December 17, 2013

Economics & Finance

Venezuela to use weaker exchange rate for oil sector. Venezuela's government has moved closer to devaluing its currency by adopting measures to use a weaker exchange rate for its key oil sector, as the country looks to attract investment and jump-start its slowing economy. President Nicolás Maduro's administration will also begin a round of discussions on a potential increase for gasoline prices in Venezuela. At pennies a gallon, locals fill their tanks for less than anywhere else in the world, Oil Minister Rafael Ramirez said. Ramirez said that all new investments into the country's oil sector will be conducted using a weaker exchange rate offered through the government's SICAD dollar auction system. The central bank will also use the SICAD reference rate for its gold transactions. Ramirez called the measures the start of a new phase of the government's efforts to boost the economy. The changes are part of an incentive "for the sectors that want to bring dollars into the country for increasing production," Ramirez said. The rate used in SICAD has never been disclosed by the government, but private-sector executives and analysts say it is close VEB 12/U$D, compared with the official rate of VEB 6.3/U$D. Ramirez said the rate could change weekly in auctions and would also be adjusted to specific economic sectors. "It's a nod to reality," said Russ Dallen, a partner at Caracas Capital Markets. "It looks like a back door way to devalue." Dallen said that he still expects Venezuelan officials to fully devalue the local currency in the near term, even if they divert more transactions to a weaker exchange rate. Analysts say the measures would also exacerbate inflation, which at around 54% is already one of the highest rates in the world. (The Wall Street Journal, http://online.wsj.com/news/articles/SB10001424052702303949504579262712549247706; Reuters, 12-16-2013; http://www.reuters.com/article/2013/12/16/venezuela-economy-idUSL2N0JV18B20131216; Bloomberg, http://www.bloomberg.com/news/2013-12-16/venezuela-to-make-fx-auctions-definitive-dollar-supply-mechanism.html; El Universal, http://www.eluniversal.com/economia/131216/sicad-to-become-a-permanent-mechanism-for-us-dollar-sales)

Venezuela to devalue Bolivar by late March, survey says. Venezuela will make the biggest devaluation of its currency since 2010 by the end of March in an effort to boost revenue and narrow the budget gap, all analysts surveyed by Bloomberg forecast. It will weaken the official Bolivar rate 39% to 10.3 per dollar, boosting local currency revenue from each dollar of oil exports, according to the median estimate of 14 analysts surveyed Dec. 11-13. A record gap between the official and black market rate has fueled the world’s fastest inflation. “Importing everything apart from food and medicine at the lower rate basically amounts to a stealth devaluation,” Alberto Ramos, Goldman Sachs Group Inc. chief Latin American economist, said by phone from New York yesterday. “This is a necessary adjustment they had to make given the unsustainable demand for dollars at the official rate.” The government will auction more than U$D 5 billion through the secondary auction system known as Sicad in 2014, compared with about U$D 1.3 billion sold since its start in March. (Bloomberg, 12-16-2013; http://www.bloomberg.com/news/2013-12-16/venezuela-to-make-fx-auctions-definitive-dollar-supply-mechanism.html

Moody's and S&P downgrade Venezuela, warn of economic collapse. Moody's Investors Service has downgraded Venezuela's credit rating and warns it could cut it again given what it sees as the growing risk of an economic and financial collapse in the country. It was the second ratings downgrade in just a few days for the country after Standard & Poor's cut its bond ratings on the "radicalization" of economic policy and declining international reserves. Moody's said it cut Venezuela's local and foreign currency ratings to Caa1 from B1 and B2, respectively, while the outlook for the rating was negative. "The downgrade reflects Moody's view that Venezuela is facing increasingly unsustainable macroeconomic imbalances, including a sky rocketing inflation and a sharp depreciation of the parallel exchange rate," the agency said. "As government policies have exacerbated these problems, the risk of an economic and financial collapse has greatly increased." It cited high inflation, a black market exchange rate 10 times the official level, widespread shortages of goods, a shrinking current account surplus, "perilously" low foreign exchange reserves and "anemic" 1.4% growth during the first three quarters of 2014. "A sharp increase in Venezuela's sovereign yields to more than 15% in early December from less than 10% in mid-May suggests the country's ability to access markets has been severely curtailed," it added. S&P maintained a negative outlook on concerns political polarization may increase the difficulty of carrying out adjustment measures such as widely expected currency devaluation, boosting the risk of default in the next two years. The ruling Socialist Party's strong showing in last Sunday's elections for mayors "will reinforce the trend toward more government intervention in the private sector, extending macroeconomic dislocations and further increasing the risks to economic, fiscal, and external sustainability," S&P said. (Reuters, http://mobilebeta.reuters.com/moodys-downgrades-venezuela-warns-of-economic; and http://www.reuters.com/article/2013/12/13/venezuela-rating-sandp-idUSL2N0JS0VQ20131213=)

