## A Back of the Envelope Calculation of The Finances of a New Venezuelan Government

December 8, 2011

(To my friend: Yes, we can!)

Everyone worries about how a new Government would function financially  if there was to be a political transition in 2012. Personally, I think this is the least of our worries. Things like dealing with unions and personnel in PDVSA and nationalized companies will be orders or magnitude more difficult than dealing with “money”.

Here is why:

We are paying about US\$ 6.5 billion for 30,000 Cuban doctors. Divide those two and you get about US\$ 216,000 per doctor per year. Renegotiate this to Venezuelan doctor salaries and you have saved US\$ 6 billion a year, about half of what the country and PDVSA issue in debt every year.

Then, there is Petrocaribe, sending oil to “country’s in need” and giving them easy credit conditions, like pay 50% now, two years grace period a less than 5% a year for the next like 25 years. The math is hard, there is barrels sent to Cuba, barrels sent to Petrocaribe and so on. But there is an easy way to quantify this: Last year, according to the Venezuelan Central Bank, accounts receivable with “friendly countries” reached US\$ 23.088 billion. As of September 2011, this number had reached US\$ 32.7 billion, a difference of, give and tale half a billion of US\$ 9 billion in nine month or US\$ 1 billion per month.

Yeap! This is the crazy revolution, borrow at 12% abroad and lend at 2-3% per year to your buddies, while your country goes hungry, enjoys shortages, malnutrition and the like. It is indeed a strange revolution.

But add the US\$ 12 billion from these “friendly countries” and you are already up to US\$ 18.5 billion a year in “savings”

Few countries in the world can find money so easily to balance the budget.

The Chavez Government has refused to do anything about gas prices. Gas is basically free today in Venezuela. We are talking about 700,000 barrels of oil a day given away (literally). At US\$ 100 per barrel (it is more for the refined products we use) this is 700,000 x 365 x 100, some US\$ 25.5 billion A YEAR in this subsidy. It is actually more, because producing this oil/gas is not free. Let’s say you decide to cover PDVSA’s cost, nothing more. That’s about (back of the envelope) about US\$ 30 per barrel or US\$ 7.65 billion a year. Say US\$ 7 billion.

We are up to about to US\$ 25.5 billion in “savings”

Now, the new President call him Leopoldo or Maria Corina, can call the IMF, the World Bank and/or CAF and from all of them extract without conditions, say US% 15 billion. With conditions you may get this up to US\$ 30 billion, but politically, the conditions will be tough. So, we take the cheaper route.

We are up to US\$ 40 billion, give or take half a billion. Nice war chest to remove exchange controls, no?

You could go bolder. Tell the Chinese you are sorry, but the law says you can’t pledge oil for loans and this will have to be renegotiated. Some US\$ 10 billion in savings, as you will pay it slowly, let’s say at half the rate, 200,000 barrels a day, not 400,000.

We are up to US\$ 50 billion.

Remove exchange controls. Buy back debt. Say you will not issue new debt. Change debt at 12% for multilateral debt at 5%.

Money will flow back into the country and you have yet to say you will privatize all those Government owned enterprises which are in intensive care.

Crazy?

Do the math, it is as simple as 1+1, the hard part will be dealing with real people…

### 45 Responses to “A Back of the Envelope Calculation of The Finances of a New Venezuelan Government”

1. Carolina Says:

I know I’m late on this thread but watching today’s news I couldn’t help wondering how much it would be saved by cutting back government propaganda…

2. Roy Says:

Miguel,

I worked in one of the small ex-Soviet Republics many years ago. When the Soviet Union broke apart, the managers and bureaucrats who were running all the collective enterprises knew their days were numbered and took advantage of their position to strip everything of value from the properties they were in charge of. All machinery that could be moved was stolen. The machinery that couldn’t be moved, was stripped of motors, instrumentation, and even cables. In fact, the country was left without a functioning power system, because all of the copper cabling was stolen right off the poles and towers, to be resold as scrap copper. The entire country was looted down to bare bones.

