As Economy Stalls, Inflation Heats Up and Maduro Seems Clueless

June 8, 2013


Maduro badly imitating Chávez, what is he smiling about?

The week brought really bad news on the economic front, as the Venezuela Central Bank reported that the economy stalled in the first quarter, growing by a meager 0.7%, while inflation really heated up, increasing by 6.1% for the month of May (up from 4.3% in April). Both numbers were worse than expected by analysts and economists.

The internals of the inflation numbers were even worse. Twelve month inflation is now running at 35.2% (Inflation  for 2012 was 20.1%), while Food and Beverages went up by 10% in May, that group is now up 27.8% for the year and 49.9% in the last twelve months. Inflation is already up 19.4% for the year, compared to a devaluation of 31% in February. The scarcity index stood at 20.5% in May, barely budging from the same number in April. Even worse, many of the basic products currently under price controls, have yet to receive approval for price increases since the devaluation in February. Meanwhile, the black market rate has reached a new all time high.

To make all of this even more worrisome, is the fact that Maduro was sworn in nine weeks ago and he has yet to announce any significant change to economic policy. Soon after being sworn in, Maduro said that the Government would make the parallel rate fall and it is now 32.4% higher than when he won (sic) the election. And while investors and the private sector wait for announcements, Maduro makes non-announcements (Sicad was going to start again three weeks ago, there will be no devaluation)

But Maduro keeps saying things that may sound good to the “people”, but are either false or will make him look bad in the future. He said that what was coming was “the strengthening of our currency and our economy”, which at this point is an impossible target for the currency in 2013 and an iffy proposition for a growing GDP in 2013. Maduro also asked for applause for Minister of Finance Merentes “who is fixing our economy”, while in reality Merentes has shown that he does not have the power to guide economic policy, as he has yet to make a single change since being named Minister in April. (Even his road show to New York and London to talk to investors was cancelled soon after it was sort of announced). And Merentes may improve the foreign exchange system, but he is no economist and thus does not know the tools to attack the many distortions in place.

And Maduro may simply be clueless or have really bad advice. Yesterday he said that the reason inflation went up like this in May is because of “overheated consumption”, while the Government’s own numbers show that the growth in consumption slowed down between the fourth quarter of 2012 and the first quarter of 2013 from 7.1% to 3.1%. Maybe Maduro should be briefed on the effects of money printing and deficit monetization.

By now, in addition to the higher inflation and the stalling of the economy, the result of the Government’s inaction is that the bond issuance (likely directly in US$) that will certainly take place in the upcoming weeks, will be more costly than eight weeks ago. Between the fear of new issuance, the drop in US Treasuries and the lack of new policies, the prices of Venezuela and PDVSA bonds have been punished harshly in the last nine weeks. This means that before Maduro was elected, the benchmark Venezuela 2027 bond was yielding 9.18%, which last Thursday stood 11.48%, before dropping sharply on Friday to 10.88%. This means that any new issuance will be between 1.5% and 2% more costly than six or eight weeks ago. (US$ 45 to 60 million a year for the length of the issue of a US$ 3 billion bond)

About the only positive note is that Minister of Energy and Oil Rafael Ramirez has managed to sign some deals worth about US$ 9 billion with Rosfnet, China and Chevron, showing that he has more power than many. Except that none of what he did  implies cash flow any time soon, as the major chunks of all the deals are for expenses in PDVSA’s projects with these partners. The only one that implies money for PDVSA is a loan from Rosfnet to PDVSA of US$ 1.5 billion, capped at US$ 300 million per year for five years and so far, it is only a Memorandum of Understanding.  The other “loans”, are all going back to the “Giusti” model, where the purse strings are controlled and held by the partner and not PDVSA. Fourteen years of a revolution to end up in the same place.

At least, that new money will go in the long run for increased oil production, something the country needs, but the revolution has ignored for too long.

32 Responses to “As Economy Stalls, Inflation Heats Up and Maduro Seems Clueless”

  1. Ira Says:

    These topics don’t generate the same kind of interest as toilet paper shortages, although it’s all connected.

