Venezuela’s Economic Adjustment That Never Was Or Will Be

September 8, 2014

a-scary-debt-default-could-be-the-best-thing-to-happen-in-china-right-now

If there is one thing that surprises me about people’s reaction to the Maduro Non-Adjustment, it was that people were surprised. For seventeen months then Minister of Energy and Oil and later VP for Economic Affairs had been telling us about the adjustments coming, but nothing ever happened. He proposed a system that would break the back of the parallel dollar, but all he did was recreate SITME at a much higher rate, creating a useless system once again, that did nothing but dispense, as usual, foreign currency arbitrarily. Ramirez also suggested regularly that prices of gasoline and certain products should be raised. Not much happened in this front either.

The problem was that we were hearing only one side of the debate taking place within Chavismo. Never the others who talked quietly among themselves. Ramirez tried, unsuccessfully, to gather support for some form of adjustment, fearing that not doing so would be worse than the alternative. In the end, Ramirez did not seem to convince too many people, others banded together and convinced Maduro to get rid of a man that had been a constant presence over oil and energy policy in Venezuela for almost ten years.

Yes, he did stay at another position in the Cabinet, but his lonely voice over the need of an adjustment becomes weak now. At the same time, giving him some perks and keeping him close, allows Maduro to insure that Ramirez will not play a Giordani on him, writing letters, criticizing or renewing his crusade for an adjustment outside the Government.

I have always been very skeptical as to the probability of a significant adjustment taking place. I always believed that it would be too little, too late. Not enough to mitigate the many distortions of the economy. Thus, the outcome of just nothing is not even a surprise, even if later we may see some small adjustments. Maduro has always acted like he is a man without concerns about the economy. This is likely to his ignorance or the existence of a plan B (Everyone in Venezuela has a plan B). It could be due to both too.

But by waiting so long, Maduro not only made an adjustment more difficult in terms of getting results before next year’s elections, but he also gave time to those opposed to a partial or a full adjustment to get together and create groups. Thus, those benefiting from the rackets oppose any form of adjustment, those that ideologically oppose the adjustment began accusing Maduro of betraying the revolution, those that thought the adjustment would be worse than not doing anything, also sided with the non-action.

In the end, in the absence of economists in or near the Cabinet, Ramirez was a lonely voice. The outcome is the one expected, even if it is remarkable that no measure has been announced, not even moving the Bs. 6.3 per US$ rate to the Sicad 1 rate of Bs. 11, the only measure I expected. (I also expect some very symbolic increase in gas prices).

So, what now?

Well, I am not in the camp of those that think there will be a default. But I think nobody knows if there will be a default. With Ramirez out of the Economic Cabinet, the probability of default is higher. He understood some of the consequences, particularly for PDVSA.

But think about it, Venezuela has to pay US$ 6.3 billion in the last three months of the year between two maturing bonds (PDVSA 14 and Venezuela 14) and interest on all bonds. Thus, don’t you think that in a world with falling oil prices some “cabeza caliente” (There are many!) in the Maduro entourage has not suggested defaulting? This is, after all, a revolution…

Did anyone think they would fire 20,000 PDVSA workers? Did anyone think they would expropriate and not pay? Did anyone think they would allow corruption at the levels they have? Do you know when and of what of Chávez died? Scruples is not a common word among revolutionaries.

People talk about default as if it would have catastrophic consequences on Venezuela. Defaults come in many flavors, look at the latest one from Argentina. Countries default regularly and few of them have catastrophic consequences, particularly if you have an oil spigot that will provide you with cash day after day, as well as trade partners that will support your default and who happen to be the ones that are sending the most food to Venezuela.

But I digress.

By now you have all heard or read the Haussman-Santos paper on default and Venezuela. They forgot to mention one detail: Venezuela already stopped paying the Sidetur bonds and it had absolutely no effect. Of course, a wider default would. But it could be selective too. Say you are willing to pay, but can’t. Keep paying interest in all bonds. Pay maturities on only some. The creativity of investment banks is unlimited. You just need a good one.

But for now, we face the adjustment that never was or will be. A sort of: what will happen now type of scenario? They will keep pushing their survival as far as they can. People die, sick patients can’t get their medicines, and there are food shortages. But the revolution is alive and well.

And they will try to keep it that way. Subsidies to the Caribbean can be removed. Even subsidies to Cuba can be stopped, if things get bad enough. But you can bet the choice is clear: Cuba comes before Wall St.

