Archive for December, 2013

Venezuelan Central Bank Joins The Dark Side

December 31, 2013

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While not wholly unexpected, yesterday’s bimonthly inflation report was a disgrace, which signals a change in the institutionality that the Venezuela Central Bank had managed to maintain during the last fifteen years under Chavismo. In some sense, the surprise was that it did not happen before, that for better or for worse, the technical side of the Central Bank had managed to prevail somehow in demanding that the data be fudged as little as possible.

And the data for November for November and December was a terrible 4.8% for Venezuela’s CPI in November and a “projected” 2.2% for December that the monetary authority takes to signal a change in direction and a slowing of inflation. Never mind the dreadful 7.5% for Food and Beverages in November, nor the 56% inflation for the year, nor the hiding of the fact (in a graph in page 2) that the scarcity index was at the high for the year.

But whether the data is believable or not is irrelevant. It is the language of the communique, the irresponsibility of it all that is simply unbelievable. The institution most responsible for the current levels, via its lonas to PDVSA, of inflation passes the buck, blaming the economic war and politics and failing to assume its mandate as being responsible for controlling prices.At the same time, it sucks up to Maduro, by suggesting that the supposed improvement in the numebrs for Decemebr is thanks to the actions of the Government on Commerce.

But it is the ideology and the politics of the language that is shameful, that reduces the Central Bank to a tool of the Government, as the Central Bank suggests that some nebulous sectors of the opposition took advantage of Chavez’ death to “artificially deteriorate economic variables” as an “authentic economic war” was waged on the population, which was only stopped by the “Government’s offensive” in November.

But there is no mention of the irresponsible lending to PDVSA and other Government institutions, nor of the dramatic and doubly irresponsible growth in monetary liquidity, nor of the continuous deficit spending by the Government, nor of the decimation of the productive sector and the total failure of the Government in its attempt to substitute it.

The whole report is simply a disgrace, a shameful yielding to politics and ideology and a refusal to admit the crass errors of the mediocre economists (and other strange professions) that today occupy the Board of the Venezuelan Central Bank.

It was the day that the Central Bank joined the dark side, after fifteen years of attempting to avoid submitting to the political pressures of Hugo Chávez, they now become servile to his fake substitute.

Who will the blame when the numbers deteriorate once again in 2014 in violation of the mandate given to them by the Constitution? How will they hide the upcoming scarcity and even higher levels of inflation? Or will they also blame the coming devaluation on these mysterious forces that are nowhere but in the midst of the Government and the sadly dependent Central Bank?

Another tragedy in Venezuelan history and a disgraceful chapter in the history of what was once a very professional Central Bank.

Added: BTW, Maduro was almost right on the magnitude of inflation, he suggested -5%, but he got the sign wrong, the magnitude almost right. Shows how clueless he is.

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What Will Happen In Venezuela In 2014?

December 29, 2013

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Now that I have your attention with that provocative title, I will give you my answer to that question right away and then I will try to justify it: I don’t think there will be economic collapse, dramatic social unrest or anything of the sort. I think that Venezuela under Chavismo will continued to plod along, drifting lower, as conditions get worse and worse, but I don’t think there will be some sort of dramatic collapse of the economy that will lead to some form of political instability.

My reasoning is simple, very few times in history do economies collapse in predictable fashion, nor do I think Venezuela is at an extreme. Yes, things are bad, but the Government has a number of degrees of freedom to act if necessary and it enjoys a level of popularity such that there is ways to go before its popularity is down to levels that could create sufficient social unrest for anything to happen.

Think about this year (2013): The Government had a shortage of dollars all year, it devalued to Bs. 6.3 from Bs. 4.3 per US$, Chávez died and was replaced by nebish Maduro, the Government spent like there was no tomorrow, inflation went up 100% from 25+% to 50+%, the unmentionable rate increased by a factor of 3.7 (It started the year at Bs. 17.4 per US$), scarcity went up from 20% to unknown and in the end, Chavismo actually got more votes than the opposition, with over 50% popularity in the Mayoral election.