  2. […] inflation went up by a whopping 6.1% in […]

  3. This is a brilliant long term blog – keep it up Miguel. My blog just tries to take a daily irreverent swipe but the serious problems left by San Hugo are now really pressing hard on everyone in Venezuela and the lack of economic nous is nothing short of extraordinary

  4. […] VENEZUELA As Economy Stalls, Inflation Heats Up and Maduro Seems Clueless […]

  5. Ronaldo Says:

    Maduro, himself, is not facing any financial problems. Nor are those close to him. Why should he care about poverty or inflation? He has a lock on his job for at least 4 years. If Maduro leaves office in the first 4 years of his presidency, it will start an election, and Capriles will win. Chavistas have to leave Maduro in office for the next 4 years.

    • TV Says:

      There is a possibility of a recall referendum after 3 years in office.

      Chavistas will try every dirty trick to stop or prevent that, but it happened to the Master, and Maduro has far less chances of surviving it – especially with the problems compounding in the meantime. Chavistas may actually try to excise him themselves and try to get a new face.

  6. Island Canuck Says:

    For those of you that need a Sunday smile here is the quote of the week:
    “JVR: “Venezolanos de oposición” compraron 18 aviones de guerra”

    JVR says the opposistion bought 18 war planes which will be delivered to a USA base in Colombia.

    I’d really like what he’s smoking.

    • m_astera Says:

      Makes me wonder what’s going on with the Russian warplanes that Chavez had the helmets sequestered so no one could fly. And the (used) Russian submarines etc he spent billions on. Are they still around?

      The bigger question should be, where are the 200 tons of gold that were supposedly repatriated to Venezuela?

    • Charlie Says:

      Island; the problem is, if you read the aporrea forum, that a lot of chavistas buy it, just because JVR said it

  7. Alex Says:

    Miguel, read the last paragraph of this article:

    And I may say it makes sense:

    1. The system, with all its flaws, used to work effectively. Almost every big multinational accepted it, which tells you it wasn’t so bad after all.

    2. Going to TSJ is much faster than getting 120 congressmen to agree on something. A call from Maduro to Luisa Morales would suffice.

    • I still say is easier to go to the Assembly, not enough to change that law.

      1. The system was incredibly opaque, it woud be better if it were transparent. It would take a while to get it to work, 48 brokers, including the bigger ones, no longer exist.

      2. It would look strange to have the TSJ change both laws, why not go to the Assembly, takes two weeks really.

      Again, why not trade money not securities, you only have to change one law that way.

      • Roy Says:

        If they traded money instead of securities it would be an effective elimination of the currency controls. CADIVI would be exposed as just a scheme to subsidize Chavismo’s preferred imports (and importers).

  8. Have not heard that at all. Why ask the SC, not the Assembly? They actually would need to change a few laws. The Ley de Ilicitos Cambiarios prohibits any form of exchange and the new Securities Law forbids brokers from trading or even holding dollar securities.

    Why not allow banks and brokers to trade Dollars for Bolivars and viceversa? Why revive the mockery of the swap?

  9. Alex Says:

    I understand Merentes is requesting the supreme court to invalidate the 2010 law that prohibited brokerage houses from trading government securities, in clear intent to reactivate the swap rate. Is this true?

  10. Noel Says:

    Besides boding ill for its future, the current policy disaster in Venezuela, when coupled with similar failures in Argentina, Bolivia and to a lesser extent in Brazil may well affect the rest of the continent and precipitate a regional crisis from which exit will be long and painful.

    Chile, Colombia, Peru and Brazil seem to think that closing your eyes and your mouth will make the problems go away. That may prove a very risky bet.

  11. TV Says:

    FT has Venezuela “deep in hyperinflation” already, with no reason to expect it will end anytime soon. Oil prices will probably come down by 10-20% in the next few years, so more trouble ahead for Maduro and Chavizmo. I do wonder how will the electorate take it. More fascism ahead looks certain.

