November 15, 2013

Economics & Finance

International reserves drop sharply, worsened perception hits bond prices. The US dollar reserve the Central Bank needs to pay for imports and service debt continues shrinking. By November 13, Venezuela's international reserves were at U$D 20.912 billion, around 30% down this year, and the lowest level since October 2004. Analysts say operating reserves at U$D 300 million can meet only three weeks of imports. The decline is taking place as the Government is forcing stores to cut prices, thus creating a rising perception of a cycle greater political instability in international markets. As a result, oil giant PDVSA and government bond prices have dived. (El Universal, 11-14-2013; http://www.eluniversal.com/economia/131114/venezuelas-international-reserves-fall-sharply; http://www.eluniversal.com/economia/131113/capriles-reports-sale-of-gold-and-shares-by-the-venezuelan-govt; and more in Spanish: El Mundo, http://www.elmundo.com.ve/noticias/economia/banca/reservas-caen-al-nivel-mas-bajo-en-nueve-anos---20.aspx#ixzz2ki2lGfPS; El Universal, http://www.eluniversal.com/economia/131115/reservas-internacionales-estan-por-debajo-de-los-21-millardos

PDVSA issues U$D 4.5 billion in new debt; S&P rates bonds ‘B’. PDVSA President Rafael Ramirez says PDVSA's new U$D 4.5 billion bond offer, will place U$D 1.5 billion with Venezuela's Central Bank while offering the remaining U$D 3 billion to service providers to pay down billions of dollars in debt. Simultaneously, Standard & Poor’s Ratings Services; assigned its ‘B’ senior unsecured debt rating to Petroleos de Venezuela S.A.’s (PDVSA; B/Negative/–) U$D 4.5 billion notes due 2026. (El Universal; http://www.eluniversal.com/economia/131113/pdvsa-to-issue-2026-bonds-with-coupon-rate-at-6; Latin American Herald Tribune, http://www.laht.com/article.asp?ArticleId=1176831&Cate; Reuters, 11-14-2013; http://www.reuters.com/article/2013/11/14/venezuela-pdvsa-idUSL2N0IZ21F20131114goryId=10717) 

Profit limits to be set between 15-30%, tradesmen call margins untenable. President Maduro has announced that once the Enabling Law is approved he will establish a 30% cap on profits in all areas. "I am preparing a table so that maximum profits are between 15-30%", he says, and explains he has been looking at profit margins in countries such as the United States, Japan, China, Argentina, Chile and the European Union. Tradesmen say profit margins under 30% are untenable and many businesses will be unable to replace inventories and forced to shut down. Nelson Loyo, a small businessman, says "we are on a tightrope, prices could be held for a few months, but they cannot expect them to be frozen for over a year". Prices are pressured upwards by high rentals and payroll costs. More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/gobierno-fijara-ganancias-entre-15-y-30-.aspx#ixzz2ki3Qenny; http://www.elmundo.com.ve/noticias/negocios/consumo/ganancias-por-debajo-de-30---son-insostenibles.aspx#ixzz2ki37xqIN) El Universal, http://www.eluniversal.com/economia/131115/estableceran-el-margen-de-ganancias-de-las-empresas-entre-15-y-30)

Appliances crackdown spurs uncertainty. President Nicolas Maduro has ordered the military to take over appliance stores, which he's told to slash prices. The populist measures seem designed to help Maduro's party get over the hump of next month's mayoral vote. But while the measures apparently are popular with voters, Maduro runs the risk of cannibalizing an already damaged economy. "It's a very high-risk strategy," said sociologist David Smilde, a senior fellow at the U.S. think tank the Washington Office on Latin America. "If this week, it's electronic stores, then the automotive sector, and you keep doing this for the four weeks until elections, you could do some real damage to the economy." It's hard to overstate the grim predicament the government and country face. Nearly 73% of Venezuelans say they're pessimistic about their country's prospects, according to a poll taken last month by the Venezuelan firm DATANALISIS that was reported by local media. Another 67% see the country's political situation as unstable. Just recently, Maduro had been trying to woo investment. Now, analysts say, Maduro is scuttling that attempt at moderation, with the risk that confiscations and price controls will prompt companies in more critical areas such as food and pharmaceuticals to freeze production. (The New York Times: http://www.nytimes.com/aponline/2013/11/13/world/americas/ap-lt-venezuela-maduros-crackdown.html?ref=americas&_r=1&)