Central Bank withholds November inflation data. Venezuela's Central Bank has failed to publish its usual National Consumer Price Index for the month of November, overdue since December 10th, the longest such delay since this economic indicator was established. Bank rules require publication of the CPI within the first 10 days of each month.  Several economic analysts have expressed astonishment at the delay, which they call "unjustified". José Guerra, former Central Bank chief analyst, calls it "very serious".  A few days ago President Nicolás Maduro declared inflation should be 5%, and the year to date rate was 45.8% by the end of October. (Notitarde: http://www.notitarde.com/Economia/Plazo-del-BCV-para-publicar-inflacion-de-noviembre-vencio-hace-cuatro-dias/2013/12/14/290045)

JP Morgan says PDVSA needs currency devaluation to VEB 15/U$D. JP Morgan's latest report on Venezuela indicates that PDVSA requires an additional devaluation down to VEB 15 to the U$D in order to stop receiving funding from Venezuela's Central Bank. "The necessary adjustment must be recessive if the government wants it to be effective, but 2014 is heading to be a year in which "stagflation" worsens, along with scarcity in some items. Social tensions continue to be a risk that must be monitored." The report projects a 1% GDP reduction, along with a severe drop in consumption, and estimates inflation above 60% in the first half of the year, averaging 50% for the year. More in Spanish: (El Nacional; http://www.el-nacional.com/)

Government to control 60% of imports by 2015. Imports by the Venezuelan public sector are likely to hit 60% in 2015, according to a report released by economic research firm ECOANALÍTICA. "Despite the gap in the cash flow of the Venezuelan State, the Executive Office keeps consolidating its model. ECOANALÍTICA estimates that imports will hit 60% in 2015," explains the report entitled, "An Unsustainable Model." The firm reckons that public imports will continue their current upward trend, reporting a 20% growth by the end of this year. This figure stands in contrast to the 15% drop estimated in private imports.

The weekly report added that private imports are expected to continue falling in 2014. (El Universal, 12-16-2013; http://www.eluniversal.com/economia/131216/venezuelan-state-to-control-60-of-imports-in-2015)

Oil & Energy

Maduro to decide on a 2683% rise on gasoline prices as PDVSA admits U$D 12.5 billion losses. Rafael Ramírez, Vice President for Economic Affairs, Minister of Energy and Oil and President of PDVSA, says it is up to President Maduro to decide on charging for gasoline "because in this country we do not pay for gasoline, it is PDVSA that pays for gasoline to be pumped". He showed charts to prove gasoline production costs are 28 more than what gasoline is sold for. He said the way for PDVSA to cut such losses on domestic gasoline production is by increasing pump prices by no less than 2683%: "we are setting a high number to recover production costs...it is a discussion we have underway". Ramirez added that PDVSA is losing over U$D 12.5 billion a year in fuel subsidies. (El Nacional, 12-17-2013; http://www.el-nacional.com/economia/manos-Maduro-veces-gasolina-octanos_0_319768283.html#.UrAwcj0dG3A.twitter)

Venezuela’s export barrel averaged U$D 97.40/bbl., up U$D 0.98/bbl. from last week, in a volatile week amid positive economic figures from the United States and expectations that Libyan exports will soon resume, says the Oil and Mining Ministry. The average for the year-to-date stood at U$D 99.98/bbl., down from the annual historic record of U$D 103.42/bbl., posted last year. (Veneconomy, 12-13-2013; http://www.veneconomy.com/site/index.asp?ids=44&idt=37528&idc=4)

Commodities

INVEPAL has imported almost 2000 tons of paper to cover production shortfalls. Government run INVEPAL is continuing imports of staples, and has brought in almost 2 thousand tons of paper from Brazil in order to cover its production shortfalls. More in Spanish: (El Carabobeño, 12-17-2013; http://www.el-carabobeno.com/impreso/articulo/87649/casi-dos-mil-toneladas-de-papel-import-invepal-para-cubrir-falta-de-produccin)

CARBONORCA workers go on strike. Workers at the CVG CARBONORCA carbon anode factory have gone on strike over wage payment delays. More in Spanish: (El Universal, 12-17-2013; http://www.eluniversal.com/economia/131217/trabajadores-de-carbonorca-en-huelga-por-atraso-en-pago)