Defaulting is a political decision. If economic policy continues this way, it is inevitable. But for now, it can likely be pushed to 2017. Maybe oil prices will rebound by then.

As I have said before, Venezuelan bonds are not paying enough, given the risk you are taking. Maybe, just maybe, they will get there soon. But you don’t want to play Russian roulette, no?

Meanwhile, I continue on vacation…

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31 Responses to “Venezuela’s Economic Adjustment That Never Was Or Will Be”

  1. xp Says:

    Venezuela’s chronic shortages have begun to encroach on a cultural cornerstone: the boob job.

    Beauty-obsessed Venezuelans face a scarcity of brand-name breast implants, and women are so desperate that they and their doctors are turning to devices that are the wrong size or made in China, with less rigorous quality standards.
    Associated Press

  2. Fergie Says:

    IIRC, Venezuela has defaulted more than any other country in Latam and is one of the world’s leading defaulters historically.

  3. Island Canuck Says:

    Los bonos en divisas de la República se desplomaron

    Caracas.- Los bonos en divisas de la República se desplomaron en un entorno en el que los precios del petróleo se debilitan, inversionistas consideran que el Gobierno pospuso la ejecución de medidas para asegurar la estabilidad de la economía, y el bajo aporte inicial de solo 750 millones de dólares para crear el Fondo Estratégico de Reservas aviva las dudas sobre la capacidad del Gobierno para cancelar vencimientos de deuda previstos para octubre por el orden de 4 mil 500 millones de dólares.

    En la jornada de hoy el Global 27, bono marcador de la República, cayó 3,5 puntos para ubicarse en 69,8% y en una semana registra un descenso de 8,5 puntos, mientras que el Pdvsa 22 se desplomó 5,5 puntos y registra una fuerte caída de 10,5 puntos en las últimas seis jornadas por lo que se cotiza en 82,5% de su valor.

    http://www.reporteconfidencial.info/noticia/3225083/los-bonos-en-divisas-de-la-republica-se-desplomaron-/

  4. Ira Says:

    Fourth paragraph missing word “due.”

  5. Roger Says:

    In Argentina, which also has economic problems, companies and people are working hard to keep things going. Last time, they re opened factories to make things that cost too much to import. Also, they have a secure local food production even though inflation is hard on the poor. Venezuela on the other hand has managed destroy all parts of the economy while trying to control the means of production. The result is that Venezuela imports almost everything at USD global prices and exports only oil and money. There’s not enough to take care of 30 million Venezuelans plus the crooks and the Cubans. At least from reports, the Cubans are using their share to build a market economy? If Venezuela defaults and/or can’t sell more bonds the imports will stop. Even China loaning more money in exchange for oil discounted well below market price seems to have reached its limit. In this day the majority of Venezulans live in cities not hato’s or fincas and have to buy food not make it or trade it. I think this is an un-explored petro-socio-economic situation we are seeing. We know of Lybia, Irak and Nigeria but we can only guess at what will happen in Venezuela?

    • Tom ODonnell Says:

      From what is known about financial matters, I think you are correct, Miguel.

      The only thing is, the degree to which spending by PDVSA seems to be down (which is anecdotal, of course … and very hard to quantify) doesn’t seem to jive with the assessment by financial observers as to the ability of the state to continue meeting its bond-payment obligations.

      I understand, along the same lines, that the military may have been displeased by Ramirez’ spending at PDVSA. If true, this could of course be due to lack of the military leadership’s economic understanding about the need to finance needed spare parts and certain very important and reasonable projects that would increase production and alleviate gas-and-electricity shortages … or, it reveals an inside knowledge of how bad the cash availability problem really is?

    • Tom ODonnell Says:

      Interesting point, Roger. In fact, Venezuela is the most urbanized state in the western Hemisphere. The UN puts it at over 95% urbanized, well above any other country

      • Kepler Says:

        Indeed. And Venezuelans are destroying the most fertile areas for certain key crops in the whole coastal area…areas that can let plants grow that won’t ever grow in the Llanos.

        I commented how San Diego, like most of Northern Valencia Lake (and part of the Southern shore) is now full of cement and still the construction companies of the friends and family of both opposition leaders and Chavista honchos keep bulldozing all the rest and an “oppo” insulted me
        saying “tierra es lo que sobra” and that Maduro had confiscated enough and it was not used. That is not the point.

