The Devil's Excrement

(I swear from this basket to always keep alive the flame of XXIst. Century Socialism)

Not content with having two controlled exchange rates, the Venezuelan Government is getting ready to issue a decree or change the laws in such a way that it apparently creates…

a third controlled exchange rate…

Way to go Hugo, call me when there are 14, that is the world record. (Alan Garcia in Peru)

But seriously, the Government will apaprently issue  a decree which says that banks and brokers will no longer be able to “intermediate” dollars (??) or dollar-denominated bonds* and those demanding dollars will have to go to a “closed-market” at the Venezuelan Central Bank, where one interprets or assumes the Government will sell foreign currency by an unknown mechanism or process which will be announced in the next few (days, weeks, months?).

Of course, since the Government wants this new rate to replace the swap rate and keep it down, it is certainly not going to be enough to satisfy everyone’s needs and you can guess what will happen…

A fourth rate, a true black rate will show up and it will be higher than the eightish rate at which the swap market closed today.

This is all guessing from an eight line decree which will be published today or tomorrow, but there are no more details.

To me the implications in this instant analysis are :

-A fourth black exchange rate

-Another mismanaged exchange rate that will not be enough and a new mechanism will be invented a couple of months later.

-Further shortages down the line as the swap rate provided an efficient mechanism to purchase foreign currency.

-Difficulties for the Government to offer bonds in local currency in the if investors have no “parallel” market to work with.

-A rise in the country’s bonds given that it shuts down the doors to any possible issuance in the near future to use as means of lowering the swap rate.

-More inflation.

These are my initials conclusions with little knowledge of what is behind the decree. Stay tuned.

*The change in the law as introduced this morning simply bans swaps with securities, thus shutting the “permuta” market.

Reader Island Canuck from Margarita sends this very interesting table in which he has kept tabs on prices at the Sigo store in the tax free island of a bunch of items. Clearly it is not your mother’s CPI, it has lots of luxury items, but it gives an insight into not only how much prices have moved upward, but also on availability. Curiously, 100% Oraneg Juice, the biggest gainer at 84.6%, is not available and the o% gainer Real carupano rum, is also not available.

Meanwhile, Chavez has refused to accept, as usual, any responsibility for the problems. It is all the oligarchs and the speculators. He plans to smash speculation. Yeah, sure, if he shuts down the swap market, what will happen is that the parallel rate will become black, it will go to Bs. 15 per dollars and shortages will be huge. He now thinks that even if he burns all international reserves the swap rate will not go down. True, if he freely sells all dollars in exchange for all Bolivars in the economy, the equivalent rate would be Bs.  8.5 per dollars, which is simply a result of his irresponsible transfer of international reserves to spend as he wishes, while printing more and more Bolivars without any backing in the Central Bank. It’s call economics, not speculation.

And if he tries to persecute those that trade foreign currency swaps, it will be just like persecuting the meat industry, there will be no dollars to sell, the price will go up, there will be no dollars for imports, there will be no imports. It is also called economics.

The problem in the end is that the Government and the Central Bank don’t have enough dollars to satisfy all of the needs. This article in today’s El Universal explains it very clearly: The Government has less foreign currency, reserves are going down and PDVSA is selling less foreign currency to the Venezuelan Central Bank. In some sense, by giving PDVSA autonomy in how much it gives or not to the Central Bank, the monetary authority has less ability to fight the rise in the swap market, even as oil prices go up (and PDVSA needs more). But the Central Bank also has been trying do to in a baffling manner, selling bonds that are useless in pushing the swap rate down.

The Government can issue debt to push the swap rate down, but that mechanism, like Greece issuing new debt to pay the old one, will one day stop working and all they do is lower the swap rate temporarily.

In the end, it is irresponsible policies that have taken us to where we are and there is clearly no intention by Chavez to assume any responsibility. He has no EU to help him and he will not spend less, the end will clearly be a disaster as the new inflation levels show.

Chavez needs an economsit that KNOWS economics, Merentes is a Mathematician with no background in finance, Giordani is an Urban Planner, they are both ideologues and it is ideology that has taken us to where we are today. It will not get them out of this Gordian knot in which they find themselves.

And we will sink with them.

(Dear Father, I ask that when I resucitate, it may not happen in the Republic of Venezuela)

I went away for ten days and really managed to keep my mind as far away from Venezuela as possible, something which is becoming harder and harder to do. And I must say, it was not only fun to get away but also to ignore the growing problems of our land.

And I come back with the currency soaring and reaching all time lows and the Government, as usual, refusing to take responsibility for its total incompetence and lack of coordination. It helps little when those in the key positions of responsibility have no clue as to what they are doing, but if on top of that they disagree and bicker over policy, it simply gets worse and worse. And thus, while the Government looks for culprits, the enemy is within and the swap rate soars without control. Any fool that believes that the swap rate does not matter to the masses is either nuts, or very ignorant, or simply both.