FOREX to be sold through a performance contract. President Maduro has announced that as soon as the National Assembly vests in him special powers to legislate, he will pass a decree-law to regulate sale of foreign currency. He says that individuals or companies seeking to buy foreign currency at the official exchange rate through the Foreign Exchange Administration Board (CADIVI) will have to sign a performance contract. He also said the government will not allocate FOREX to individuals or corporations that are not registered with the National Foreign Trade Center, an agency charged with enforcing all policies intended to promote exports and streamline all import needs. Rafael Ramírez, Vice President for Economic Affairs says "it was a mistake to allocate FOREX on good faith...we will have a system where companies will have to sign an agreement, with accountability. There will be controls before and after (imports)." (El Universal, 11-14-2013; http://www.eluniversal.com/economia/131114/venezuelan-govt-to-sell-foreign-currency-under-performance-bond; Veneconomy, 11-14-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37171&idc=2)

Scarcity is expected to surge over the next few months. A few weeks ago Finance Minister Nelson Merentes promised to loosen exchange controls. Policies have changed and stricter controls on FOREX have now been announced. President Maduro says the National Foreign Trade Center will manage and allocate FOREX which will be granted to companies under a sort of contract that guarantees their use of allocated foreign currency. Economist Angel Garcia Banchs of ECONOMÉTRICA, says this is the road to "state controlled imports" which can only result in "a surge" in scarcity and a "devastating effect on supply". (El Universal, http://www.eluniversal.com/economia/131115/preven-desborde-de-la-escasez-en-proximos-meses)

HSBC says slashing prices will exacerbate inflation. HSBC says the move to slash prices and use the military to take over establishments are desperate steps that "rather than solve the problem will exacerbate inflation". The report by the firm says events show the economy has been impoverished: inflation, weak growth, severe scarcity and a rise in the parallel exchange rate all indicate distortion has grown worse and heightened the need for adjustments. "Besides, the political pressure on President Maduro increases daily", and adds that recent polls show his popularity has dropped to a "not very comfortable level under 40%". HSBC concludes. "In our opinion political problems are key for the government with impending December 8th municipal elections which are seen as a referendum on Maduro's popularity." More in Spanish: (El Nacional; http://www.el-nacional.com/)

Oil & Energy

Venezuela to grant more autonomy to oil joint venture partners. Venezuela will give foreign partners in heavy oil joint ventures more autonomy in hopes of boosting production from today’s 1.2 million BPD to 4 million BPD by 2019. Foreign companies operating in the Orinoco heavy-oil belt will have more autonomy to make decisions on investments and operations, says Oil Minister Rafael Ramirez. Ramirez, who also serves as president of state-owned oil company PDVSA, wants partners to assume a more active role. “If companies have the capacity to bring in additional rigs for the joint ventures, we have no problem,” Ramirez said. “We’re looking to reduce bottlenecks while optimizing and increasing the capacity of our existing upgraders,” Ramirez said. “We also expect to achieve early production of at least 50,000 BPD as the production from our upgraders has reached a maximum.” Ramírez said Venezuela and her partners plan to invest nearly U$D 200 billion in the Faja in two phases. PDVSA will invest U$D 24 billion through 2016 to expand existing upgraders and another U$D 108 billion after 2016 on new upgraders and infrastructure, he said. The rest of the money will be dedicated to drilling wells and other underground operations. Venezuela will invest U$D 26 billion next year to boost total production to at least 3.3 million BPD, Ramirez said. (Bloomberg: http://www.bloomberg.com/news/2013-11-14/venezuela-to-give-oil-jv-partners-more-autonomy-ramirez-says.html)

PDVSA awards tender to sell heavy crudes to Houston Refining. State-run Petroleos de Venezuela (PDVSA) awarded a contract to sell three cargoes of heavy Laguna, Bachaquero and Bachblend crudes to U.S. company Houston Refining, a trader close to the deal told Reuters. Houston Refining, formerly known as LYONDELL-CITGO Refining (LCR), operates a 270,000 barrel refinery located on the Gulf Coast in Texas. PDVSA's subsidiary in the Unites States, CITGO, had a 41.25% stake in the plant until it was sold in 2006 to its majority partner, Lyondell Chemical. The trader added that the 300,000 barrel cargo of heavy Bachaquero crude included in the tender was sold at a price of U$D 20.50 per barrel below ICE Brent. (Reuters, 11-14-2013; http://www.reuters.com/article/2013/11/14/oil-venezuela-tender-idUSL2N0IZ1AT20131114; El Universal; http://www.eluniversal.com/economia/131114/pdvsa-awards-oil-shipment-to-us-refinery-at-low-prices)

