The Devil's Excrement

Anyone that thinks they understand the sudden moves made by Nicolas Maduro during the last few weeks, should wait a while, because I don’t think the full picture is clear yet. What I do think is clear is two things: Maduro is not happy the way things are going, he knows his Government is not working well and the importance of Nelson Merentes has been substantially diminished.

In fact, Merentes’ slide seemed to begin earlier than two days ago, when in a puzzling move, Maduro failed to include him in his bombastically-named “Organo Supeiror para la Defensa de la Economia (OSDE)” , which was created on the last day of September and is presided by a General, whose power has been increasing, but despite its name, failed to include Merentes. This discrepancy was noted at the time, but nobody knew exactly what it really meant.

Merentes is clearly paying for his lack of accomplishments. The man that was supposed to be the “pragmatic” member of Maduro’s Caibent, was not energetic enough to push his agenda and the more ideologically minded members of the Cabinet managed to slow down all of his initiatives and Merentes has essentially nothing to show for his almost six months in the Ministry of Finance.

The second sudden move, was the removal of Maduro’s confidant Temir Porras from both the development bank Bandes and the development fund Fonden. Porras was a new figure in the economic side of the Government and had been reported to be Maduro’s sounding board on economic and financial matters. But faster that you could say Temir, he was pushed out last week with no explanation. And there is still no clear idea of what happened there, even if some suggests that Porras was removed due to Maduro’s displeasure with the French intelligent services pulling off the operation that allowed them to catch the drug in the Air France plane. Reportedly Porras’ inability to know about this forced him out. Others suggest that Porras’ team convinced Maduro that the Chinese would lend him the US$ 5 billion in cash, which did not happen.

Then this week, Merentes was removed as Vice President for the Economy, a position that is now occupied by the Minister f Energy and Mines and President of PDVSA Rafael Ramirez.  This position is not that important, but there is a “Revolutionary” Cabinet above the crowded Cabinet, which is composed of six Vice Presidents. This supra-Cabinet meets more often with Maduro and is supposed to have a coordinating role.

It turns out that Ramirez was already part of this supra-Cabinet, so whether it has a meaning or not that he replaces Merentes is not that clear. Ramirez was previously the Vice President for Territorial Development, a position now occupied by General Hebert Garcia (More on him later)

Ramirez being the new Vice-President for the Economy may not be so bad as many think. He is considered to be part of the more ideological and radical branch of the Government, but he has shown in the past that he can be quite pragmatic. In fact, the only area where there have been some positive signs since Maduro took over has been in PDVSA’s flexibility, which has been led by Ramirez. Ramirez may actually be more capable of convincing the radicals that some change is needed.

The problem is that Ramirez is no economist and the change needed is more than a foreign exchange system, like Merentes seemed to think. What is needed is a larger adjustment of the economy and its variables, before distortions gets further out of hand. Ramirez will certainly not deliver that.

Caracas is full of rumors and among them, the possibility that Ramirez may also be moved sideways is one of them. PDVSA is where the money is and some Madurista groups may be trying to get closer to the honey pot and the Royal Family having a bigger influence there.

As for General Hebert Garcia, he now occupies three positions, the one in the supra-Cabinet, the President of Mision Vivienda and the President of OSDE, signifying that Maduro trusts him and he is the point military man to organize the economy and reduce shortages and build housing. Sounds like a tall order for a single person, let alone a Venezuelan General. But as PMB comments today, there seems to be this belief in Chavista circles that the military can organize things despite fifteen years of proving the contrary.

So, stay tuned, Maduro may yet make other moves pronto, which will allow us to better understand the ones he has made, excluding how he fell from that bicycle.

Americo Da Grazia, the opposition Deputy from Bolivar State, the same one that was pushed down the stairs of the National Assembly a few months ago by a group of Chavista Deputies, gave this excellent speech during the discussion to approve a resolution backing Maduro’s decision to expel three US diplomats. Da Grazia is a member of Causa R, the Guayana socialist party associated with the union movement.

For those that do not speak Spanish, Da Grazia starts by showing his birth certificate and saying he is Venezuelan and where he was born. He then recalls the murder of a Causa R leader last weekend. He then says among other things:

-What a pity that this assembly refuses to discuss Venezuela’s problems.

-Pity you don’t care about what Venezuelans care about.

-We are not lackeys of the gringo empire, but we are also not lackeys of the Chinese empire. But you just gave away the Las Cristinas gold mine to the Chinese empire while on your knees. Shame on you!

-You also gave Guyana (the country) the disputed territory.