And Venezuela continues to bleed from corruption, as another Argentinean scandal hits the press. When the buddies of the Kirchner’s and even companies related to past and present Ministers and high Government officials of Mr. and Mrs. K, receive a 15% commission for doing business with Chavez’ Government, you have to wonder how much dirtier it has to get for Chavez to do anything about it. Chavez with his typical “who me?” attitude dismisses the charges, once again turning into prosecutor, judge and jury, deciding that like Maletagate (some of the principals are coincidentally the same) nothing should be investigated. It is as usual a “plot” by the “enemies” of Venezuelan-Argentinean friendship or the like.

And history will judge these “left wing” heroes like Chavez and Lula, on the one hand claiming to care about democracy and the people and on the other allowing corruption to run rampant and naming Mr. Kirchner to preside a less than democratic institution like Unasur, a “union” that only includes those they sympathize with them and will go the way of other useless and irrelevant institutions like the OAS, because they have been either reduced or created just to promote the personal interests of a few. Chavez gives away the farm, Argentina’s oil company never paid US$ 600 million to PDVSA, corruption in inter Government deals is rampant, but Chavez the clown is allowed to appoint kings to empty fiefdoms.

Meanwhile, Chavez’ own election did not go well for him. You can bicker about abstention and whether enough people showed up or not, but you can not argue that it was successful. But the numbers are remarkable, of the 106 “loyal” Deputies of the current National Assembly that aspired to repeat, a meager 22 were able to squeak by, giving clear indication that they got there because of Chavez, have no constituency and did so little in their four year tenure that nobody wants to vote for them.

But even more interesting is that “renown” figures of the robolution like that despicable character Mario Silva or the murderous shooter from Puente El Llaguno Richard Peñalver did not get there either. Instead what is considered the “right-wing” of the revolution, led by Diosdado Cabello, scored a small victory by being more organized and preserving more loyalty from his followers that Chavez managed to do. Of course, some of the losers in these stage will be re-anointed by Chavez guaranteeing the level of loyalty that Chavez the Dictator likes to have.

And the little Dictator showed his class by insulting a reporter for the biggest of all sins: questioning the almighty leader. Cubans are good he said and in any case, he does not have to defend his position. But then he proceeded to do exactly that for half an hour. Next time, only loyal press at the press conference to insure that Chavez’ autocratic and personalistic view can be espoused without impertinent questions by brain washed reporters of the opposition and only the paid slaves of the robolution can ask questions.

And thus I am back, still tired and recovering from resting too much and partying some. The water is back for the time being but the shelves at the supermarket did not look great. To the Argentinean story I will return with more details, but I leave the primaries behind, both sides failed democracy, choosing at will and violating the spirit and the letter of the Constitution.Let’s see what happens in September.

As for the economy, not doing very well so far, soon the Central Bank will let us in on the secret of the first quarter GDP numbers , maybe that jolt will wake up Chavez, Merentes or Giordani, but I doubt it.

(I am going to burn all of this)

Away and disconnected. sort of, hard to be with primaries and all, but here are some things that caught my attention out of the main news:

1) The Miami Herald reports that the US Government is investigating payments made by US companies to PDVSA as bribes to obtain contracts, as well as for payments made to custom officials.

Of course, not  a beep from the Comptroller or anyone in office in Venezuela, as it becomes clear that corruption is everywhere you look, but particularly in Ramirez’ PDVSA and Ruffian the Comptroller looks the other way while asking even bank tellers of nationalized banks to file their holdings just in case they are ever investigated for corruption. (Obviously an unlikely occurrence)

2) Former rabid pro-Chavez supporter Luis Fuenmayor accused the President of the Armed Forces University (UNEFA) of fraud, saying the students quote by Chavez don’t exist. He also said recent untrained graduates become the Professors in order to grow.

It’s a great socialist model, graduate students who become Professors instantly so that the whole country can go to the University and be Professors.

3) Chavez’ corrupt friends the Kirchners came to town a few years ago and got Chavez to agree to give an Argentinean company IMPSA the contract for the expansion of the hydroelectric power plant Macagua I. The contract was forced on power company EDELCA who objected because IMPSA did not even qualify to work for it because it had failed in the past to fulfill a contract. A contract was signed for US$ 142 million, mysteriously expanded to US$ 242 million and US$ 350 million have been spent on it by now. After all this money has been spent, the power has not increased and the contract ahs little to show for it.

Viva Chavez! Viva Kirchner! Viva Argentina! Viva Venezuela!

