November 22, 2013

Economics & Finance

Ghost of Chavez can't stop hyperinflation

Economist Steve Hanke believes Venezuela is sliding into a hyperinflation episode: "For years, Venezuela has sustained a massive social spending program, combined with costly price and labor controls, as well as an aggressive annual foreign aid strategy. This fiscal house of cards has been kept afloat -- barely -- by oil revenues. "But as the price tag of the Chavez/Maduro regime has grown, the country has dipped more and more into the coffers of its state-owned oil company, PDVSA, and (increasingly) the country’s central bank. "Since Chavez’s death, this house of cards has begun to collapse, and the black market exchange rate between the Bolivar (VEF) and the U.S. dollar (USD) tells the tale. Since Chavez’s death on March 5, 2013, the Bolivar has lost 62.36% of its value on the black market ... "This, in turn has brought about very high inflation in Venezuela. The government has responded by imposing ever tougher price controls to suppress the inflation. But those policies have failed, resulting in shortages of critical goods, such as toilet paper, without addressing the root cause of Venezuela’s inflation woes." The country's official inflation rate is about 50% a year. Steven Hanke puts the actual inflation rate at more like 280% a year. (Bloomberg, 11-20-2013; http://www.bloomberg.com/news/2013-11-20/ghost-of-chavez-can-t-stop-hyperinflation.html)

Excessive liquidity is fueling inflation

In an attempt to rein in the constant increase of circulating Bolivars, the Central Bank increased the ratio of deposits financial institutions most hold in reserve from 17 to 19%, but the currency flood is such that this step has had virtually no impact. In October banks were holding on to some 74.5 billion Bolivars as mandatory reserves, and by November 20th the amount had risen 30% to 96.8 billion Bolivars. More in Spanish: (El Universal, http://www.eluniversal.com/economia/131122/exceso-de-liquidez-amenaza-con-acelerar-la-inflacion)

CAPITAL ECONOMICS sees default risk

CAPITAL ECONOMICS is skeptical over the government's mid-term ability to meet its foreign debt. "Default is a clear risk, particularly if oil prices continue to drop". The firm says the fact that PDVSA has returned to the market with a new PDVSA 2026 bond for U$D 4.5 billion, along with the decision by the National Assembly to enact the Enabling Law for the coming 12 months clearly indicate the government is reacting to high inflation. "With upcoming December 8th municipal elections turning into a measure of the government's popularity, President Nicolás Maduro has been taking ever more radical steps to meet inflation". More in Spanish: (El Nacional; http://www.el-nacional.com/)

Declining gold prices hit Venezuela's international reserves

The average price of gold has tumbled by 21%, from U$D 1,671 per ounce in January to U$D 1,314 in October. On November 20, the ounce of gold hit U$D 1,242. Analysts believe that in order to boost Central Bank liquid reserves it will have to sell a part of the country's gold; yet falling prices make this operation complicated. (El Universal, 11-21-2013; http://www.eluniversal.com/economia/131121/declining-gold-price-hits-venezuelas-international-reserves)

Economic reform seen as more unlikely

Investment banks see uncertainty over Venezuela is increasing, reform becoming more difficult, and foresee high inflation along with more acute fiscal imbalance. A UBS report says President Nicolás Maduro is in a difficult position to launch basic reforms given his drop in popularity and increasing social tensions. It says devaluation may be postponed in the coming months, and considers "exchange flexibility is the key, but the government seems to be going in the opposite direction by increasing public sector imports and further tightening the private sector's access". More in Spanish: (El Universal, http://www.eluniversal.com/economia/131122/creen-que-reformas-economicas-en-el-pais-se-dificultan)

Oil & Energy

A SPECIAL REPORT by SUBEAESHI: "Losing an oil market"

Is attached to this edition given the importance of oil production and sales to Venezuela's economy. (See attachment).

