October 01, 2013

Economics & Finance

Government finances worsen

Venezuela's FOREX reserves currently appear too low to reliably finance government spending, at least in the midterm, and the nation will probably have to allow the Bolivar to depreciate substantially through a new exchange system and sell gold from its reserves to inject sufficient foreign currency into the domestic market to ameliorate shortages. Reports show Central Bank of Venezuela's liquid cash reserves have fallen to U$D 900 million --down from approximately U$D 3 billion in July. Another report indicates China denied a Venezuelan request for a cash loan. Financial pressure on the government stems from declining oil exports and sustained high levels of government spending. Venezuela only exported an estimated 1.7 million BPD of oil in 2012, down from 2.3 million BPD in 2004 and 3.1 million BPD in 1997. Meanwhile, imports of refined products from the United States jumped nearly six-fold, from U$D 568.9 million in 2011 to U$D 3.3 billion in 2012. With less inflow and high demands for FOREX to finance imports, official Central Bank reserves have fallen sharply this year, from U$D 29.8 billion in January to U$D 22.3 billion in late September. But most of Central Bank reserves are held in gold, and the recent fall in futures prices is not reflected in Caracas' accounting. The shortage in foreign exchange could total about U$D 8 billion in 2013. As a result, the value of the Bolivar on the unofficial exchange markets has plummeted, and government leadership is currently discussing a new FOREX exchange system whereby currency and bond exchanges would link private and public entities in a more open trading environment than is currently possible. Even with PDVSA promising to inject some U$D 6 billion through the new system, the Bolivar in all likelihood would nonetheless lose its value in such a market exchange. Growing inflation will cause political problems for President Nicolas Maduro, and totaled 31.4% between January and August. Inflation in 2013 may reach as high as 44%, compared to reported inflation in 2012 of 20%. Political discussions over the exchange system have pitted PDVSA President Rafael Ramirez and Planning Minister Jorge Giordani against Finance Minister Nelson Merentes and Central Bank President Eudomar Tovar. Giordani had previously opposed the devaluation of the bolivar in early 2013 because of the inflation it would create. The new exchange system's potential effect on inflation will likely delay its implementation until after Dec. 8 municipal elections. Currency devaluation created by the new exchange system now seems inevitable as the government faces the politically unpopular choice of undoing economic problems inherited from the previous administration or remaining in an untenable economic situation. (STRATFOR; http://www.stratfor.com/sample/analysis/venezuelas-finances-worsen)

Exchange control imbalance is now the worst in history

Never in Venezuela's history has the difference between the official currency value and the parallel market gone up as high as 600%, as is currently the case. The previous record high was in the 1980's when it rose to 235%. Such a large difference makes the demand for cheap FOREX practically infinite, and access to such currency slow and difficult. More in Spanish: (El Universal, http://www.eluniversal.com/economia/131001/desajuste-del-control-de-cambio-es-el-mas-grave-de-la-historia)

Caution is advised in acquiring Venezuelan bonds

For the first time, reports by international firms agree that domestic political and economic conditions are increasing risks in acquiring Venezuelan debt. BCP Securities says successive loans from China, the drop in PDVSA output and in crude oil prices, PETROCARIBE commitments, and refusal to pay off SIDETUR debts show the nation's vulnerability. It says "the number of recent events at the state oil company, which will continue to occur, has been negative and has increased the credit risk for that industry". The BCP Securities report adds: "the hostile and erratic rhetoric, and the paranoid behavior" of President Nicolás Maduro do not make markets more confident. "Venezuela now has the 4th costliest debt in the world, only Argentina, Ukraine, and Greece are worse. Even Egypt and Pakistan are better rated than Venezuela ". More in Spanish: (El Nacional; http://www.el-nacional.com/)

Government sells assets abroad in order to raise funds

Recent balance of payments information published by the Central Bank show that assets held abroad by the government have diminished by U$D 1.457 billion; and external holdings by FONDEN and the National Treasury have gone down by U$D 2.616 billion. ECOANALITICA think tank analysts believe this is due to the need to pay for imports and finance investments. More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/gobierno-liquida-activos-en-el-exterior-para-mejor.aspx#ixzz2gSozxdg3)

Venezuelan oil tumbles under U$D100 per barrel

Venezuela's weekly oil basket tumbled below its desired U$D 100 a barrel floor as easing worries over Syria and the Middle East continued to be calm international oil markets. According to figures from the Ministry of Energy and Petroleum, the average price of Venezuelan crude sold by Petroleos de Venezuela S.A. (PDVSA) during the week ending September 27 was U$D 99.39, down U$D 3.75 from the previous week's U$D 103.14. (Latin American Herald Tribune, 09-29-2013; http://www.laht.com/article.asp?ArticleId=1047050&CategoryId=10717)