Venezuela has The Devil’s Excrement, for better or for worse, we know the flow of foreign currency can sustain the types of distortions that the Venezuelan economy has enjoyed the last few years with total inaction. At some point,  things will unravel. but I believe this will happen only after the Government devalues sharply, which it does not seem ready to do and/or attempts to fix some of the distortions in the economy.

Because it is precisely the fact that it has not tried to fix these distortions that will allow the Government to make some adjustments. It can reign in spending, it can cut Petrocaribe and Cuba, it can devalue, it can increase the price of gas, sell the gold, mortgage more of the future than it has take over the banking system to issue even more local debt, issue more foreign debt and many other measures, before its popularity goes below 40%. Think Mugabe, for example, he had gizillion inflation and even held on to power.

Oh yeah, things will get worse and people will be unhappy, nobody enjoys 75%-80% inflation like we will see in the first half of 2014, but the Government will blame Obama, Capriles, Economic War or even Martians for the problems. And given the control f the media they will sell it yet again, once or twice more, but it will not be enough at some point. But this is not close, oil needs to weaken, some measures taken and maybe, just maybe something will happen. But I doubt it will be in 2014 and I doubt it will be dramatic.

Of course, the longer they plod along, the bigger the distortions and the sharper the eventual collapse, but we are not there yet.

Oil is indeed the Devil’s Excrement. Just watch!

Merry Christmas Everybody!

December 24, 2013

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As you know, I am not the most optimistic about Venezuela at this time, which sometimes makes it hard to sit down and write. Thus, as I was thinking about what image to post for the holidays, I had mixed feelings about posting something without a reality check on what is happening in Venezuela. Then, my brother sent me this image and I thought it was perfect, a somewhat cynical view at the type of Christmas Venezuelans are being forced to have. But despite all, Christmas has to be celebrated.

It is a time of the year to be thankful, to be with family and enjoy the holidays. I wish you all a very Merry Christmas wherever you may be. That Santa Claus or the Wise Men bring you what you want (hopefully not what is in the picture) and you spend some happy times with your family, forgetting about all the problems.

Thank you for coming back and putting up with my writings and my rants. I am humbled to have such a loyal readership and hope you keep enjoying it.

Merry Christmas everybody!

From the Devil Himself.

Virtual Profits In Venezuela

December 22, 2013

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This week, Ford Motors said that it expects to lose US$ 350 million in Venezuela with the upcoming devaluation, which they believe will take the Bolivar from Bs. 6.3 per US$ to around Bs. 12. Basically Ford has investments in Venezuela valued at around US$ 802 million plus the Government owes them a few hundred million in Cadivi imports, which could eventually be paid at the higher rate of the new official devaluation, which people think will be around Bs. 12. Thus, Ford expects that in 2014 it will not make money in Latin America, only because of Venezuela.

Which shows how difficult it has become to do business in Venezuela, when you book  “virtual” profits one year, only to see them disappear the next, together with the loss in value of your assets. Last year, Ford took a US$ 186 million hit when the Government devalued to Bs. 6.3. For years, multinationals have been saying they are in Venezuela for the long run, but most of them never imagined it would “long” would take all this time. And there is no end in sight for earning this virtual, “funny” money.

Essentially, companies have not been given foreign currency to repatriate dividends since 2007, when the Bolivar was officially at Bs. 2.7 per US$, but at least until May 2010, companies could buy foreign currency at their own risk via the parallel swap market. Today that market, which is illegal,  is almost a factor of 10 higher than it was in May 2010.

Thus, companies are trapped, their earnings get diluted by the devaluation, their assets lose value and the Government fails to pay them for imports of parts and goods sold at the lower rate before the evaluation. It’s funny money, almost like Monopoly money.

Except that things may actually be or get even worse than Ford expects, depending on “how” the Government devalues. Essentially, Ford has little visibility going forward, because not even the Government knows what it will do with the devaluation, least of all the companies in the country.