Do you have any reason to think that will not happen here? In the case of some of the agricultural properties, you have a point. The land retains it’s essential value. But by the time the Chavistas are done with Sidetur and the other industrial enterprises, they will be worthless piles of scrap, that will require billions in new investment to restore them to functional productive enterprises.

• Kepler. Says:

Azerbaijan, Georgia? Or rather Kyrgyzstan, Turkmenistan?
In any case: it’s true. I wonder if we could discuss this openly
so that the average Venezuelan keeps an eye on this, so that Chavista honchos know people will react better than in the USSR falling apart

• Roy Says:

Kepler,

I would prefer not to say where. It was a pretty high-profile project, and I am trying to maintain my anonymity, because I am still in Venezuela.

However, if anyone doubts what will happen, they should recall the examples of what happened when the Opposition won the elections for the Miranda State Government, the Greater Caracas Mayoralty, and Sucre Mayoralty, where equipment, computers and furniture were stolen, records destroyed, and even bank accounts cleaned out.

Extrapolate what happened then, and at the UCV, to a national level.

3. Miguel Octavio Says:

I am not dismissing it, but I think that in most cases tge owners will be more than pleased to get their property back, take Cerro negro, Petrozuata, Sidetur, as examples ( the more expensive ones) they are all running, so, of those not compensated, i dont think the liabilities are so large.

4. moctavio Says:

Ramon: The opposition has a number of plans to make the votes count. What this plan will not do is clean up the voter registry, but wit will insure that at each center votes are counted properly. A friend of mine owner of a company quit his job to devote himself to one of these plans. Another group of retired people from CANTV and various walks of life is overseeing each step of the voting process. Does it guarantee anything? No, it does not, but a lot of work is being done behind the scenes that in some sense is better not to divulge.

5. CharlesC Says:

The contrast could not be greater between the failed dreams of Chavez, the false promises from Chavez, the huge debts Chavez has built, the loss of respect in the world because of Chavez and now the main opposition candidates appear
so hopeful, so clean, so intelligent, so good for Venezuela.
The look even- imagine looking at Chavez with one eye and any of the
opposition with the other. Wouldn’t most everyone choose an opposition
just on the basis of looks?

6. captainccs Says:

Even Fidel gave up power when he was deadly sick. What is this guy waiting for?

7. ramon Says:

The issue here is not whether an opposition candidate will win. I’m sure in a fair election we win. The new challenge that we have is how do we protect our votes? How do we deal with the millions of phantom voters on the registry? Its not a question of if the government will lie, cheat or steal to stay in power. They know they can’t win…they know it more than we do. The challenge is how do you prevent it? I don’t want to seem negative, but I don’t see how we can.

• moctavio Says:

Then give up and dont fight, that is what Venezuelans seem to have done in the last few years and see where it took us.

• ramon Says:

Not what I meant and not what I will do. Just stressing the point that there must be a clear and solid plan to address all these issues. The oppo will win the election, that I am confident of. I know that the oppo candidates are all looking and campaigning for the primaries as they should, but someone has to be looking at the worst case scenario because the government is already planning on it. They know exactly what they have to do and will do. The only thing the government is very efficient at is cheating and stealing. I think that the faster the oppo plans for it the better off they are. The more they talk about it the more people become aware.You have to put it out there so that everyone is prepared and waiting for it. Hoping for the best and preparing for the worst. The oppo has to make all the voters know and believe that their vote will count….that they will make that difference that will defeat this government….no matter what the government throws at them. You are dealing with brutal street thugs that will do whatever it takes to stay in power. For them it is life or death. When Chavez loses….they all have to run or be prosecuted for all they have done.

These issues cannot be put on the back burner…they have to be addressed.

• moctavio Says:

Personally, I dont think he makes it to Oct. 7th.

