guaranteed by the Venezuelan Constitution.

Come on, if you are talking about giving false information, all of Chavez’ entourage should go to jail. The President of the National Assembly said in early June that if Chavez had cancer, he would be the first to tell the country. Jose Vicente Rangel said the President is in good health and he will return whenever he feels like it. Then last weekend, Jose Vicente said that Chavez does not need chemotherapy. But Chavez himself said last night the tumor he had was the size of a baseball and he will need either chemotherapy or radiotherapy.

So much for Chavista veracity!

But, of course, these are all of the President’s buddies and they will not be accused of anything, even if they have been lying through their teeth all along. Chavez has been sick since March and even today, we are not being told the truth.

Talk about lying! These guys should get life in prison, because they know the real prognosis and it’s worse than we are being told, much worse.

But that is another post.

But all of this is not about Justice. This is about revenge. This is about hate. If Chavez could turn on Uson, a man that served him well, but one day decided he had had enough. Or Raul Baduel, another loyal buddy that Chavez decided to punish, despite Baduel saving Chavez’ presidency in 2002.

Why Alvarez Paz?

Who knows! Chavez’ convoluted mind is like that. Maybe because Alvarez was Governor at the time of the coup and convinced Arias Cardenas to give up (While Chavez failed…) Maybe Alvarez looks too oligarchic. Whatever the case may be, today was Alvarez Paz’ turn.

Just hope tomorrow will not be yours. Chavez’ is an inefficient Dictatorship. Not all enemies are treated equally. Just pray he will not set his sight on you or whatever part of everyday life you lead in Venezuela.

If he does, expect the worst, even if there is no reason for it.

A graph of the Devil Excrement at work in Venezuela

July 12, 2011

There is an interview with Economist Asdrubal Baptista in last week’s El Nacional that had the following graph:

taken from apparently a book by him. I find this plot fascinating. It shows Venezuela’s per capita GDP since 1830 in constant Bolivars, that is adjusted for inflation. What is remarkable is how little GDP per capita has increased since essentially the 50’s. Since Venezuela went from producing zero oil in 1914 to producing half a million barrels of oil in 1950, the rise until 1950 can easily be understood. The rest, as they say, is pure Devils Excrement, production went up to one million barrels a day by 1960, without GDP per capita increasing significantly. Then, as seen below, the price of oil began to rise in 1969 (see chart below), production more than tripled and GDP per capita barely moved up. You can see how the peaks and valleys in price are clearly reflected in the GDP plot, but it never got above the level set in the 70’s, despite the fact that the price zoomed up.

The oil was never sowed.


Voluntad Popular: A small and important step towards a more democratic Venezuela

July 11, 2011

While Venezuela’s Constitution says that the authorities as well as the candidates have to be elected in internal elections (Art. 67), this has seldom been the case and since most political parties are private clubs run by their founders, nobody complains much about it and the rules are not enforced by either the Electoral Board (CNE) or the Venezuelan Supreme Court, which is another demonstration of the sorry state of the rule of law in Venezuela.

There have been efforts to elect authorities and candidates in the past, but many of them have led to parties splitting up or to rules being manipulated in such a way that the law was bypassed. The most notable example was the election for candidates in PSUV, where Chavez basically had veto power if the candidate did not get over 50% of the votes in the primary. He not only exercised that power, but some losers were winners in the process and vice versa.

In 1994 Eduardo Fernandez held an open election for the candidate for his party COPEI, thinking that he was a cinch to win it. Oswaldo Alvarez Paz surprised him by beating him, but then lost the national election.

When Chavez ran for President, all of the candidates were “self-selected”, including Chavez, Salas Romer, Irene and Alfaro Ucero. Since then, there have been no primaries to select a candidate.

Thus, I think it is fantastic that Leopoldo Lopez held elections yesterday for his “movement” Voluntad Popular. Yes, it is “his” movement, but this may change some day, he just opened it to thousands of people and he will have to follow the same procedure in the future. Moreover, decisions will now be made by one coordinator per state and more than 7,000 candidates participated in the process. I am sure not all of them think alike and things will be discussed by groups of people and not just a few individuals.

I have always believed that the only way to change politics in Venezuela is to have more democracy in the political parties and movements. The step taken by Voluntad Popular is certainly a huge one and in the right direction. Hopefully, others will follow this and it will become the norm, rather than the exception.