Government generates 97% of Venezuela's FOREX

Currency Board (CADIVI) President José Khan says the public sector generates 96% of all FOREX for the country, mainly through exporting oil and its derivates, plus basic industries. He says the private sector generates the remaining 3% through exports. More in Spanish: (Agencia Venezolana de Noticias; http://www.avn.info.ve/contenido/sector-p%C3%BAblico-produce-97-divisas-pa%C3%ADs; Notitarde, http://www.notitarde.com/Economia/Sector-publico-produce-97-de-las-divisas-en-el-pais/2013/11/21/283054)

A Special Economic Zone to be created for the Orinoco oil belt

Oil and Mining Minister Rafael Ramírez says three new oil related laws will be established under the newly granted special powers. This includes a special law to regulate the Orinoco oil belt, in order to increase operations and develop new projects, such as 2 refineries, 282 drills, 2750 kilometers of pipelines, and activating 10,800 wells. He says a National Industrial Oil Conglomerate will expand participation by the productive sector. More in Spanish: (PDVSA, http://www.pdvsa.com/; El Mundo, http://www.elmundo.com.ve/noticias/petroleo/pdvsa/promulgaran-leyes-sobre-crudo-en-el-marco-de-la-ha.aspx; El Universal, http://www.eluniversal.com/economia/131122/crearan-zona-economica-en-la-faja-del-orinoco-via-habilitante)

ROSNEFT to invest U$D 65 billion in the Orinoco oil belt

Igor Sechin, President of Russia's state owned ROSNEFT says the company will invest U$D 65 billion into the Orinoco oil belt over the next years, and adds that "this is the most important investment project we have for the future." He said cooperation between Venezuela and Russia is an alliance between two global oil giants. Joint projects include the development of PETROMIRANDA and PETROVICTORIA, the creation of an oil services joint venture, for engineering and construction, the development of the Mariscal Sucre projects, among others. More in Spanish:  (PDVSA, http://www.pdvsa.com/; El Mundo, http://www.elmundo.com.ve/noticias/petroleo/pdvsa/rosneft-acompanara-a-venezuela-con--65-000-millone.aspx; La Información, http://noticias.lainformacion.com/economia-negocios-y-finanzas/petroleo-y-gases-secundarios/petrolera-rusa-rosfneft-invertira-65-000-millones-de-dolares-en-venezuela_lsyUZ05h3kcwb9DZrdn7y2/; Notitarde, http://www.notitarde.com/Economia/Petrolera-rusa-preve-millonaria-inversion-en-faja-del-rio-Orinoco/2013/11/21/283146)

Harvest Natural says PLUSPETROL revises proposal for Venezuela interests

Harvest Natural Resources Inc, announces revised proposal from PLUSPETROL for company's interests in Venezuela; termination of negotiations with VITOL. Says co and PLUSPETROL agreed to enter into two independent transactions. Negotiations toward definitive deal with VITOL S.A. for sale of 66.667% interest in Dussafu marine permit psc terminated. (Reuters, 11-19-2013; http://www.reuters.com/article/2013/11/20/harvestnaturalresources-brief-idUSWNBB035GK20131120)

Commodities

Cell phone shortage worsens

State company TELECOM Venezuela was created to rein in "speculation" by centralizing imports, but it has not been efficient and scarcity continues to intensify. Cell phones have disappeared from stores because TELECOM Venezuela has a long standing U$D 500 million debt with suppliers which means key operators such as DIGITEL, MOVILNET and MOVISTAR may not be able to meet increased demand during the upcoming Christmas season. TELECOM Venezuela limits the number of units entering the country, decides what models can be imported, and restricts operators from importing other models. In addition, it demands payment in advance on units required by operators, with a special surcharge for "social investment", plus other charges which raise the cost to the public, and then has not paid suppliers abroad. As a consequence, none of the operators, including state-owned MOVILNET, have units available and it is likely they will not have any until next year. More in Spanish: (Tal Cual: http://www.talcualdigital.com/Nota/visor.aspx?id=95338&sec=44&colum=156)