In fact, according to the latest rumors and information, the Government may be planning to set up an even more complicated system, in which there will be two Cadivi rates (Bs. 6.3 and bs. 12) plus the Sicad rate (Bs. 17-18). What this means, is that whether companies take the hit at Bs. 12 or the higher Sicad rate, will depend on the detailed wording of the decrees. If, for example, there is no mention of dividends at the higher Cadivi rate, then companies will have to do their accounting at the Sicad rate, because now that rate will be public, like Sitme used to be. (Up to now the Government had kept the Sicad rate secret, so that accounting was all done at Bs. 6.3, but when Sitme existed, if you had no access to Cadivi dollars, you had to do your accounting at the Bs. 5.3 Sicad rate)

This means that they could lose even more than they think

Thus, Ford, or any other company has no clue today as to the size of the hit they will have to take with the devaluation which is likely to take place in the next couple of weeks at the latest.

Which shows how hard it is to do business in Venezuela under the current environment. Companies have no way of hedging their profits, which lose value in a country with 50%-plus devaluation. They can’t plan, they have little clue about 2014 and there are only seven days left in 2013.

If, as rumored, the Bs. 6.3 per US$ Cadivi rate is left only for food and medicines, at least companies in these two sectors will not take a hit (por ahora!) like what happened last year. Those are the only guys feeling better.

There are dozens of multinational companies in this situation and every year it gets worse, as the numbers of Bolívars they have grows, but there is no way out.

And they keep waiting for the long run to end…

The Venezuelan Opposition Blunders Criticizing The Gasoline Price Increase

December 18, 2013

gas49.76 Liters (13 gallons) for Bs. 3.5 , that is US$ 0.55 at the official rate for a full tank, or US$ 0.055 at the parallel exchange rate. (4.2 cents per gallon at the official rate or 0.42 cents per gallon at the parallel rate)

I think the opposition is making a huge blunder criticizing the gasoline price increase and it shows its inability to evaluate how it reacts first before going forward. In the particular case of the gasoline price increase, which has now been opposed by at least, Henrique Capriles, Julio Borges, Leopoldo Lopez (The only winner in the recent election) and Maria Corina Machado, I think they should have waited for the full proposal before jumping the gun, rather than reacting viscerally to the announcement.

First of all, the announcement is incomplete, we don’t know what the new price will be and who it will apply to. The Vice-President suggested that it will not apply to public transportation and freight trucks, but we don’t know yet. Moreover, while the President of PDVSA has suggested that the new price for a liter of gasoline will be Bs. 2.8, there has been no formal announcement, what he had was a slide that showed at what price PDVSA breaks even in selling gasoline.

Second, if the opposition should believe in something is in that the current price is simply absurd (see picture above) and should be careful in opposing it today, when it may have to be in favor of it in a few years. It makes no sense to sell gasoline at a loss, it makes no sense to oppose the price increase if you believe in having a rational economic system and that the subsidizing of everything has to stop, particularly such a regressive subsidy.

Third, tying it to the Cuban or Petrocaribe subsidy makes it a very complex issue that most people will not understand and it is not true that the gasoline  given to these countries is “free” either, as most of them have suggested. Petrocaribe countries pay 50% within 60 days of delivery and the remainder with a loan that makes no sense, but that is a different matter. And while Cuba does not pay with money, it pays the gasoline with services. These services are paid at absurd prices, yes, but again, if you start lying and saying half-truths you are behaving the same way we criticize the Government for behaving.

Fourth, the Petrocaribe subsidy has actually been reduced in 2013, as clearly explained in this article in El Nacional, so the Government is actually doing something about that too. So, check your facts before you speak should be an important rule.

And finally, the opposition should be careful with anything proposed by a Government that has been so clever at manipulating public opinion and getting its way. While everyone thinks back to El Caracazo when talking about gasoline price increases and its consequences, people seem to forget that a very unpopular President, Rafael Caldera, actually increased the price of gas by about 800% in 1996, with little political consequence, as it sold the idea well and people understood it was needed. I don’t believe for a moment that the Government is being naive in proposing this price increase. They must have polls that show that people would support it and are ready to make the subject even more popular. Even to the point of having a referendum on the subject and beating the opposition (again!)