Understanding the bet on Venezuelan bonds due to a possible change in economic strategy

July 5, 2011

Some people are a little surprised that someone would buy Venezuelan bonds because of Chavez’ illness. It is simply a bet on Chavez not being around or even much simpler, on something as simple as Chavez changing his team, including the economic team.

You see, it was not that long ago (2008), under Chavez, that Venezuela’s risk premium was 500 basis points or 5%. This is simply the extra yield that investors demand from Venezuelan bonds over the equivalent US Treasury bond or expressed in another way how much it costs to insure against default (They are similar). Today that number stands around 1050 basis points or 10.5% for Venezuela (For comparison, it stood at 105 basis points for Colombia, 107 for Brazil, 1.05% and 1.07% respectively, that is what good management does and could do in Venezuela). The historical graph is shown below:

Above you can see the value of the 5 year CDS, the cost of insuring against Venezuela’s default in five years, which is the most common benchmark used. As you can see in 2008 this was around 500 basis points, it rose to over 3000 points during the financial crisis and now settled down around 1060 in the graph.

Why didn’t it go back down to 500 basis points?

Easy, just look at graphs in this post a couple of weeks ago and you will see that it was around this time that Venezuela and PDVSA started increasing debt issuance in both local and foreign currency. Here is the change in total debt (Warning since that date of the post two weeks ago, it has already increased by US$ 1.7 billion (or maybe more…)):

This creates two problems for investors: First, there are too many new bonds around that have to  be absorbed by the markets. Second, it is in the long run an impossible strategy as there is a limit to how much Venezuela can issue. As long as there is no alternative strategy in the long term something has to give some day.

Thus, if there was a possibility that the economic team would change with Chavez’ illness, that the Government itself could change, or the actors could change, then there is the possibility that this crazy rhythm of issuance will end and Venezuela’s debt will improve and maybe even go back down to the 500 basis points or 5% value it had in 2008.

What is critical to understand is that small changes in yield lead to large changes in bond prices, particularly of bonds that trade at discount like all Venezuelan bonds.

For example, if the yield to maturity of Venezuela’s benchmark bond Global 2027 went down by 3% (from 13% to 10%), the price of the bond would change (increase!) by almost 25%. Or if the yield to maturity of the PDVSA 2022 dropped by 3% (from 14.7% to 11.7%), the price of that bond would jump up by almost 18%.

So, if you are a foreign investor who thinks there may be change in Venezuela, it becomes a very asymmetrical bet. If you think there will be change in the next 18 months, you buy the bond. If there is change, the strategy changes for whatever reason and Venezuela stops issuing like there is no tomorrow, the bonds go up by 18-25%.

What if nothing changes?

Well that is why it is so asymmetrical and attractive. If nothing changes in those 18 months, you collect a year and a half of coupons, which range from 18% for the 2027 to roughly 26% for the PDVSA bond. As long as Venezuela and PDVSA pay and the bonds don’t drop so much in price, it is a nice return either way.

Of course, investors are attracted by the possibility of the upside, which they believe would occur if something as a simple as a change in the country’s economic team takes place. The possible downside in the same time frame, looks reasonable.

Thinking aloud about Venezuela’s uncertain future

July 4, 2011

In my mind, Venezuela’s future has turned quite uncertain. If it was so before, imagine now when so many demons must be waking up in the face of the possibility of  a future with no Hugo Chavez or a weakened Hugo Chavez.

While we do not know the details about Chavez’ illness, it is clear that he has undergone major surgery. If one believes what is being said, then he had tumors removed and he will require chemotherapy. Survival rates can be good, depending on the stage of the cancer, if he truly has a Duke D or stage 4 cancer, the prognosis could be quite grim.

But since we don’t know, we cannot assume one scenario or the other, we have to look at all of them and in my mind the lead to a very uncertain future, not matter which fork in the road we take. Even worse, the most likely scenarios in my mind, can be those that lead to the most instability and turbulence in the short and medium term.

To understand the options that I envision, one has to consider who has the most to lose from the demise of the Bolivarian Revolution and thus who will the utmost to avoid such a scenario even in the absence of the all mighty leader. Without giving detailed names, these are the three groups affected the most and in this particular order:

1- The Cuban hierarchy: Not only do they lose the Venezuelan money and oil pipeline, but they also lose their only option were they to lose power after Fidel’s passing

2- The Venezuelan Military:No group has benefited the most from the robolution than this one. The high ranking military officers are up to their ears in corruption and drugs. The revolution’s demise will uncover many details about this and they will have to run, but their options are limited.