Venezuela signs joint ventures with SAMSUNG, MABE

The government has allied with SAMSUNG to jointly produce consumer electronics and appliances. Rafael Ramirez, vice president for the economy, signed the agreement with the South Korean company's regional president, Hyun Chil Hong. SAMSUNG will initially invest U$D 50 million in a factory for the joint production and Venezuela will take a controlling interest, Ramirez said. Its location, output and start date won't be announced for at least a month. In the meantime, the government will directly import 400,000 SAMSUNG major home appliances and other electronics worth about U$D 100 million to arrive in "the coming days" from SAMSUNG plants in Brazil, Mexico and Argentina. Venezuela has signed a similar agreement earlier this month with Mexican appliance maker MABE to produce and sell stoves, refrigerators and other durable goods at "fair prices" well below what Venezuelans have grown accustomed to amid soaring inflation. (ABC News: http://abcnews.go.com/International/wireStory/venezuela-inks-joint-venture-samsung-20954071; Veneconomy, 11-21-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37242&idc=3; Reuters, http://www.reuters.com/article/2013/11/20/us-venezuela-samsung-idUSBRE9AJ14A20131120; Fox News, http://www.foxnews.com/world/2013/11/20/venezuela-signs-joint-venture-with-samsung-as-state-deepens-its-control-economy/)

Venezuela fines GENERAL MOTORS over spare parts' prices

The government has fined the local subsidiary of General Motors nearly U$D 85,000 for allegedly selling spare parts at exorbitant prices. The measure came as part of an aggressive drive by President Nicolas Maduro's government to tackle the country's high inflation rate by forcing businesses to lower prices. Speaking from the GM subsidiary's assembly plant in central Carabobo state, Industry Minister Ricardo Menendez accused it of selling spare parts at up to 500% more than cost. "Obviously this is a case of usury," he said. (The Chicago Tribune: http://www.chicagotribune.com/classified/automotive/sns-rt-us-venezuela-generalmotors-20131119,0,5104863.story

Dairy product distribution is diminishing

A 50% drop in production at companies such as PARMALAT, NESTLÉ and LACTEOS LOS ANDES is leading them to reduce distribution to market outlets and cut employment. The National Association of Food Distributors has called for state of emergency for government to urgently approve FOREX for packing material, fruit pulp and concentrates necessary for production. More in Spanish: (El Nacional; http://www.el-nacional.com/)

International Trade

Government to control all foreign trade

President Nicolas Maduro exercised new emergency powers for the first time Thursday, signing decrees limiting business profit margins and tightening regulation of imports. The two new laws aim to control prices and profits in the business sector and closely monitor imports and exports and hard currency that come in from oil sales, Venezuela's main source of revenue. Maduro says the law on foreign trade is designed to control "all that is imported and all that is exported", and adds that all businessmen who request FOREX for imports must register with the government - and those accused of "stealing" or "misusing" FOREX will not be allowed to register. The Currency Board (CADIVI), charged with delivering 95% of FOREX to business since 2003, will now come under the direct orders of a National Foreign Trade Center. He said the Foreign Trade Corporation will take care of imports by "powerful State-owned companies" and that registered private companies can take part "when advise is needed" on "vital matters", such as medical imports. (Yahoo News: http://news.yahoo.com/venezuelan-president-tries-emergency-powers-071959194.html; and more in Spanish: Infolatam)

Importers will have to declare US dollar origin

Venezuela's Currency Board (CADIVI) is now requiring importers bringing in goods below U$D 50,000 to report on the way they purchased US dollars to bring goods into the country. (El Universal, 11-20-2013; http://www.eluniversal.com/economia/131120/importers-in-venezuela-will-have-to-declare-us-dollar-origin)

Public sector share of imports will be 48%

Economist Asdrúbal Oliveros, of the ECOANALITICA economic research firm, estimates that nearly 48% of Venezuela's imports will be carried out by the public sector, in an economic model in which the State keeps gaining ground as importer. He further says the government aims at centralizing imports of auto spare parts and appliances. (El Universal, 11-20-2013; http://www.eluniversal.com/economia/131120/expert-imports-by-the-public-sector-will-total-48)

Foreign suppliers come calling to collect

Venezuelan businessmen in different areas have been receiving increasing visits from their foreign suppliers concerned about collecting outstanding debts. A business source who asked not to be identified says: "We meet with them, we explain the situation and we try to convince them that we will honor our debts." In some cases the merchandise has been delivered and is not yet paid for, others are products on their way to Venezuela, and in other cases there are products pending for dispatch. More in Spanish: (El Nacional; http://www.el-nacional.com/)