• Kepler. Says:

Miguel,
If you come over to Brussels (90 minutes from London’s city centre, 5 minutes extra to get to the Grande Place), I’ll invite you for dinner plus Belgian beer if you are right.

8. moctavio Says:

To me the most interesting rumor is the one going around now that Maduro is the new VP. I said in June this would be the signal that something is up. This happens as Jaua is in Russia, not a nice way to do things, but circumstances are circumstances.

9. island canuck Says:

Since 9.30 last night there have been many rumours on the Internet (Twitter, ND, etc.) that Chavez was taken to the military hospital with —— (fill in the blank).

Reports of flurried activity in Miraflores & denials by the PSUV & various ministers.

Could be an interesting weekend.

10. Roy Says:

Miguel,

I accept your primary point, but with the caveat that there may well be boatload of hidden liabilities to add into the equation.

• moctavio Says:

Sure, but a 50 billion war chest is a good starting point to deal with them.

• Roy Says:

Still playing the pessimist…:

1. Isn’t there about \$ 30 billion still owed on expropriated property and businesses? Yes, I understand that this is a one-time liability, but it will have to be addressed quickly, to convince the international investors that the new government is serious.

2. Re-privatizing government enterprises will not generate cash, because they have have already been bled out. The liabilities of the enterprises exceed their value. The government will probably have to add cash to get investors to take them over. But it could stem some of the bleeding.

3. Repairing the infrastructure of the country will need most of that 50 billion annually and more for the next five years. You are not going to have a lot left over for “caramelos” to keep the hoi polloi from whining.

But, I like your optimism. I don’t see much of that these days.

• moctavio Says:

Expropriated properties not compensated for would be returned to their owners. Those compensated for, including the whole electric grid, CANTV, Sidor, can be sold in auction after waiting so that investors see that things have changed. You can bet many foreign investors would be interested in these companies.

The US\$ 50 billion will help, but the idea is to have a war chest and a cushion, but count on Venezuelans and foreigners to come and invest their money, they have not done it for years. Do a real housing program, but let the private sector build, not the Government.

Look at what happened in 1996-1997, Venezuela turned on a dime, nobody believed CANTV could be place in the international markets 4 months before it was done, within a year we had investors coming knocking on doors. As I said the problem will be the people, unions, those enjoying salaries for doing nothing, those are the true enemies, not money.

• Roy Says:

Miguel,

I am responding to your statement that the expropriations can be compensated for simply by returning them to their owners.

Suppose I steal your house, live in it for several years, neglect all maintenance, and then leave it after stealing or breaking all the furniture and fixtures, leaving all the utilities and taxes unpaid. Are you going to accept mere return of the property as compensation for my theft? No, you are going to demand that I compensate you for all loss and damage as well as compensation for the loss of the use of your property for that period.

In the case of the house, the cost to restore it, pay all the liabilities, and compensate you for your loss of use may well equal the original value of the property. In the case of some of the business enterprises that have been expropriated, the value of the current liabilities may even exceed the value of the existing plant. The value of a defunct business cannot be equated with the value of the viable business that was expropriated.

So, I disagree that you can just dismiss this liability by returning expropriated properties to their original owners.

11. colon Says:

ummm “the new President call him Leopoldo or Maria Corina, can call the IMF”….not Henrique or Pablo?

Do you know some poll numbers we ignore? Is hard to find a poll with polarized MCM vs Chavez.

I believe MCM is the best candidate and could win, but….

• moctavio Says:

It was sort of tongue in cheek, since my preferences are not aligned with the polls, I decided to be cute, no new knowledge involved, although I hear Maria Corina is doing better in telephone polls.

12. On paper, the math is indeed rather simple. But we all know the main reason behind this financial mess, as others internationally, is special interest, theft and grand-scale corruption. Granted, these neo-rebolucionarios Chavistas are often uneducated and highly incompetent. But even some of them could figure the math you point out to improve the economy. They just don’t want to do anything because they are getting very, very rich, you see?