Representatives from CHEVRON, REPSOL and ENI reiterated their interest in remaining as partners in the Orinoco Oil Belt projects since covering future estimated demand “will be almost impossible with conventional oil.” (Veneconomy, 11-14-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37164&idc=4)

Logistics & Transport

International airfare to have a price bracket. After meeting with airline representatives, Pedro Alberto González, President of the National Civil Aeronautics Boards, said international airlines operating in Venezuela must establish fares within a price bracket. More in Spanish: (El Nacional; http://www.el-nacional.com/)

Politics

Maduro says "with superpowers no one can stop me", vows no let-up in business crackdown. The so-called Enabling Law which grants the President the power to legislate without legislative oversight has been passed in the first of two voting rounds by the National Assembly, 99 to 60. Maduro reacted by saying that with these powers "no one can stop me". Maduro is now one step away from getting the power he seeks to control prices and profit margins, as well as more control over FOREX allocations. He promised to step up a pre-election "economic offensive" that has seen hundreds of Venezuelan businesses inspected for price gouging and crowds flocking to shops to take advantage of state-ordered discounts. (Reuters, 11-14-2013; http://www.reuters.com/article/2013/11/14/us-venezuela-economy-idUSBRE9AD0W720131114; Fox News, http://www.foxnews.com/world/2013/11/13/maduro-crackdown-on-appliance-stores-may-win-key-votes-but-spurs-uncertainty-in/; El Universal, 11-14-2013; http://www.eluniversal.com/nacional-y-politica/131114/enabling-law-approved-with-99-votes-in-its-first-reading; Fox News, http://www.foxnews.com/world/2013/11/14/venezuela-congress-looks-set-to-hand-president-maduro-decree-powers/; and more in Spanish: Infolatam)

FEDECAMARAS President Jorge Roig says Maduro attempts to enforce a failed economic system. President Nicolás Maduro recently said "I have proof the economic warfare is being directed by Jorge Roig", who is President of FEDECAMARAS, Venezuela's premier business organization. Roig has countered by charging that the forcible imposition of a discredited statist model is behind the nation's difficult situation. He calls it "a model that has failed in every country in the world", and ads "I am very ashamed. I feel we are a bit of a laughing stock for the entire world". Roig, heads an oil and petrochemical supply company and is a former legislator from CAUSA R, a leftist political party. He describes himself a centrist with "social concerns" and says FEDECAMARAS only seeks to influence policy, not take over power. He credits social gains since Chavez took office, but says that a decade of exchange controls and refusal to talk to business puts the brakes on prosperity, pressures the private sector and makes the economic outlook for 2013 very dark. FEDECAMARAS, which represents 423 chambers and associations throughout the country, says 4700 companies have disappeared over the past decade. Roig says "it is clear that if the situation is not corrected, business mortality will continue"; and charges that inflation "is the consequence of an economic model that is showing its most perverse side". More in Spanish: (Infolatam)

Capriles charges the FOREX board is home to corruption. Opposition leader Henrique Capriles says "CADIVI (the Foreign Exchange Board) is home to corruption...they have stolen millions of dollars." Capriles challenged "corrupt members of the government to reveal the names of the DAKA appliance chain and publish a list of those receiving FOREX through CADIVI. Take up the challenge!" he twitted. (El Universal, 11-14-2013; http://www.eluniversal.com/economia/131114/capriles-forex-commission-is-home-to-corruption)

Maduro claims Venezuela will be "impregnable", charges opposition plans cyber attack on election day

Venezuela has become the prime buyer of Russian military equipment, to the tune of U$D 11 billion. President Nicolás Maduro now claims Venezuela will be "impregnable" militarily and says that even though it is a peaceful nation it is not a "silly" or "cowardly" nation. He insisted the regime will install an anti-aircraft system in the large city slum areas. He again attacked the opposition, saying that: "on an elections day this crazy right wing can mount a cyber attack on the elections system, and we must be prepared." More in Spanish: (Infolatam)

Election campaign formally starts Saturday, November 16, according to the National Elections Council (CNE). However, both the government and the opposition launched their campaigns months ago. The campaign will last 20 days thorough midnight December 5. (Veneconomy, 11-14-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37168&idc=1)

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.