The Devil's Excrement

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.

Accountability is simply a dirty word for Chavismo. There he was, Nelson Merentes, the current Minister of Finance talking on TV on what a mess the economy is, as if he had not been omnipresent in Chavez’ Cabinet and as if all of the things he was saying are not working, were not the creation of Chavez, aided by none other than Nelson Merentes, Jorge Giordani and others. Sadly, he also showed that he has no clue as to how to solve the problems anyway.

First, the clueless Mathematician says that the black market dollar “perturbs and gives anxiety” to Venezuelans. Thus, the wise man suggests that the Illicit Foreign Exchange Bill needs to be changed because it has not fulfilled its objectives. He also suggests that the Securities Markets Bill also needs to be modified.

Let’s see. The first Bill has been in existence for eight years and was passed when the National Assembly was 100% Chavista. It was modified once to make controls tighter, not softer, making it illegal to even mention what the exchange rate is and to make all foreign exchange transactions, except those made thru the Government, absoluetly illegal.

Even worse, up to 2010, there was a functioning parallel market in Venezuela, which the Government squashed because it did not like the ever increasing rate of exchange, killing Venezuela’s Capital markets in the process, jailing people and modifying a well-thought out (and widely consulted!) Capital Markets Law to satisfy the regime’s wishes at the time.

The result? That same parallel rate is now five times larger, barely three years later!

And Merentes apparently thinks that changing these laws will apparently solve the problems, the same way he thought SITME was the best foreign exchange market in the world (Will last 100 years! Nelson dixit) and silly SICAD would solve the scarcity problems)

Which shows that after eleven years practicing finance, which Merentes had never been interested in, he has yet to learn much about it. Moreover, things are what they are because of the absurd monetary and foreign exchange policies, which he helped implement at the Central Bank and are still in place today.

Because changing the laws, will not lower the black market rate. Creating a parallel market will not lower the black market rate. (I personally think it will increase it, not decrease it!) Because the problem is excess demand for foreign currency, generated in part by the artificial creation of money, while maintaining the official exchange rate constant.

It’s very simple: You start with pent up demand for foreign currency which has been building up over the years. Then, you increase restrictions on who can get the foreign currency. You follow it up, by having the Government increase its imports, which is not only inefficient, but full of “guisos”, overprices and empty containers and follow it up with keeping the official rate of exchange artificially low, while all this time the number of dollars you have to sell are constant, if not lower.

It is an equation that will never work, to put it in terms the Minister should understand.

Because the US$ 47 billion that Merentes magically mentions as what Venezuela imports, is not really that much. When the Government is directly importing US$ 34 billion, while “assigning” US$ 26 billion to the private sector using convoluted criteria at such a favorable rate, simply does not work. Even Jorge Giordani has admitted that as much as 40% of all that may be fake.

And then, the final and golden touch to his statements is when Merentes says: “We want to produce what Venezuelans consume”. Really? You could have fooled me Nelson, because you have spent fourteen years doing exactly the opposite, threatening, expropriating and making it very difficult for the private sector to grow. And just a hint, keeping a low official rate of exchange, with 20-30% inflation is exactly a recipe to kill local production, so start there.

Same with exports, where many of those same exports don’t exist today, because the plants and factories were expropriated and lie idle under Chavista management.

But Merentes speaks as if this is a new Government and he was never part of the previous one. As his predecessor in his current position, there is simply no accountability. It is as if these failed policies were implemented by extraterrestrials. In fact, It is as if he became Minister of Finance last week, not almost five months ago.

Accountability is a fifteen letter word, but for Chavismo it appears to be a four letter one.

All of a sudden Maduro’s PSUV party has lost one vote in the Venezuelan National Assembly, leaving it two short of the required 99 votes because, of all reasons, Deputy Adel el Zabayar, a Deputy from Bolivar State, has requested a leave of absence to go and fight for the Syrian Government.

El Zabayar was an alternate in the National Assembly, but became a Deputy when Rafael Gil was named President of the Corporación Venezolana de Guayana. Thus, El Zabayar has no alternate and PSUV has thus lost a vote. .

El Zabayar is of Syrian origin and is President of the Venezuelan Arab League and a former member of the Venezuelan Comunist party.

I guess that is what Maduro meant when he said that he would help Syria if the US attacked. El Zabayar said that he would return to Venezuela if Maduro asked him to. But I guess the Syrian fight is more important than anything happening in Venezuela. I hope other PSUV Deputies join him in this fight for authoritarianism. Maybe they will be further away from their quorum.

Reuters today had this piece about Venezuela’s new plan to get a “fair price” for its metals under Maduro’s new “Sovereign marketing Plan”. The plan is simple, nobody is going to come and set the prices for Venezuela. Nobody is going to come from abroad and set the price of what belongs to all Venezuelans. We want fair prices.

WE will set the price, you hear!

This is really revolutionary, Venezuela from now on will sell all of its metals well above international prices, using their own proprietary formula for what fair prices is.

Comments so far by traders:

“The government has no idea what it’s doing … They put up so many obstacles that clients are losing faith in Venezuela”

“This is crazy, it’s never going to work,” said a metals merchant based in the United States. “People are leaving Venezuelan minerals in the ports”

What’s next? Venezuela will only sell oil at US$ 200 per barrel?

Now, that would be truly revolutionary, no?