        Even in very densely populated countries such as Belgium, the Netherlands and regions of Germany certain areas are kept for agricultural purposes only…right next to the big cities.

        In Venezuela we are doing everything wrong:
        feudal property rights are kept (for those who don’t bother the regime)
        confiscation and uncertainty for a lot more
        massive pollution
        absence of investment on sustainable agriculture
        absolutely chaotic urbanization in the most destructive and a-social way

        Almost no Venezuelan knows this but we used to grow WHEAT even in what is called Miranda, Aragua and Carabobo.

        We are behaving worse than Haitians in the last few centuries and still we are arrogant and think Venezuela is a rich country with unlimited potentials.

    • geronl Says:

      Argentina is trying hard to be like Venezuela


    • Roger, the Cubans are supposed to be changing into a neo fascistoid semi capitalist regime. However they have internal conflicts. I saw a video showing a training session for Interior Ministry uniformed personnel (they use a Soviet Union style ministry set up, the Interior Ministry has troops and is in charge of internal repression). The video was really interesting, it showed the trainer (an economist) discussing the changes Raul wanted to make. He emphasized there was a need to accept these ideas even though they were contrary to what Fidel had taught them.

      I hear the guy was fired. And i don´t see changes in Cuba getting anywhere. At best they would end up with a stiffling and suffocating version of India under Ghandi coupled with a fascist military dictatorship. It´s a recipe for a worker´s revolution.

      Venezuela lacks the ability to implement what you propose in short order, in part due to the system inertia, and in part because the regime is full of communists who believe the Marxist dogma Chavez and Maduro have been peddling. The regime seems to be turning into a military dictatorship run by officers who don´t understand much about economic matters or the oil industry. That country is doomed.

      • Roger Says:

        There is a difference. Cubans follow the party line. Selling a pig on the black market will land you in prison. In Venezuela the party members run the black market. They cheat at not only democracy but also marxism. You can’t even have a dictatorship if everyone that grabs whatever they can for themselves and their gang with impunity. Thats what Chavez created! There a smart lot too. Why take the oil fields by force when you can just steal the profits?

  6. xp Says:

    Re: in the absence of economists in or near the Cabinet,
    Ramirez was a lonely voice.

    Ramirez –
    the sound of one hand clapping …
    is still deafening.

    tapando el sol con el pulgar
    will still sunburn your thumb 🙂

    • xp Says:

      “The bond market is finally beginning to wake up” to the possibility of Venezuela defaulting, David Rees, an economist at Capital Economics in London, said by phone. He predicts the country could default as soon as this year.

      Venezuela’s bonds fell 4.4 percent yesterday, pushing the extra yield investors demand to own the nation’s debt instead of U.S. Treasuries to a six-month high of 11.95 percentage points, data compiled by Bloomberg show. The country’s notes now yield 3.31 percentage points more than debt from similarly rated Ukraine.

    • xp Says:

      Venezuela is selling Citgo in part due to a cash crunch stemming from repaying debts to Beijing with oil, rather than selling the crude to generate revenue, analysts say. The government denies a cashflow problem exists.

      Within President Nicolas Maduro’s government, the potential sale is controversial and seen as a privatization that would contradict years of socialist policies, including a nationalization of the oil industry in 2006 and 2007.

      Investment bank Lazard Ltd, which is running the sale process for Citgo on behalf of PDVSA, has sent offering materials to potential buyers, the people said in recent days, asking not to be named because the matter is not public.

      PDVSA also has a 50 percent stake in the Chalmette refinery in Louisiana alongside Exxon Mobil Corp, which owns the remainder. The Venezuelan oil company has tapped Deutsche Bank separately to explore a sale of its stake in that refinery.

      The assets being offered as part of the Lazard process have annual earnings before interest, taxes, depreciation and amortization (EBITDA) of around $1.5 billion, four people said.

      Citgo’s assets, the core of which are three refineries with combined capacity of 749,000 barrels per day (bpd), could fetch between $8 billion and $10 billion, three of the people said.

      Venezuela’s former Petroleum Minister, Rafael Ramirez, said last month that the country expects to receive “more than that” if it decides to sell all the facilities.