Which brings me to point #2: Do we still dream of a follow-up government after Chavez collapses which will be fair, honest and financially sound?? Or do we forget that for decades our country has been a veritable whore-house financially, especially after the oil boom in the early 70’s? (hence the name of this blog).

The adecos, copeyanos, independientes or what have you will continue to steal, make shady international trade deals for personal gain, corruption will always be there. It’s called politics.. (the financial scandals in Europe or the USA, not to mention Africa and Asia are also HUGE, and they are usually quite more honest and regulated than in Venezuela..)

So I wouldn’t be so optimistic about the financial future of our country. Even with such simple math to work with. The crooks will always be there, remember Caldera’s little sunshine sons, or CAP and his buddy Diego Arria, now running for president? Son todos una pila de ladrones corruptos. That’s the REAL problem when adding 1 + 1…

• moctavio Says:

That is an all together different question than the one I was trying to answer. You hear a lot the country is broke, too much debt, etc, the next President will not be able to do much. I am showing this is not true, there are many, many other things that worry me, but money and funding is not the most difficult one. That is the point of the post. .

• I understand. But I’m wondering when has Venezuela’s Financial and economic situation been at its best, and worse, since the oil boom? Through adecos, copeyanos and Chavez now..

So I just did a quick “googlinvestigation”:

http://www.miamiherald.com/2011/06/29/2291809/chavez-should-get-credit-for-economic.html

http://venezuelanalysis.com/analysis/74

http://countrystudies.us/venezuela/22.htm

What is clear is that post-oil boom Venezuela has more often than not been a financial and economic mess, Carlos Andres, Luis Herrera, Lusinchi, Caldera.. now of course, with Chavez it’s the worst ever, considering oil prices the past 12 years and the still small population, etc.

How would you compare Venezuela’s financial and economic debacles since the 70’s? My point is that the name of this blog appears to be a common denominator in the financial equation, decade after decade. And it’s all related to 2 mains factors: under-educated leaders and population and incredible levels of corruption at all levels.

• moctavio Says:

There have been good and bad times, never great. You would think that given the current levels of oil prices, a “reasonable” Government should do well. Yes, the task is titanic, particularly given the levels of corruption and lack of ethics. Yes, easy money is bad and it may be impossible to reverse the trend, but you would hope that things can improve so the poor do better. In the first CAP period, poverty, overall poverty not critical poverty, was only 20%, just going back to that would be an achievement.

You can only hope for the best….

13. captainccs Says:

The Cuban “doctors” are part of Cuba’s modern day communist slave trade. There is no way these “doctors” get US\$ 216,000 per doctor per year. Maybe \$16,000 with the other \$200,000 going to the Cuban state. This is what also happens with Cubans on the island working for foreign companies. The Cuban regime collects their dollar salaries and keeps most of it by using fanciful exchange rates.

I bet that when Chavez collapses most of the Cuban “doctors” will ask for political asylum, happy to be free men again.

14. Roberto N Says:

Miguel:

If those Cubans are doctors, then I am Mother Teresa from Calcutta.

Better yet, pay ZERO to them and tell them they have 3 months to GTFO of town or choose to be paid as nurses, which is closer to their level of knowledge.

At the same time, enforce a regulation that requires all medical students at public Universities to give 4 years residency in a Mision or in the interior of the country, and only once that is done, they get the title of Doctor. Think of it as their thesis, if you will.

The rest of what you posited, gets my vote.

• Kepler Says:

I agree. If most of those Cubans are doctors, I am Angelina Jolie.
Really, I know quite some real doctors in Venezuela and some of them have to deal on a daily basis with the Cuban “doctors”…who end up asking for every piece of advice from the Venezuelan ones because they confess – off the record – what they studied was some sort of “technical health care help.