So, I think the statements made were wrong. The opposition should have waited for the details and oppose the details, but not the very logical and sensible gasoline price increase. Not doing so is simply cheap politics of the worst kind. The same way, it should say it backs it, but it also backs better terms for Venezuelan in the Petrocaribe and Cuba deals.

What the opposition is showing is that it has no solid proposal of any kind, it just reacts and opposes what the Government says. Maybe that is part of the reason why a large segment of the population does not trust it.

El “Cambiazo”: Reality Check For Those Who Think Bolivars Are Worth Less

December 17, 2013

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For those who think that our currency is worth less, here is how distortions can make Bolívars be worth actually more. Yes, in the ultimate arbitrage (or inverse arbotrage?) opportunity, you can sell Bs. 1 million for Bs. 1.1 at the border, you hand in bills and the foreign exchange houses in Cucuta give you an instant transfer of your Bs. 1.1 into your Venezuelan bank account. This transaction called the “Cambiazo”, has been the rage at the border in the last few weeks.

The reason for this? Simple, Colombians going to Venezuela to buy goods need currency, bills, they don’t want to use their Colombian credit cards, which register operations at the official rate of exchange. As the black rate has soared, the incentive to go and buy goods in Venezuela has increased to the point that there is actually a shortage of bills at the border, creating this new arbitrage which remarkably makes the Bolívar actually stronger. Since the difference between the official rate of exchange and the black rate is a factor of ten, then goods are still cheap, even if the merchant is making a 200% profit and you pay 10% more for the Bolivars.

Another market solution by inventive Venezuelans and Colombians to a problem created by the excessive controls in Venezuela. Sort of like reverse arbitrage. Is this a first instrument of its kind in the world?

Moody’s Downgrades Venezuela’s Debt to Caa1

December 17, 2013

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Moody’s Investors Services downgraded last night Venezuela’s dollar denominated debt to Caa1, the equivalent of a CCC level for other credit raters. This is the first credit rater to downgrade Venezuela to this level, which means the debt has gone from having “substantial” risks to being “highly speculative”. To add insult to injury, the company keeps Venezuela on “negative watch”, suggesting it may downgrade it further at any time.

Moody’s cites increasingly unsustainable macroeconomic imbalances, as well as a higher risk of an economic collapse.

While I am not on the economic collapse side of things, I think the Government still has a lot of leeway in what it can do, I do think that the country’s debt will go lower than where it has been. Since the Mayoral election, bond prices have risen because analysts really think that the Government will become more pragmatic. I disagree, the Government will devalue and raise the price of gasoline a bit and that will be the end of the “adjustment”, but it will continue on its radical agenda, spending money like there is no tomorrow and controlling more the private sector. I will write more on what I think will happen in a post before the end of the year.

While some of these credit raters are usually late to the game and people tend to ignore the news, they are important. In particular, this lowering to CCC or Caa1 in Moody’s system, represents the first time Venezuela goes this low since when oil production went down right after the 2002-2003 oil strike. Investors will take notice and this will reflect in higher interest rates for the country and fewer investors being interested.

As I said, I think prices of the debt will go lower as investors realize there will be little pragmatism and more radicalism. To start, the inflation number, which by law has to be released in the first ten days of the month, has yet to be released and it is Dec. 17th. I hear that it is not the inflation number that looks bad, but the scarcity number which went up 50%. Thus, while investors want to hear the good news, they seem to be ignoring the bad ones. While inflation numbers have been doctored in the past, they have been manipulated using new formulas and weights, but this time we don’t even know the number and whatever is announced will have less credibility.

So, hold on to your seats, the movie gets interesting. Never a dull moment in Venezuela!

 

What’s With Maduro’s Plan To Allow People To Import Cars?

December 15, 2013

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Just before the election and completely out of the blue, the Maduro Government announced that it would allow both individuals and companies to import one car during the next 12 months. The only conditions for this would be that you open an account in dollars in a Venezuelan bank (mostly Government owned ones) and that you can not sell the cars for 36 months. Up to now, there has been no information on whether there will be limitations on what type of car you can bring. You simply have to bring your bucks, deposit them and pay all of the taxes, which will be in Bolivars at the official rate of exchange, i.e. they will be not be that large if you have greenbacks abroad.