    • xp Says:

      “What? Me worry?”
      Alfred E. Neuman

      Re: “What Venezuela has demonstrated in the last 15 years of revolution is that it meets its obligations, and this year won’t be an exception,” Maduro said yesterday in a speech on state television. “We’re ready to keep meeting our international obligations completely, down to the last dollar.”

    • xp Says:

      Ramirez –
      the sound of one hand clapping …
      is still deafening….

      Maduro lashed out at Hausmann during a televised address last night, calling him a “financial hitman” and “outlaw” who forms part of a campaign “that has been initiated around the world against Venezuela.” He didn’t specify what actions he had asked the attorney general and prosecutor to take.

      Venezuelan bonds tumbled earlier this week after Hausmann co-wrote an opinion piece on Sept. 5 with a Harvard colleague arguing the country should consider defaulting because it had already racked up billions of dollars of arrears with importers. Widespread shortages of everything from toilet paper to medicine have helped fuel the world’s fastest inflation.

      Maduro’s speech was “the despotic diatribe of a tropical thug,” Hausmann said by phone today. “This is Exhibit A in how Venezuela is not a democracy. He uses his position as head of state to intimidate people who think differently.”
      from Bloomberg…

  7. OW Says:

    I think they are very likely to default simply because it is a) the government that would be defaulting and b) the Venezuelan government has assets overseas and owns all the oil that gets exported, both of which could be seized and used to pay outstanding debts.
    Argentina isn’t doing so well with its idea to pay some and not others. I am sure Venezuela would do even worse. I can’t see how they could default and then still transport oil outside the country without it being seized to pay debts.
    I therefore believe default is very unlikely, all the more so as it isn’t necessary.


    • Venezuela can easily arrange things so it doesn´t transport the oil, they sell it FOB the loading buoy in territorial waters. The load´s owner could be anyone.

      Regarding assets, the only one left that´s worth much is CITGO. They are trying to sell it at this time. Other than CITGO they have a few oil tankers, an airplane or two, and bank accounts. The other properties they have are nearly worthless.

  8. Oil Can Boyd Says:

    This is a basic question, but how does the Venezuelan government not have the dollars to pay creditors when it exports so much oil? Where does all the money from oil sales go?

    • Boludo Tejano Says:

      To get an idea, read Miguel’s two previous posts, which begin “There is too Much Money to be Made in the Bolivarian Revolution…” In a word: corruption. But precisely where all the money goes is another matter, as the Government of Venezuela is hardly the model of transparency.


    • As Tejano says, some of it is stolen. However, are you sure Venezuela exports so much oil? What percentage of exports receives full payment? How much is sent to China to repay the Chinese Fund debt? How much gasoline is smuggled to Colombia? And how much is consumed internally? How much does it cost to produce the oil? And how much has to be invested every year to keep the production rate from increasing?

      Then you have to factor the number of Venezuelans, about 30 million. When you put in reasonable estimates and account for the stolen money (as reported by Giordani), they have less than $1000 per capita.

      Now take away the money they spend on the military, and what´s left isn´t enough to satisfy both PDVSA´s and the import sector demand. Ramirez was right.

      The best thing that could happen to Venezuela was to see Ramirez go to the foreign ministry. His replacement won´t be able to do much about PDVSA, the damage was caused by Chavez, not Ramirez. The Cubans don´t know much about oil, and this hasn´t really sunk in. They sink they can make a few deals with Chevron, the Chinese, and Rosneft, but that´s not going to save the Venezuelan economy.

      I think they will default and keep running the country down. The Cuban reaction will likely be to squeeze the population even harder.

      We are about to find out how bad it can get in a country that´s managed using Castroite dogma hybridized with multinational capitalism, thievery, lousy management, and corruption.


      • Above I meant how much has to be invested to keep the production DECLINE rate from increasing. Right now Venezuela´s oil fields have a decline rate. To keep this RATE OF DECLINE from increasing it takes a lot of money. To reverse the rate so that production doesn´t decline it takes even more cash. And to REVERSE things and INCREASE production is extremely difficult, it´s like running up a down escalator.

  9. HalfEmpty Says:

    Cuba before Wall St.? You’re the expert.
    Yikes!
    Run!

  10. tuziodos Says:

    Devil, Do you by any chance have a Venezuelan debt schedule (interest and principal) for the next 20 years? Or where can I get the data to put one together?

  11. geronl Says:

    Venezuela set to import oil. If socialists were in charge of the desert there would be a sand shortage.


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