-You dont say anything or discuss anything about the Sidor strike, the Ferrominera strike or the miners that are in jail.

-Because of you electricity consumption is back to the 80’s in Guayana because you ruined the electric infrastructure. And you don’t talk about it.

-How many of you know that in Guayana there is not asingle hospital that can provide chemotherapy or radiotherapy treatment to cancer patients. single hospital that provides chemotherapy or radiotherapy to cancer patients, but then you want to discuss this “pendejada”.

-He then says ironically that he just told his daughter not to go to the market, because thanks to kicking out the americans, there will be no shortages, there will be toilet paper and the dollar will go down in price.

-He then calls them stupid and imbeciles.

-He then calls for a democratic solution to Venezuela’s political problem.

-He then mentions all the positions, CNE, Comptroller that need to be elected and says they are illegitimate.

A Chavista Deputy then answers him with ideological BS.

Hat Tip: Damian Pratt who made the effort to place the video in youtube

For a group of people that is incapable of managing even the simplest systems, Chavismo has proven quite adept at establishing controls systems for everything. It is truly amazing how they can be so creative and inventive to establish very complicated systems to monitor and control, but are incapable of managing a simple supply chain for example, for an arepera.

Yesterday, I was praising Chavismo in private, because for the first time, they were actually going to remove some layers of controls for imports, removing certain steps to request certificates necessary for any import request, as well as extending the validity of current certificates until December 31st.

But my joy lasted a very short time, when I learned today about the new invention of the CADIVI “creativity” department to stop the “raspaito” of credit cards without traveling. As you know, people are buying airline tickets, requesting the CADIVI dollars for travel and not using them (This requires folders, going to the bank, wasting half a day, going online many times, etc..). They take their credit card, send it with someone or have someone use it for them and voila, they exchange those dollars bought at Bs. 6.3 per US$ and sell it at a huge profit at six times that rate in the unmentionable market. With the difference, the price of the ticket is almost irrelevant.

Well, given the truculent mind of Chavista officials, here is what they are planning to do to stop “raspaitos”: They will set up fingerprint units at all international exit points of the country in airports, ports, roads. Then, as you exit immigration, you will activate your credit card with your fingerprint. The system will be connected to the national credit card system. In this fashion, the theory goes, only people that actually leave the country will have their credit card activated.

Except…

-What if the system is down when you leave?

-What if there is no electricity that day?

-What if the connection is down?

-There is no law stopping you from leaving the country and immediately going thru immigration, missing your flight and activating the card in the process.

and so many others…

And, of course, there will be a cost to implementing this whole thing, but who cares, we will have Patria and fingerprint systems and they will feel good about it!

A few months ago, I heard a strange tale of cheap Chinese cars being imported to Venezuela and sold for incredibly low prices. When I asked on limitations, I was told there were none, the organization they were telling me about could buy as many cars as it wanted. Just put a small down payment down per car and voilá, a few months later and upon delivery, you would pay the balance. To give you an idea of the prices, the down payment was less than Bs. 10,000 (US$ 1,587 at the official rate or US$ 244 at the parallel rate of exchange) and upon delivery you paid the balance, with the total cost being around Bs. 100,000, or US$ 15,870 at the official rate of exchange or US$ 2,440 at the parallel rate. Yes, less than US$ 3,000.

The whole thing sounded very fishy. I immediately thought it was some sort of scam via CADIVI, whereby someone was getting dollars at the official rate of exchange to bring these cars to Venezuela. But it sounded strange, why would the Government give official dollars to some scammer, rather than giving it to the car companies that generate work in the country?

After making a few inquiries, I tracked down the story behind the cars. In some sense, it is not a scam, it is somewhat legit. But in another it is an amazing example of how Chavismo has lost sight of what developing a country is all about. Moreover it is simply The Devil’s Excrement at work: Oil generates such wealth, that those in charge can’t think on how to use that wealth productively and instead waste it “doing good” to a  few, without generating any wealth or well being for the “people”.

Most of you have probably never heard of Suvinca. Suvinca is a company owned by the Ministry of Commerce, which is an acronym to the name “Venezuelan Industrial Supplies”. Suvinca is supposed to procure “the access to raw materials, inputs, capital goods, intermediate and finished, with the purpose of deepening the endogenous development of the country”

A noble goal indeed. But somehow, something was lost in translation. Or by the limited brains of the Revolutionary management. Because it turns out that Suvinca has access to the loans from the Chinese Funds. One of those loans, was partly in in the Chinese currency Yuan (70 billion Yuan if I recall correctly, almost US$ 10 billion at the time). Well, the money from these Chinese Funds is supposed to go roughly (my words) to:

“Projects within the National Development Program, that have high social impact, improve the standard of living, generate employment and consolidate some sectors which are considered a priority.”