The strange thing is that nobody asked for this, nor suggested it, it came as so many Chavista decisions are made, they decided to do it and announced it.

So, what gives? I have seen nobody to attempt to explain this decision, a sort of market friendly decision, very un-Chavista-like.

My theory is that the Government realizes that with the lack of foreign currency right now, the automotive sector is one in which it simply does not have the money to satisfy demand. After two years of 100,000 cars sold per year, in a market of at least 200,000 per year if no more, there was simply no way the Government would spend another billion and a half per year to satisfy demand. At the same time, not satisfying demand, continued to drive prices higher, cars are scarce and importing chimbo Chinese cars was not working, you still have go pay for them. And it was a huge racket anyway.

Enter a market friendly, screw the private sector solution: Let those that have savings in foreign currency bring the dollars and the cars. That way, have the wealthy finance the supply of cars, partially helping to solve the problem. At the same time, it would also ease the pressure on the Government to give foreign currency to local car manufacturers to build cars or import cars, bypassing the private sector and reducing their profits.

If implemented correctly, the plan will work. Many companies and individuals with foreign currency abroad will take advantage of this window of opportunity to solve their car problems. Others will simply take advantage of it to change the model they drive, the used car hitting the market. Others will turn this into a business, bringing cars under the name of everyone in their family and selling them via a private document without transferring the car until the 36 months are up. In fact, it has even been suggested that there could be a Sicad auction for importing cars, in which case you know someone will make a lot of money with this new policy by the Government.

A good pragmatic solution to a problem, even if for the wrong reasons.

The Details Of Sunday’s Venezuelan Municipal Election Results Are Ugly For The Opposition

December 12, 2013

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While people are still trying to show that the municipal elections were somehow a victory for the opposition, the more the results are analyzed, the worse it actually looks for the opposition. I had tried to analyze the results of the election to look at local parties which ran independent candidates and separate the votes according to the leanings of those parties. But since the CNE  site is blocked outside Venezuela, it is very difficult to do. Someone was helping me locally, but then today Eugenio Martinez did an even better (more precise) job in El Universal, as he even had two additional categories, candidates supported by both sides (bizarro country) and really independent candidates with no ties to either side.

The results are shown in the table above. The first two lines are the Lucena-style results, in which you only take into account the votes for PSUV and the votes for the MUD, which makes it look like PSUV got 54.4% of the vote and the MUD 45.6%. (Both in red).

The opposition had a different interpretation, which was to add ALL votes not for the MUD or PSUV to the opposition, which made it look fairly close, with a slight advantage to the opposition.

But the reality is that, as Martinez shows, of those additional votes, about 533,000 correspond to candidates who are part of Polo Patriotico, but were in municipalities where the votes were divided. Similarly, about 270,000 were for parties which are part of the opposition, but ran separate candidates from the MUD. Finally, about 300,000 votes can not be accredited to anyone, because the candidates were either supported by both sides or neither.

What the totals say is that the results up to yesterday, are quite close to the Lucena-style results with PSUV and its allies obtaining 53.7% of the total vote and the MUD and its allies 43.4% for a total difference of 1.1 million votes between the two sides.

This means that the results are even worse that they looked initially, as the opposition lost by about 8% of the vote, compared to the minimal difference (if any) of the April Presidential election. Thus, about the only positive thing you can say is that the opposition managed to win the more “emblematic” races, including most large cities, but losing Maracay, Distrito Libertador and Sotillo (Puerto la Cruz), as well as the “in your face” opposition victory in Barinas.

Chavismo on the other hand won the popular vote handily, won nineteen of twenty three states and only lost 26 cities when compared to the 2008 election. Maduro can also say that he is now more legitimate than he ever was and Capriles lost the plebiscite.

By now, even one Mayor elected within the MUD has already switched sides in Aragua, while the opposition lost one Deputy in the National Assembly because both the principal and his alternate were elected as Mayors in Zulia State.