BCV raises funding to PDVSA; triggers parallel dollar

From August 23 through September 20, the US dollar escalated in the parallel market and pushed up the prices of a wide array of goods since business uses this indicator as a benchmark to estimate replacement costs. The 15% hike of the US dollar in the unofficial market is mainly due to Central Bank funding of state-run companies, particularly PDVSA. The Bank prints out Bolivars to buy PDVSA bonds, and PDVSA uses such funds to fulfill commitments, such as construction of houses and payment to suppliers who in turn acquire FOREX on the parallel market. (El Universal, 09-30-2013; http://www.eluniversal.com/economia/130930/bcv-lifts-funding-of-pdvsa-triggers-parallel-dollar)

New public debt to be issued during third quarter

The Finance Ministry has announced the start of public debt placement during the 3Q 2013 in order to absorb domestic liquidity. Treasury notes are aimed at the financial system in order to take up approximately VEB 500 million per week. More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/anuncian-emision-de-deuda-publica-nacional-para-el.aspx#ixzz2gSocBDOA)

Government "intervenes" four state companies

Industrias Diana, Palmeras Diana del Lago, Indugram and Productos La Fina, as part of the so called "Efficiency or Nothing Mission". In addition, General Wilmer Barrientos, Minister for the Office of the President, announced that the chief of the National Dikes and Shipyards Company (DIANCA), the Cojedes state MERCAL coordinator, Plaza Venezuela’s BICENTENARIO supermarket manager and the heads of PROESCA and FERROMINERA have all been replaced in their posts “because they did not do their job.” (Veneconomy, 09-30-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=36531&idc=1; El Universal; http://www.eluniversal.com/economia/130930/government-takes-over-four-state-run-companies)

Commodities

Industry inventories are coming down

José Manuel González, President of the Venezuelan Packing Chamber says delays by the Ministry of Industries in granting import permits have risen from 20 to 90 working days, which is hurting inventory replacement. "There is no crisis, but timing must change ", he said.  Industry representatives from textiles, graphic arts, chemicals and footwear also say delays have become more acute, and inventories are going back down to levels reported before talks began between the government and the private sector in May. Inventories new range between 30-60 days. More in Spanish: (El Nacional; http://www.el-nacional.com/)

FERROMINERA Orinoco paralyzed due to labor strife

Operations at CVG FERROMINERA Orinoco were paralyzed yesterday after workers declared a stoppage over unpaid debts by the company. Rail and iron ore processing operations came to a standstill last week, and yesterday administrative personnel along with mining operators at Ciudad Piar stopped working: Iron ore supplies are currently stopped. More in Spanish: (El Universal, http://www.eluniversal.com/economia/131001/paralizan-fmo-por-incumplimiento-en-pago-de-pasivos)

Strike lifted at steelmaker SIDOR

A 10-day strike at steelmaker SIDOR is over after workers reached agreement with management over benefits claims stretching back years, union and company sources said. "Operations re-started on Sunday with the 3-11 pm shift," the local Sutiss union's president Jose Luis Hernandez told Reuters, confirming agreement over the back payments. "We're back to work. The production lines are totally operative," added a company source, who asked not to be named. SIDOR has an installed annual capacity of 5 million tons, but output has tumbled since its nationalization five years ago due to frequent protests and insufficient investment. (Reuters, 09-30-2013; http://www.reuters.com/article/2013/09/30/venezuela-steel-idUSL1N0HQ0SA20130930)

International Trade

PDVSA-YPFB projects in Bolivia are lagging

Four out of five projects at PETROANDINA SAM, a partnership in Bolivia between YPFB and PDVSA are falling behind because environmental licenses have not been granted. The leader of PDVSA's project in Bolivia, Naim Issa, says:"We have plenty of environmental constraints in some blocks. Madidi is one of them, under special treatment; there are many environmental constraints to operate it, as it were; this has been the difficult part to implement the projects". (El Universal, 09-30-2013; http://www.eluniversal.com/economia/130930/pdvsa-ypfb-projects-in-bolivia-lag-behind)

CAVECOL says food staple imports from Colombia are not coming through yet and one of the matters under discussion is the payment the Venezuelan government intends to make with PDVSA bonds. CAVECOL’s Chief Luis Alberto Russian explains that talks between governments have “advanced” and added among staples to be imported there is cattle, powdered milk, butter, oil and baby chickens. (Veneconomy, 09-30-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=36521&idc=3)