  12. pitiyanqui Says:

    Between the fear of new issuance, the drop in US Treasuries and the lack of new policies, the prices of Venezuela and PDVSA bonds have been punished harshly in the last nine weeks.

    Two other things that bode ill aside from these things: 1.) Brazil is lowering the tax rates on foreign remittances on its bond issues and 2.) There’s been a strong movement into short positions on developing market bonds in the last few weeks as people switch back to US treasuries on the expected ending of QE.

    For those investors in the LATAM sector, this does not help any offering by Venezuela and would push expected rates on any new issue into at least the 12-13% rate, I would expect. The market will be extremely soft and I doubt they will raise the funds they target. There are real serious concerns with the working capital of the government, and investors are starting to smell something rotten.

  13. Morpheous Says:

    The problem of communist people is that they believe that the the economic laws were invented by men when actually men discovered the laws. Economic laws are like physics laws. Men just discovered them and learned how to take advantage of them by understanding the laws and not by going against them. But communist do the opposite and then get hammered like Cuba, North Corea, and sadly Venezuela. An even so they do not learned any lessons and sacrifice themselves for decades and possible even centuries. It is really difficult to be optimist about the Venezuelan prospects.

    • Boludo Tejano Says:

      The problem of communist people is that they believe that the the economic laws were invented by men when actually men discovered the laws.

      Very well put. Which reminds me of the question a visiting professor from the PRC, in the US for a semester in 1991, asked me. “Marx created communism. Who created capitalism?” Capitalism was there, and Adam Smith wrote about what he saw. He didn’t create it.

    • Kepler Says:

      Sorry, but although capitalism just appeared, economic laws are NOT like physics. They are just huge simplifications. Physical laws are not simplifications in the same way. There has never, for instance, been something as “free market”. There are just mere approximations.
      And capitalism did not appear with the first humans. We had a long way to go. Venezuela never entered into capitalist state because it has always remained in a feudal stage. Russia and China could be ruled by commies because people didn’t want to get out of the feudal situation, because then a world war came in and on top of that the Germans for the first and the Soviet for the other helped established a certain regime.

      Communism would have never arrived to Germany hadn’t the Soviet Union occupied part of it.
      Why? Because it had already evolved into a capitalist stage.

      We can strive for a free market and capitalism but believing in those things as if they were as true as the laws of energy or the like is as naive as believing one can create a new man.

      Britain and the US got to where they got through a flexible mix of free trade AND a lot of protectionism.

      • HalfEmpty Says:

        There has never, for instance, been something as “free market”. There are just mere approximations.
        You should ask the Neanderthals about that…. no wait….

        • Kepler Says:

          The Homo sapiens had a monopoly on certain things, they told the Neanderthals they wanted free trade, but what the Neanderthals didn’t know was that the Homo sapiens meant “free trade” only for the things convenient to them, one-way free trade, so to speak.

          The Japanese of the Meiji era corrected the stupid decisions they took before. We Latin Americans seem to go from complete isolation to blind “hand it over and behave like compradores attitude”.

          This kind of discussion only happens in Latin America.

          Ps. and by the way, absolutely every person with non-sub-Saharan blood has a little bit of Neanderthal :-), 2.6% on average

          • Morpheous Says:

            Potential economic behaviors are not inventions, they are there ready to manifest and they are certainly much less predictably than physics which makes it difficult to uncover and understand how the economic forces will unfold when the environment change. On the other hand, economic policy can be certainly invented and the best results will come from those policy designers who better understand the behavioral economics. I agree that now days the relevant debate is not about communism vs. capitalism. Instead, I believe smart pragmatism targeting social welfare is the answer. The more knowledge and information is used including from other fields besides economics, the better the results.

  14. Tough times ahead for Venezuela.

  15. Raymond Says:

    Like the old Venezuelan saying goes: “Que va saber burro de pasta de dientes?”

  16. Rouge Alevre Says:

    La gira postcomunista de Diosdado por Cuba, China, Rusia y Vietnam marcará un rumbo más pragmático en lo económico y consolidará un gobierno colegiado con fuerte presencia militar. Maduro es un segundón. Mi análisis aquí:

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