4) General Rivero who recently retired after five years as Head of Civil Defense, said that one reason for retiring was the presence of Cuban military officials “beyond what should be allowed”. Rivero implied there was a threat to National Security by allowing this and  forced Chavez to acknowledge on his Sunday Variety Show Alo Presidente that the Cubans were indeed here “helping out”. As long as they don’t help themselves out to a country, for Chavez this is all right.

Wasn’t Chavez the guy who used to argue sovereignty at every turn? What happened to it? His personal survival is more important than the country? Who is the traitor in this?

5) And yes, there were primaries. Pity that they took place only in some areas, but they go done wrinkles and all, but at least a bunch of candidates in September will be able to proudly say they were selected and elected according to the law and the Constitution, not a small achievement for the country.

In my district I would have voted for the loser, but democracy went for the better known, I will vote for her in September in any case.

Back to the beach!

Tomorrow I go on a very special trip, I will likely post, but don’t necessarily count on it, if I relax too much you may not read much from me. It will be nice to get away, life is getting rough down here and I am not talking about politics, I am talking about the daily details, the grind.

While everyone talks about shortages, there are some undesirable effects that sometimes you don’t realize. This week, I went to the supermarket to get my usual lunch, some fruit that I eat at my desk. This is efficient and it’s a simple task, I go to a market with a tiny parking lot, so that there are never lines at noon.

Except this week, on two different days I had the bad luck that items of which there is a shortage were available, if albeit very briefly. The first day there was milk and the cell phone shortage network was quite active, there were maybe twenty people ahead of me and I managed to get in the shortest line. Mind you, the milk was not even liquid, it was bags of awful tasting (to me) powdered milk, but clearly people were desperate, the lady behind me asked me if I was buying some, I said no, so she asked if I could buy two bags for her (Limit two bags per customer). I did, it was a complicated transaction, I paid for my stuff, then I paid for the two bags of powdered milk with her money and gave her the change and, of course, the bags. The pear I had for lunch was delicious, but it certainly took too much effort to get it.

Just my luck, the next day the market had soft margarine, another item of which there is a shortage, lines were shorter, maybe only ten people. I decided to participate in the hoarding, I know we run out of margarine regularly, as I was leaving I realized this was not the “light” stuff my wife usually buys but it was the “good” brand she likes, I hope its ok, she hasn’t said anything so far.

Then, I get a call from my sister’s boyfriend, my sister is trapped in the elevator in the building where I work. It’s the same effect, there is a shortage of spare parts, little maintenance, elevators even in the best buildings and malls of the country mostly don’t work. People get trapped, this time one of my (seven) sisters. Hey! We are Catholic!

I get back to the building where my office is and see some guys working on the elevators of the building and I tell them my sister is trapped. They look at them, only three of the six work, but that is what is expected. The three “good”” ones are working, so what gives?

Shoot, by the time I get in touch with her, I realize my sister is trapped in the parking lot elevator, not in the building. But she is out! Relief overall, she was in the only one of the two elevators to the parking lot that work, so when I left the office I had to walk down. Take a positive approach: Great exercize!

This morning, I got up at the usual time, read the news, then time for a shower. Plenty of time before rationing kicks in, twenty minutes to spare. Soap up, shampoo in, water pressure dies, I have suds all over the place as I try to catch every single drop that comes my way. I even kneel on the floor as the pressure dies! In the end, I dry mostly soap off and off to work, sticky, but smelling good.

I try to make a fuss when I go down asking why the water was shut off twenty minutes early, the lady (wife of the superintendent) smiles, laughing: “Oh! I made a mistake, I though we had changed the hours, but I have just been told I was wrong.”  What can I tell her? She was not even at the meeting when the time to stop rationing in the morning was not changed. She was just confused. No point arguing or getting mad.

So, hopefully, by the time I come back in ten days, a year and a decade older, things will have improved, my Electric Bill will come without a penalty, thanks to my efforts and the water rationing will be gone.

That is my hope, but somehow it is just wishful thinking. Things tend to get worse, not better.

At least I got some of those foreign exchange bonds at a 50% discount to the parallel swap rate, so hell, I should thank the revolution for at least one of their stupidities…

When the President of a country is his own Press Secretary, it becomes difficult to sort out the news in detail, because in this particular case, there are seldom questions and/or clarifications. Such was the case of the multiple announcements this week on new agreements between Venezuela and China both on oil exploration in the Junin 4 heavy crude oil field and a loan of US$ 20 billion given by China to Venezuela. All of these announcements were supposed to be part of high level agreements signed between Chavez and the Chinese President Jintao, during the latter’s visit, but the Chinese earthquake forced him to cancel his visit and the whole affair lost some of the thunder Chavez wanted to have.