Well, it turns out that Suvinca uses intermediary companies in the US, of all places, to import cars made in China, some made by US companies in China exclusively for that market, and which are paid with the Yuans from the loan from the Chinese Fund. Suvinca then turns around and sells these cars to chosen groups of individuals, at ridiculously low prices, since those Yuan are calculated at the official rate of exchange.

Thus, Venezuela’s “development” money. The same money that is borrowed from the Chinese, instead of being used to buy machinery, factories, equipment, as everyone envisioned, is being used to import Chinese cars. That’s it!

That’s what someone in the Chavismo stratosphere considers “development”

How low our country has fallen…

In fact, if you look through the news section of Suvinca, this “procurement” company, seems to do anything but what it was mandated to do. It sells cars, school supplies, produce in markets. But mostly, it sells cars, cheap Chinese imported cars, paid by the loan, as you can see if you go down the list of “news”.

It is all about cars, importing them and selling them to buddies. Many quite well off, actually, like my friend.

Thus, we get a loan to import stuff, undercutting local producers who went more than a year without Cadivi giving them much and likely importing many cars that are not even supposed to come to Venezuela and for which there are no spare parts or support.

It’s The Devil’s Excrement at work, as implemented by brainless bureaucrats, whose only qualification to preside those institutions, is loyalty and ideology to the brainless revolution.

And President Maduro? In China, getting another one of these “development” loans.

Suppose I wrote in this blog the following about the Venezuelan economy:

“The problems to be solved (in Venezuela) are related to endemic inflation and a productive system that has not responded to the stimulus of government spending, while rentism has deepened the country’s dependence on oil. It can be characterized by inflation above thousand percentage points in the 14-year rule of Chavismo, with food prices rising 1760% in the same period, the highest figure in all of Latin America, with clear signs of acceleration, as May inflation reached 6%, highest in a month, than in a full  year anywhere in Latin America. Production has only grown by 10% in 14 years, the lowest in the region, except for Haiti. The rate of industrialization in this government continued to decline, reaching 13.9% last year, when it had reached 20% in 1986, and non-oil exports went from being 40% of the total, to only 4% in 14 years. The fiscal situation is severe, reaching 15% of GDP, with problems to finance social spending, with oil production in a very problematic situation, despite high oil prices, and the Government has resorted to the Central Bank printing money in order to finance itself.

The causes of the situation have to do with increasing the size of the centralized state inherited from the Fourth Republic, which was unable be transformed from the top and has absorbed in its corruption a large fraction of the Government’s execution. In addition, social spending and production incentives have become inflation, not production, in the presence of a regime and import policies that have harmed the development of production, especially by the issuance of paper money by the Venezuelan Central Bank.”

And suppose then that among the solutions I proposed here that the Government talk to the productive sector to establish clear rules, remove the Board of the Central Bank, reform the tax system, create a monetary stabilization fund, implement a transition plan so that everything that is imported is made in Venezuela and within seven months allow the currency to float freely.

I am sure that more than one Chavista would read that and accuse me of being a capitalist, an ignorant and who knows what else. Because anyone that writes the above is simply saying that Chavismo has failed miserably. No?

Right diagnosis. Wrong hands to fix it.

Except that I did not write that. With small changes, just to make a point, the above was written by a group of Bolivarian professionals, under the title ¿Que Hacer?. led by former Minister of Planning Felipe Perez and contained in the fourth version of a very long document, which is exquisite in its diagnoses of the economic failure of Chavismo, but, in my opinion, fails miserably on the solutions, as it proposes as a solution to the execution problem of the Government  to turn control to communal power.

I had read the first revision a few months ago, but this one is much more detailed. What is shows is that someone that knows economics knows how screwed up the last fourteen years have been. What I find amazing is that in the face of that critique, anyone thinks that Chavismo deserves another chance to screw up. So, if you speak Spanish and have patience go read it, the details on the diagnoses of the economic problems are pretty, pretty good.

Many people seem to think that Venezuela is or may be close to some sort of economic bottom. That the current economic situation is unsustainable. That things are about to crack up somehow due to the economy. Collapse, explode or implotion.

Well, think again..

Countries are like the shares of a bad company. they keep going down and down, and too many people think it can’t go lower and they buy more, but it continues to go down.