• CharlesC Says:

Absolutely. Roberto N. and I predict every single one will
go for it -ie. paid nurses…

• liz Says:

Without any doubt they are no MD. I know a couple of them… goodness gracious! they are ignorant as they come and not only medically speaking.

I think I shared the story here once: I went one night to the CPI near the Eurobuilding looking for an antibiotic -as I’m allergic to penicillin- the ‘doctorcita’ gave me the medicine without even touching me! No temperature, no blood test, no blood pressure, NOthing!

Another one of them I met once, heard my son having troubles pronouncing his Rs. She told me he needed an operation (cortarle el frenillo). Take into account that this one did revise his mouth and was very professional about it. Of course, I took him to, not one but two of the best otorhino doctors in town; and guess what? no operation needed, just therapy -vocal exercises.

15. island canuck Says:

That’s one of the advantages of having such a looney in power.
He’s made so many grievous mistakes that correcting some of them will be fairly easy. Others, not so much.

Some of the PetroCaribe countries that he throws oil at compete for tourism with Margarita & other tourist areas of Venezuela. We now have virtually no charters coming to Margarita while they are able to fuel planes at reasonable prices & reap the tourist benefits.

It’s a strange, strange world we live in here in Margarita.

On another note two things happened yesterday that show the state of things, at least here in Margarita.

I tried to buy granulated chloro (70%) yesterday for the pool. It’s absolutely essential to have chlorine that doesn’t contain cyanuric acid to shock the pool which is in all 90% chlorines.
According to my pool chemical supplier the government has embargoed all importation of granulated chlorine because they fear someone will use it for explosives. Paranoid or what??

I then went to Banco Provincial (one of Venezuela’s largest banks) to make a deposit. The teller informed me that they would no longer be receiving deposits or doing normal transactions as they were eliminating the tellers & from now on we had to use the automated tellers. This was in Sambil.

Our local branch has already changed the layout of the bank & have told me that they will be down to just 1 teller in the new year & everyone will have to make deposits and other transactions by ATM.
This is obviously going to mean a huge loss of jobs and is an indication of the punitive nature of the labour laws. It may also be as a result of the pressures the government is putting on the banking system in general.

For those of you outside Venezuela this is a huge change that many of their clients are not equipped to handle – old age pensioners, the under educated, etc. Also all companies have to line up in banks every month to pay Social Security & other government taxes that can’t be paid on-line. It’s going to create chaos.

• Kepler Says:

Thanks for giving us those details. I am sorry for you, man…you could be so useful for Venezuela, y esos milicos y chavistas de mierda no hacen más que joder.

• CharlesC Says:

Smokin’ hot. Right on! Diablo you certainly motivate me to believe
that the financial problems can be corrected. (I lose sleep worrying..)
You are the right man to run the economy. If only the people
knew what is good for the country..

• firepigette Says:

That’s awful Island…

• Richards Says:

HI Island canuk, its true bout the job losses and everything, but i bet you haven´t considered that the bank its doing all that to benefit us the customers, it is not a secret if I say that the teller, if u withdraw a significant amount of money have contacts with thiefs that when you leave the bank, steal all your money… Tell me if im wrong

• island canuck Says:

Richards, how is this going to change? Now you will have to withdraw from a machine with people all around you. If anything I see it as being worse. There will absolutely no privacy.

16. captainccs Says:

Running Venezuela after 2012 without Chavez is easy (1+1=2). Getting rid of Chavez is the hard part and has to happen first. Don’t count your chicks before they are hatched.

17. CarlosElio Says:

Borrowing at 12% and lending at 3%, paying \$200,000 per doctor (not that they are very good, after all) to Cuban doctors, financing electricity and bonus to workers in Nicaragua, and it continues while his adoring fans in his Twitter account beg for jobs, houses, cars, scholarships, medicine. Who can stomach that? I think a message with those facts written in class D and E language may well be the antidote for the adoring masses to reflect as to what is it that they are adoring.