Typical of the confusion is this news item from UPI, which only adds to the confusion since after a headline of the Chinese lending Venezuela US$ 20 billion, says the highlight of the deal is the US$ 16.3 billion investment in the Junin 4 field.

The two things have nothing to do with each other, they are two separate deals which are much different in nature. Let’s eal with them separately:

1) The PDVSA-China Junin-4 deal: This is nothing new, the Junin 4 field had been assigned to the Chinese company CNPC quite a while back, terms had been agreed to, this was just the formal signing and announcement of the bonus to be paid. As an example, Reuter published this summary of the Junin field at the beginning of April including the part about Junin-4 being assigned to the Chinese company, production levels, etc.

The only question is the usual one: PDVSA announces a huge investment, in this case US$ 16.3 billion, but PDVSA has to put up 60% of that, in this case US$ 9.78 billion. It sounds great, but where is the money going to come from, as I discussed in a previous post. This is something not even Ramirez can answer, his and the administration’s management style seems to be “oil and God will provide”. PDVSA is in the end a typical Venezuelan family.

2) Then, we come to the US$ 20 billion, ten year loan. Sounds great, no? At a time of tight cash flow and foreign currency problems the Chinese advance you the not irrelevant amount of 20 billion dollars.

But did they?

I have no idea. According to the CNPC website:

“Under the long-term financing cooperation framework agreement, China will provide Venezuela a 10-year wholesale financing loan. PDVSA and CNPC also signed an oil purchase and sale contract to guarantee PDVSA’s repayment.”

which makes it clear the loan will be paid with oil, but “wholesale financing loan” is a strange term.

While I may not understand it, many interpret this as the Chinese giving Venezuela US$ 20 billion now, to be paid in dollars. With this, Venezuela’s foreign currency deficit for the year is no longer an issue, Morgan Stanley’s concerns get pushed until at least 2011.

But then, we read that:

“framework agreement on financing” under which the China Development Bank (CDB) will provide a USD 10 billion loan and other credit amounting to 70 billion Yuan (USD 10.25 billion)” (note that when you subtract the 10.25 billion yuan, you get almost exactly what PDVSA needs to finance its shares of the Junin-4 field, is that all Venezuela is getting, Junin’s financing over the years plus the Yuans for Chinese purchases?)

So, over half the credit is now in Yuan, a non-convertible currency, last I heard. And “other credit” sounds like loans to buy Chinese products in Yuan, if I am reading this correctly. But really, I am not sure, it is all very fuzzy. Ramirez also said PDVSA will not need to issue new bonds in 2010, which is good news for Venezuela and PDVSA bonds, but immediately said that PDVSA was looking into financing from banks to the tune of US$ 1.5 billion in the next few months.

Once again, It may be as high as US$ 21.5 billion or as low, as…anybody’s guess. Are the US$ 10 billion of the US$ 20 billion not in Yuan a one time ten year loan? It sounds like it, but I can’t swear to it.

So, it appears as if: Venezuela signed a project for US$ 16.3 billion with China and received US$ 20 billion in financing from China. But, about half of that (the 20 billion) is in Chinese local currency and the other half, happens to be exactly what is needed in financing for  PDVSA to fund its share in Junin-4.

But I don’t know which one it is. Does anybody outside the Government?

Footnote: My next post was going to be on the Guri dam and the electric problem. I was going to estimate how much rain we needed to have the dam in good shape for 2011 and talk about the funny statistics of Opsis which at some point made me doubt that I was right in thinking there would be no collapse in 2009. But then I saw this post in this very professional new blog about Venezuela called Setty’s Notebook and it made no sense to duplicate. Please check it out!

Mystery Number One:

-Oil is up

-Cadivi gives less than it did last year

-Government seems to be intervening less in swap market

But international reserves fall US$ 7 billion in three months, US$ 5 billion transferred to Fonden, but US$ 2 billion is very real. International Reserves are at a 52 week low today.

Mystery Number Two:

-The Government said in January when the swap rate was near Bs. 6 per $ that it wanted to lower the swap rate to Bs. 4.3 per US$

-The Central Bank began selling US$ zero coupon bonds to “aid in lowering this swap rate. First sale was at a fixed price equivalent to Bs. 5.2 per dollar. Second to fifth sales at Bs. 4.8 per dollar. Sizes are small, few people get the bonds, swap prices soars hitting an all time high last week above Bs. 7 per US$.

-Today the Central Bank calls for an auction in which people can bid between 110 (Bs. 4.7) and 112 (Bs. 4.8)

What’s the idea? Essentially the Central Bank is giving away dollars, very cheap ones, for an unknown purpose, since these sales do not lower the swap rate.

Your guess is as good as mine…