        

Government allies received most FOREX

An investigation by Últimas Noticias daily newspaper shows State companies and companies with ties with the regime received the most dollars from CADIVI in its nine years in operation. For instance, DAKA received more dollars (ranking 59th) than Alimentos Polar, Glaxosmithkline pharmaceutical lab, Coca Cola, Grupo Souto (breeding and distribution of poultry, among others), Plumrose, Agroisleña and Johnson & Johnson Venezuela. (Veneconomy, 11-21-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37241&idc=2)

Politics

Maduro gets power to rule by decree

Venezuela's congress has granted President Nicolas Maduro emergency decree powers that will strengthen his hand as he goes after businesses the government accuses of sabotaging the economy. The same device was employed four times by Maduro's predecessor, the late Hugo Chávez, to promulgate dozens of laws that dramatically boosted state control over the economy. Unlike the charismatic Chávez, who had near-absolute command over his party, doubts about Maduro's leadership have risen since he defeated opposition leader Henrique Capriles by a razor-thin margin in April's presidential election and as worsening shortages of basic goods and galloping inflation, now at 54%, have eroded popular support for his rule. Addressing a crowd smaller than the ones Chávez was accustomed to drawing, Maduro reiterated a pledge to use his expanded powers to keep prices low across industries and limit profit margins to 30%. He also vowed to start 2014 with a frontal attack on corruption. "They underestimated me; they said Maduro was an amateur," he told the crowd. But "what you've seen is little compared to what we're going to do". Opposition leader Henrique Capriles replied in a Twitter message: "I'll give it to you really straight so it registers," ... after the December elections "we're going after you and your disastrous government, constitution in hand". (The Guardian; http://www.theguardian.com/world/2013/nov/20/maduro-power-rule-by-decree)

Fire sale TVs and Chavez-style theatrics heat up Venezuela vote

President Nicolas Maduro is firing up supporters for the upcoming mayors' election through a theatrical confrontation with businesses that has showered voters with cheap consumer goods, echoing the style of late Hugo Chavez. The Dec. 8 vote for control of 335 municipalities, ranging from urban hillside slums to isolated villages in sweltering plains, will be the first major test of Maduro's strength after he narrowly won the presidency in April. Venezuelans are flooding shops to snatch up discounted car parts, televisions and clothes since Maduro ordered businesses to slash prices in a gambit similar to the oil-financed pre-election largesse of the Chavez era, but with private merchants footing the bill. (Reuters, 11-21-2013; http://www.reuters.com/article/2013/11/21/venezuela-election-idUSL2N0IX1QL20131121)

Capriles calls on Venezuelans to demonstrate against economic chaos

Opposition leader Henrique Capriles and the Democratic Unity Conference (MUD) have called on Venezuelans to march this Saturday in a protest against Nicolas Maduro's regime and the crisis he says is caused by the government, a crisis reflected in scarcities, inflation and lack of personal safety. Capriles said: "I call upon all Venezuelans suffering this crisis, upon all those who feel the government wants to destroy the nation, to protest in all 355 municipalities around Venezuela this Saturday". He said these demonstrations require no permits as they will take place within the upcoming election campaign. More in Spanish: (INFOLATAM)

Internet coming under censorship

The government's telecom regulatory agency CONATEL is trying to criminalize some web pages, forcing them to restrict content it considers inconvenient. It has taken steps to remove concessions and licenses from carriers, and has taken down sites that provide information on foreign exchange rates on the parallel market. The trend seems to be moving toward taking down any number of sites they believe upset "public tranquility" by providing information on scarcities and others. The regime might, by law, force carriers into becoming digital wardens over content on the web. The move seems destined to fail because many sites are based outside Venezuela and can continue creating new ways to get around restrictions, unless the government decides to block internet in the entire nation. More in Spanish: (Tal Cual: http://www.talcualdigital.com/Nota/visor.aspx?id=95000&tipo=COL&idcolum=156)

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.