Politics

Maduro to meet with opposition mayors and governors

President Nicolás Maduro has invited opposition mayors and governors for a meeting tomorrow in the Presidential Palace: "I have invited them in good faith to dialogue and listen; now, what I demand in the first place is respect for the Constitution. No one can enter ...who does not accept and respect the Constitution. It would be madness".  He said his "Plan for the Fatherland" must be accepted as the law of the land. "If you do not acknowledge it, go do so outside...if we are to begin a new stage of dialogue we must correct bad habits". Opposition leader Henri Falcon, Governor of Lara state, responds he will attend the meeting, but adds that opposition mayors and governors will not attend as subordinates, nor will they accept "for them to give us orders or read us a riot act". "We are going to this meeting in order to make a productive dialogue happen, to make our administrations more workable, effective and efficient." Ramón Guillermo Aveledo, Secretary General of the opposition Democratic Unity Conference (MUD) says: "There must be dialogue and cooperation between the different instances of power because it is established within the Constitution...Dialogue cannot be based on insults and aggression, nor can it be based on conditions (...) we are willing to hold talks because we are accountable to citizens". More in Spanish: (El Nacional, 12-17-2013; http://www.el-nacional.com/; El Universal, http://www.eluniversal.com/nacional-y-politica/131217/henri-falcon-al-gobierno-nacional-no-nos-vengan-a-dar-ordenes and http://www.eluniversal.com/nacional-y-politica/131216/dissenters-the-terms-for-dialogue-are-set-in-the-constitution)

Local elections are a mixed bag for Venezuela's opposition. The country continues to be evenly divided between two warring factions, reflecting the sharp polarization in Venezuelan society. While the government has navigated tenuously between dictatorship and farce, Venezuela's opposition has similarly failed to become the majority force they hoped to be at this point. From the start of the campaign, opposition leaders labeled this election a referendum on Maduro and campaigned across the country to support opposition candidates, fighting for a win that always seems a bit out of reach. There were a lot of factors playing against them in the run up to the elections. In particular, the government made sure opposition candidates were all but shut out of mass media. In the end, the opposition racked up significant wins: It started the day with 55 mayors, and they will now have around 76, most in the country's largest cities. However, chavismo can also play a claim to victory. It won the most municipalities, and its political party beat the opposition coalition, although the total vote tally for each side is not yet known because there are many small opposition parties that, taken together, won a significant percentage of the vote - with a roughly 41% abstention rate. Many had thought an overwhelming opposition win in the popular vote would engender a massive shakeup in Venezuelan politics. That did not happen. Nevertheless, time is in the opposition's favor. Many of the government's economic measures had been postponed until after this election, and voters will wake up in a few days to find themselves poorer and paying higher prices for many basic staples. (Foreign Policy)

Poll shows 83.95% believe land takeovers aggravate scarcity

A recent poll by DATANALISIS on public perception of government moves to improve food supply shows that the most favored option is to invest in food producing industries (88.5%). 68.9% believe easing import restrictions on the private sector is positive, and 61% believe store inspections are helpful.  80.4% say that taking over food industries worsens supply, and 77.8% say as much about expropriation of supermarkets. 83.95% believe land takeovers make scarcity worse. Asked about the reasons for scarce supply, 48.4% blame power outages, 46% say government should control companies that are not producing, and 44% said price controls lower supply.  More in Spanish: (El Universal, 12-16-2013; http://www.eluniversal.com/economia/131216/57-de-la-poblacion-objeta-racionamiento-de-los-alimentos)

Spain’s ABC: Diplomats confirm Venezuelan links to drug trafficking. Information published by ABC regarding negotiations between Nicolás Maduro’s staff—when he was foreign minister—in an FMLN drug trafficking operation in El Salvador, has corroborated suspicions that existed in Venezuelan political and diplomatic circles. “This news confirms what many already knew about the significant and growing presence of drug trafficking in Venezuela and its important relations with the top echelon in the government and the Armed Forces,” former Venezuelan ambassador to Sweden and Guyana, Sadio Garavini commented. The information from ABC proves that Maduro’s cabinet facilitated the flight of a plane in which Italian drug lord Roberto Adamo was on to negotiate with the FARC in Apure, where the Colombian guerrillas operate with impunity and where no international flights are supposed to land. Meanwhile, Venezuela’s former ambassador to El Salvador, Juan José Monsant, is not surprised that leaders of the Farabundo Marti National Liberation Front (FMLN) in El Salvador are linked to the Colombian guerrillas, while stressing the massive financial backing from Venezuela to the FMLN, which has been done to take complete control of the country. “The FMLN and Alba Petroleos of El Salvador – the entity that funnels Venezuelan aid – has taken over the country in ways the United Fruit Company would have never imagined: from airlines to mass purchases of land in the capital, coffee crops above price, pharmacies, banks, and media outlets." (Interamerican Security Watch)

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.