FOREX distortions hit the Colombia-Venezuela border economy

Business representatives on the Venezuelan border with Colombia say distortions due to Venezuela's FOREX have hurt domestic trade in the Colombia-Venezuela border region. Daniel Aguilar and José Rozo, president and former president of the FEDECÁMARAS-Táchira state chapter, are warning that the Venezuelan bolivar (VEB) to Colombian peso (COP) exchange rate has reached its highest gap so far this year. According to Rozo, FOREX operators have noted an over-supply of Venezuelan bolivars in the FOREXn currency market at the border, thus lowering the value of Venezuelan currency. (El Universal, 09-28-2013; http://www.eluniversal.com/economia/130928/forex-distortions-hit-colombia-venezuela-border-economy)

Politics

Venezuela expels 3 US diplomats

President Nicolas Maduro announced the expulsion of 3 US diplomats - including the Charge d'Affaires - during a live speech to Venezuela soldiers. Maduro asked Foreign Minister Elias Jaua to expel the 3 US diplomats, giving them 48 hours to leave the country. Maduro accused the 3 unnamed US diplomats of meeting with the country's "right wing" to plan electricity system sabotage. “We have sufficient evidence collected of the hostile, illegal and interventionist attitude of the officials,” Maduro said. “Out of Venezuela. Yankee, go home! Enough with the abuse.” He did not provide any evidence or name the diplomats.  “I don’t care what actions Barack Obama’s government may take," Maduro told the soldiers. "We’re not going to allow an imperial government to bring money and see how they shut down the basic industries, how they turn off electricity to black out all Venezuela. What is that?” (LATIN AMERICAN HERALD TRIBUNE; http://www.laht.com/article.asp?ArticleId=1049644&CategoryId=10717; http://www.eluniversal.com/nacional-y-politica/130930/nicolas-maduro-gives-three-us-diplomats-48-hours-to-leave-venezuela; Reuters, http://www.reuters.com/article/2013/09/30/venezuela-usa-idUSL1N0HQ24V20130930; CNN, http://edition.cnn.com/2013/09/30/world/americas/venezuela-us-diplomats-expelled/index.html?iref=allsearch; Fox News, http://www.foxnews.com/world/2013/09/30/venezuela-expels-three-us-embassy-diplomats/)

Obama names Venezuelan advisor

Venezuelan economist Andrés R. Gluski, has been named Export Advisor by US President Barack Obama. Gluski, is President and CEO of the AES Corporation since November 2011 and has a PhD in Economy and International Finance from the University of Virginia. More in Spanish: (El Nacional; http://www.el-nacional.com/)

Recording of 'kidnapped' Chavez is fake, says Maduro

President Nicolas Maduro says right-wing opponents have unleashed a new weapon in their push to destabilize his government and demoralize his supporters: an imitation of Hugo Chavez's voice. An audio recording widely circulated on social media purports to be the late Venezuelan leader saying he's still alive. The recording comes nearly seven months after authorities announced Chavez's death from cancer and just a few months before municipal elections in the politically polarized country. President Maduro says the recording implying that Chavez has been kidnapped is fake, and he isn't taking it lightly. (CNN, 09-29-2013; http://edition.cnn.com/2013/09/29/world/americas/venezuela-chavez-recording/index.html?iref=allsearch)

Sabaneta jail search yields weapons arsenal

A security sweep of Venezuela's Sabaneta prison, where 16 inmates were killed in gang violence, has uncovered more than a hundred weapons and tens of thousands of rounds of ammunition. Inmates were temporarily moved from Sabaneta, near the city of Maracaibo, after the violent fight between rival gangs two weeks ago. Some of the victims were reportedly decapitated and dismembered. Prisons in Venezuela are notoriously overcrowded and riots are not uncommon. Prison Minister Iris Varela said guards had searched about half of the prison grounds so far, seizing more than 22,000 rounds of ammunition, as well as pistols and rifles. The sweep also uncovered tunnels of up to 15m (50ft) depth, in which more than 12kg (26lb) of marijuana and cocaine were stored. Venezuela has one of the highest crime and homicide rates in Latin America and the judicial system is struggling to cope with the caseload. The prison population has been increasing with many of those incarcerated waiting for trial. The Venezuelan Prison Observatory says that 80% of jails are run by armed inmates, with the security forces having little or no control. (BBC; http://www.bbc.co.uk/news/world-latin-america-24329536)


The following brief is a synthesis of the news as reported by a variety of media sources. As such, the views and opinions expressed do not necessarily reflect those of Duarte Vivas & Asociados and The Selinger Group.