Archive for March 31st, 2015

Government Keeps Kicking The Can Down The Road…

March 31, 2015

kicking-the-can1Since 2013 we have all been waiting for the Venezuelan Government to make some form of adjustment to the Venezuelan economy, as it was clear that the trajectory was simply unsustainable. Then, in 2014 oil prices dropped making the adjustments even more urgent. But remarkably, little has been done, as the Government simply keeps kicking the can down the road, either waiting for some miraculous event or executing a well conceived plan that if oil prices don’t recover then…something may be done.

And thus we keep waiting. Venezuela’s economy is in intensive therapy. Inflation is pushing 100, shortages are the rule of the day, the economy is shrinking, the foreign exchange system is unsustainable and the Government faces a US$ 25 billion deficit. And despite this, the Government is doing very little.

Let’s look at what it has done:

-It obtained US$ 1.9 billion from swapping its Petrocaribe debt with the Dominican Republic

-It obtained US$ 2.8 billion from Citgo

-It started a new fx system, including a new rate Simadi, which took a month to be drawn up and a week to fail.

The most remarkable aspect of Simadi, is that the Government did not seem to have much of a plan for providing it with foreign currency, essentially guaranteeing its failure from day one. Some people claim that the Government really believed that people will sell into Simadi rather than the black market.

Really? If they are that naive, we are in bigger trouble than we thought.

But in any case, the Government made Simadi extremely complex, with the only good decision to have it trade at a value close to the parallel rate. However, it imposed a cap on its maximum price and while the system began trading close to that rate, once it became clear that there was a cap and there would be little flows via Simadi, the parallel rate, which had been held back by Simadi expectations, simply soared. (Read: More inflation ahead)

Remarkably, rather than relax or change the rules for Simadi, the Government has done absolutely nothing since then. An even bigger puzzle has been that after a month of the new foreign exchange system, there has been no Sicad auction, despite the Government announcing that one third of all foreign currency for imports would flow through that. Go Figure…

With the new system, the Government truly kicked the can down the road, as it failed to take advantage of the changes to modify either the Cencoex rate (Bs. 6.3 per US$) and the non-existent Sicad rate, last seen at around Bs. 12 per US$.

What the Government has not done:

-Despite announcements, advertising, claims and talk, the Government has yet to increase the price of gasoline which, while likely will be timid, could help a little in closing the financing gap (and save foreign currency). Why spend so much money in daily (and constant!) TV and radio ads and then do nothing? What is holding up the increase? Minister of Transportation El Troudi ( Likely the best Minister by far in the Cabinet) keeps going on TV, making statements about the small impact of the gasoline price increase, but then nothing happens. Whose decision is it?

-The Government has done little to control the growth in the money supply M2. Yes, the slope appears to be slowing down, but this always happens before March, when the Government delays budgets and then releases two or three months at once. Even more puzzling was the fact that there were no Treasury Bill auctions in January and February. These auctions are held regularly during the year. Why did they stop them at a time that you actually want to use them to reduce M2?

-Selling/Swapping the Gold: Whether people like it or not, the Government has some US$ 15 billion in gold that could be used at this time. That is what reserves are for and it is dumb to hold them in gold. There has been talk of a swap with the gold that is still in London, but nothing happens. If I were the Government I would ship even more abroad for future use. Again, why kick the can on this?

-There was supposed to be another Petrocaribe debt transaction with Jamaica, but nothing happens. Oh well, par for the course.

-The Government issued a PDVSA 2022 bond with a 6% coupon in stealth mode last October, which it sold to the Central Bank. This issue has yet to be sold in the market. What are they waiting for, a recovery in prices?

-PDVSA, which is rumored to have bought back close to a billion (cash) in its short term bonds, could be preparing some sort of liability management operation, that would seem to be the only justification for buying back bonds. Some people claim, they sre just buying back to pay less in October. Can they be that naive? Or is the same “intelligence” behind the Petrocaribe, Citgo and Gold transactions is preparing some form of exchange for the PDVSA 2015, 2016 and 2017 bonds?

What is clear is that the Government considers default only a last minute option, something that will be tested if the Judge in the Gold Reserve case rules against Venezuela and declares it in default. We suspect, Venezuela will simply pay at that time. The same way it is likely to pay next October, even if half of the market thinks they will not. But 2016 is a whole different ball game.

But in the mean time, to close the fiscal and balance of payments gap, it can’t continue to kick the can down the road. Oil may rise, but it may not, bonds may recover, or they may not, China may lend more or not, but Venezuelan has to act. The sooner the better.

The puzzle is what are they waiting for?