3-The leaders of PSUV and Chavez’ close associates.

This hierarchy is simply scary, because at the same time if one were to rank the power, I would say the order is likely to be 2-, 1- and 3-, as Chavez has made sure none of those in 3- acquire much power, the military has the weapons and the Cubans have the trained personnel to outsmart and outgun Venezuelans with their local intelligence.

This all makes for an explosive and volatile future.

There are three paths in my mind:

1) Chavez does not survive until December 2012

2) Chavez survives until December 2012, but decides not to be a candidate for the good and survival of the revolution

3) Chavez is the candidate and manages to survive until 2012 (There is also the possibility that he is the candidate, but does not survive. In my mind this will have an outcome like 1) above)

To me 1) is the worst possible outcome today. If Chavez did not survive until the elections are held, I feel that the combination of the top two groups above and even the third one, will lead to a break in the Constitutional order. My bet is the military are the ones to do it. Simply grab power in order to insure that the details of everything they have done been doing the last few years does not surface, but also, that they can continue doing what they have been doing.

Many outside Venezuela think this scenario is unlikely. They believe that these groups would not dare because of the outcry of the international community, Venezuela would become an outlaw state, etc.


These people have lost all semblance of having any scruples, ethics and/or morality. They will not even stop to think about the international reaction, they will just grab for power. Who? Those on top, the top leaders of the military hierarchy whenever and if this scenario develops.

This is, of course, the worst possible outcome for Venezuela, but in some perverse sense, it is also the best one long term. Because even though this may be the most unstable, chaotic outcome, it will be unstable within itself and the internal turmoil is likely to lead to the collapse of the new regime, discrediting those that side with it and allowing for the cleansing and restructuring of the military and also facilitating the turning back of many of the structures put in place by Chavez and his Bolivarian revolution.

The second scenario of Chavez  surviving until December 2012 is also full of peril, because it depends specifically on the details of how we get there.

Suppose Chavez decides he can’t run. He would have to choose a candidate among his close collaborators. Unfortunately for him, he has always removed those that gain popularity around him. In my mind there are also three groups he could choose from:

1) Someone close to him, loyal, with little general support like the Vice-President Elias Jaua or his brother Adan. None of them would receive the wholehearted support of the military or the party, they both make terrible candidates, particularly Adan, who has cared little for others, he was simply “the President’s brother”, so why would he have to play politics? They would have Cuban support, but no military support. If Chavez named them candidates and he did not make it to the elections, the final outcome would not be much different than the one in which Chavez has no time to decide on a candidate, expect then a break in the Constitutional order.

2) Someone not as close to him, maybe Diosdado or Jose Vicente Rangel, who would be able to balance out the military, the party and get the support of the Cubans. The problem is that neither of the two mention or others is very charismatic and/or has ever been able to carry out a good campaign. Diosdado, in particular, was trounced by Henrique Capriles in the Miranda race, a clear indication of his inadequacy as a candidate. Jose Vicente was always a loser in his younger days.

3) Someone more “of the party” like Nicolas Maduro, who has worked the politics in the past and has wider appeal within the various Chavista factions. Someone like him might be able to keep all groups at bay better, but much like most opposition candidates, it is unclear whether they can win  a national campaign.

Finally, suppose Chavez decides to be the candidate even if he knows he is not in great shape to do it. This, in the end, is the best scenario. Chavez runs a softer campaign, gets to the election and there is an electoral transition or he wins. In either of these two outcomes there will be order, it is more likely to be respected. Of course, a sick Chavez is no longer the formidable candidate he used to be. This opens a huge hole for the opposition, which now has a true chance of unseating Chavismo from power.

Of course, the opposition has to stay united, ignore Chavez’ illness as much as possible, continue to attack the lack of accomplishments by the revolution and insure that those votes are properly counted.

My feeling, the most probable outcome at this time, is that what Chavez has is quite serious, that he may not last until the election and we face uncertain times ahead, but Chavez’ cancer may prove me wrong, like all cancers do. His return today suggests that he felt his presence in Caracas was needed to deal with the different groups and perhaps to start making changes like in the Vice-Presidency.

The information I have continues to be that what Chavez has is quite serious, very serious, but you never know, so my “feeling” may be wrong to begin with. The rest, we will have to wait to see how it plays out.