I think Venezuela is the same. Things continue to deteriorate, shortages, blackouts, inflation, crisis after crisis and conflicts, crime and constant devaluation.

Guess what? That is the story of the last fourteen years, but the bottom may be far into the future.

First of all, think Zimbabwe. If country’s economic crisis hit a bottom and political change would follow, then Mugabe would have been a goner long ago. Instead, there is Robert Gabriel Mugabe, plodding along, year after year. In the middle, the country has seen a variety of things, from hyperinflation, to sanctions, to austerity, with plenty of elections all the time. And Mugabe is still “it”, leading and ruling the country, like Chavismo owns ours. Except Chavez died.

But Mugabe does not have the pipeline of dollars that Chavismo has, nor the leeway to adjust and change in order to plod along along longer. In fact, I suspect that Mugabe has more smarts to adapt and change politically and that is about it.

Think about it, Chavismo has the barrel of oil at US$ 107, give or take some cents, almost as high as it has ever been. It also has a gazillion barrels of oil (and gas, and gold, and iron) underground that it can lease, lend, promise and/or mortgage, in order to achieve its means.

Yes, thing are not well, but an adjustment here, an adjustment there, and quicker that you can say devaluation or default, for that matter, things could improve rather quickly.

And they have. Really. Things are worse now in terms of dollar availability, for example, but at 21% scarcity levels, we are far from the 49% levels of 2007, or the electricity rationing of the 2010 crisis. Think about it.

And oil is as high as it has been in the last five years for example. That means that even if the parallel funds have less in them, they probably have at least US$ 16 billion to muddle through until things get very tight. And if PDVSA needs money, the Central Bank can increase lending to it, by 50%, rather than 28% like in the last year. Crazy? Yes. Inflationary? Yes. But when you have no scruples, the show must go on! As long as you can keep it going.

You are worried that there is a shortage of dollars? Well, let me remind you this is a revolution. And the reality is, that there is a shortage of foreign currency for the private sector which imported US$ 38.7 billion in 2007, but only received US$ 26 billion last year. That is a 32.8% drop. But guess what? The Government in the meantime, has gone from importing “only” US$ 19.7 billion in 2007 to importing US$ 34.3 billion in 2012, that is “only” a  74% increase.

So, you “feel” the lack of foreign currency, because you get essentially 33% less, but the Government has almost doubled what it imports and the Central Bank said those imports went up 25% in the first half of 2103. Yes, their imports are inefficient, overpriced, full of graft and the like, but they have the money, you don’t. Feels bad, but is reality…

This is, after all, a revolution…Remember?

And lest you think that they don’t know they are in trouble, let me tell you three stories:

-Financing for Petrocaribe has almost ground to a halt this year. Yes, according to Central Bank numbers, last year financing to oil exports to Petrocaribe grew by US$ 7 billion. This year? A small increase of about US$ 300 million, according to the Venezuelan Central Bank. That means more money from oil for the Government, more foreign currency for other things.

-Many importers have received in June and July more new foreign currency from Cadivi than what they had received in the last twelve months.  Where is the money coming from? I don’t know. It may be coming from lower Government imports, or it may be coming from funds that used to go to shell companies that never imported anything under the “old” Cadivi management.

-The Government had to import gasoline with the Amuay fire, by now, most repairs have been completed. That means more dollars for PDVSA, as imports of gasoline go down.

And there are more economic tools that could be used. Devaluation, for example. Increase the price of gas from free to free by 200% or 300% higher. Sell dollars at a much higher rate for Sicad. Or if push comes to shove, no dollars, really critical, do you really think these guys are incapable of default? Think again.

But that is far in the future, we are not even close to that.

For now, if you are waiting for Venezuela’s bottom, look again. It’s not close. Going back to my stock analogy, buy Facebook shares ($FB). That one did hit the bottom. And it is going up…

Because about the only thing that Venezuela has hit bottom yet, is on the leadership. Maduro is really near bottom, he is no Chavez, but oil and oil prices and some reasonable decisions could keep him there for a long time, let’s say, all of his six years.

Countries do not reach economic bottoms, only political ones. And that is what the opposition has to work on. The opposition will likely get more votes in December than Chavismo. But Chavismo is likely to get more Mayors than the opposition.

And that, my friend, would not be a sign of a bottom. Chavismo would sell it, through the State controlled media, as a huge victory. And it would be.

So, if you are waiting for Venezuela’s bottom, this is likely not it.

It is after all called the Devil’s Excrement. A true curse. More than you could have ever imagined.