Meanwhile, both sides are claiming victory with Maduro even saying his candidate won in Lagunillas (??). But what is true is that the Daka offensive, the so called “Cadakazo” worked, it changed public opinion overnight. And the opposition had no time or did not have time to react. Thus the loss. And it is a big loss.

And in the best Chavista (and Venezuelan!) fashion, to celebrate his victory, Maduro decides to give Venezuelan a “gift” by cancelling school all of next week with return to classes on Jan. 6th. Makes sense, the last thing Chavismo needs is an educated voter. Maybe they would start to understand what the populist game is all about.

Three I “forgots”: 1) I think we may have a referendum on the gasoline price increase, that would really divide the opposition, Capriles already came out against it.  2) Government discovers 40% of companies given CADIVI are fake, but it is someone else’s fault. 3) Apparently inflation in Novemeber was imaginary= i, because the number is already three days late.

Both Sides Lost In The Venezuelan Municipal Elections

December 9, 2013

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No matter how you look at it, no matter how you interpret it or want to interpret it, yesterday’s results in the Venezuelan Municipal election were not a victory for the opposition. Far from it. They may not have been a victory for Chavismo either, but the results were far from what the opposition had expected a few weeks ago and while there were some sweet victories like Valencia, Barinas (Triple sweet and Divine Justice on the day of Loyalty to Chávez), Barquisimeto, the Alcaldía Mayor and others, squeaking by in Maracaibo was not in the plans and can not be considered to be a victory. Neither can be narrowing margins in some of the large city municipalities where it has traditionally won.

Consider this: Maduro has been President for eight months. Eight months of absolute inaction. Maduro has little charisma, speaks badly, even if he has improved his delivery. During his brief tenure in office, inflation has double to 50%, the parallel rate has been allowed to double, shortages and lines have increased significantly and the opposition could not even increase its percentage of the votes from the April Presidential election…

Of course the opposition improved from the previous Municipal elections. Of course it had to do better, but this was no victory. It was not a victory for Chavismo either, but despite the deterioration of the country, the disappearance of the maximum leader and  a nebish President, all the opposition did was preserve its spaces, gaining very little.

Of course the Government abused its power over the media, used all sorts of tricks to buy votes, including a brilliant maneuver to make it look like inflation is the private sector’s fault. But prior to that, a maneuver which was actually badly timed, I saw little attack on the Government’s economic policies, little coordination on the part of the opposition in finding a topic and sticking to it. The opposition simply did not take advantage of the Government’s many weaknesses.

Both sides lost in these elections, but this means that Chavismo continues to have the upper hand. In fact, while I do not expect it to happen, it even has the chance to attempt to straighten out the economy. Imagine what would happen if the Government brought inflation down! It will not happen, Maduro is not going to see the light, but the virtual tie on Sunday gives the Maduro Government some range of action to devalue sharply, for example, or as suggested by the VP today, to increase the price of gasoline. Measures that are insufficient to fix all the problems, but that could help the sustainability of the Government long term.

Except that Chavismo is trapped in its ideology, as much as the opposition in its inability to mount an attack it. Thus, after a brief period of some rational policies, I expect Chavismo to step on the accelerator of its radicalization, just because it will be desperate. As desperate as it felt in October when it declared war on commerce. Just because it has no other plan. It will make up another war, a war that the “people” will sympathize with, catching the opposition flat footed once again.

And yes, things are going to deteriorate even further, but I think this election proves that it may not be enough to aid the opposition’s cause. The opposition can not be reactive, it has to proactive, have a plan, some form of ideology beyond wanting to get rid of Chavismo and the danger it represents to Venezuela’s economy and its people. It has to let its leaders lead and not have stale politicians telling people what they think.

About the only positive thing you can say about it is that the opposition continues to dominate the cities. In Venezuela, small cities decide elections, but big cities is where people organize against the Government when they are unhappy and disgruntled. The only question is whether the opposition will take advantage of it, or will someone else do it for them.

Maybe Maduro actually won yesterday, even if he expected more. He could have fumbled the whole thing…but he didn’t.