January 24, 2014

Economics & Finance

Venezuela creates dual-rate FOREX system; critics cry devaluation

Venezuela has revamped its 11-year-old currency controls, creating a dual-rate system intended to stem rampant embezzlement of oil dollars, a change critics pilloried as a disguised devaluation. The widely expected reform kept a preferential rate of 6.3 bolivars to the dollar for essential goods such as some widely used basic food staples and medicine, while doubling the volume of dollars offered at a higher rate of around 11.3 bolivars. Officials offered few clear details about how they would control the black market rate for greenbacks, now more than 10 times the preferential rate. Critics predict the measures will simply spur inflation, which hit 56.2% in 2013, the highest in the Americas. The new measures expand the central bank's SICAD system of weekly currency auctions by boosting the amount offered to U$D 220 million, from about U$D 100 million. Expenditures such as travel allowances, airline tickets and remittances previously calculated at the preferential rate will be moved to the less favorable SICAD rate, currently 11.3. Ramirez insisted that the 6.3 rate would still cover 80% of Venezuela's dollar needs, in the food, agriculture, industrial, health, education, science and technology sectors. The currency plan could fuel inflation for some goods and services, but could reduce shortages if dollars previously destined for foreign travel are freed up to import food and medicines. Economist Asdrubal Oliveros of Caracas-based ECONALITICA called the new system a "slow-motion devaluation" that will help shore up state finances by providing more bolivars for dollars sold at the higher rate. But he said added the measure alone will not resolve the problems created by controls and heavy state intervention: "The currency shortages will continue until the government recognizes that a fixed exchange rate is not the solution".  (Reuters, 01-22-2014; http://www.reuters.com/article/2014/01/23/venezuela-forex-idUSL2N0KW10G20140123; Veneconomy, 01-23-2014; http://www.veneconomy.com/site/index.asp?ids=44&idt=37743&idc=2; Bloomberg, http://www.bloomberg.com/news/2014-01-22/venezuela-devalues-bolivar-for-airlines-remittances.html; El Universal, http://www.eluniversal.com/economia/140122/venezuelan-govt-announces-band-system-for-new-exchange-scheme; AVN, http://www.avn.info.ve/contenido/80-percent-currencies-be-alloted-priority-sectors; Fox News, http://www.foxnews.com/world/2014/01/22/venezuela-overhauls-foreign-currency-exchange-system/ and more in Spanish: AVN; http://www.avn.info.ve/contenido/venezuela-activa-nuevo-sistema-cambiario-para-fortalecer-econom%C3%ADa; http://www.avn.info.ve/contenido/ram%C3%ADrez-tasa-sicad-es-mucho-m%C3%A1s-baja-que-fijada-saboteadores-econom%C3%ADa; http://www.avn.info.ve/contenido/ram%C3%ADrez-nuevo-sistema-cambiario-consolidar%C3%A1-orden-econ%C3%B3mico-socialista; El Universal, http://www.eluniversal.com/economia/140123/lineas-aereas-recibiran-dolares-a-la-tasa-del-sicad; http://www.eluniversal.com/economia/140123/recortan-divisas-a-viajeros-para-atender-importaciones-basicas; http://www.eluniversal.com/economia/140123/gobierno-condiciona-el-pago-de-la-deuda-con-las-empresas; Ultimas Noticias, http://www.ultimasnoticias.com.ve/noticias/actualidad/economia/estos-son-los-sectores-que-quedaron-en-cadivi-y-en.aspx; http://www.ultimasnoticias.com.ve/noticias/actualidad/economia/lo-que-debe-saber-del-sistema-de-bandas.aspx; http://www.ultimasnoticias.com.ve/noticias/actualidad/economia/ramirez-dice-que-optimizaran-tramites-para-solicit.aspx; El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/aseguran-que-optimizaran-tramites-para-solicitar-c.aspx; El Universal, http://www.eluniversal.com/economia/140124/daran-divisas-a-630-solo-para-alimentos-de-alto-consumo)

Venezuela bonds slide as economic measures deemed insufficient

Venezuelan bonds fell hard Thursday, a day after the government announced a partial currency devaluation seen largely as insufficient to resolve the oil-rich country's growing economic challenges. Economists said the government's plan to sell more dollars to Venezuelans at a weaker exchange rate against the dollar would produce a marginal difference in its fiscal deficit, and likely prompt the central bank to continue printing the Bolivar currency. That is likely to potentially exacerbate an inflation rate that is already at 56%, one of the world's highest. "It's a case of too little, too late, to put it bluntly," said Russ Dallen, a partner at brokerage Caracas Capital Markets. Venezuela's benchmark 2027 bond slipped to a bid price of 68.65 for a yield of 14.61%, according to Markit, levels last seen in November 2011. The measures announced so far will help the government rake in additional revenue of about 5% of gross domestic product, not enough to cover a fiscal shortfall seen at about 14% of GDP, Caracas-based consultancy ECOANALITICA estimates. (The Wall Street Journal, http://online.wsj.com/article/BT-CO-20140123-713760.html)

Ramírez hints of de-criminalizing swap operations

Ramírez also hinted at de-criminalizing swap operations, saying "If that is not sufficient (CADIVI and SICAD) then we will change the Illegal Exchange Law so that the private sector can bring in their FOREX and carry out their swaps". More in Spanish: (El Universal; http://www.eluniversal.com/economia/140124/ramirez-asoma-despenalizacion-del-mercado-permuta; El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/despenalizacion-resucita-operaciones-permuta-de-di.aspx; El Nacional, http://www.el-nacional.com/economia/Reforma-Ley-Ilicitos-legalizara-permuta_0_342565983.html)

Private debt default could jeopardize new imports

Jorge Roig, President of FEDECAMARAS, Venezuela's main business organization, expressed concern that the announcement by Ramirez could be an "implicit disregard" of private sector imports previously approved by CADIVI, and warned of possible consequences: "I want to tell the nation that credit lines to Venezuela are absolutely closed. If companies such as POLAR have publicly announced that their credit lines with international suppliers are closed due to default, you can well imagine what is left for other companies with far weaker credit". More in Spanish: (El Universal, http://www.eluniversal.com/economia/140124/impago-de-deudas-arriesga-las-nuevas-importaciones; El Mundo, http://www.elmundo.com.ve/noticias/economia/gremios/medidas-dan-respiro--pero-no-salvaran-el-primer-tr.aspx; El Nacional, http://www.el-nacional.com/economia/Empresas-paralizaran-falta-divisas_0_342565995.html)

New system will continue processing pending CADIVI cases

According to Rafael Ramírez, Vice President for Economic Affairs, "all applications pending with CADIVI will continue to be processed with no change...the only difference is that the allocation will be made at another rate, the SICAD rate": More in Spanish: (AVN; http://www.avn.info.ve/contenido/nuevo-sistema-cambiario-garantiza-curso-solicitudes-hechas-cadivi-y-simplificar%C3%A1-tr%C3%A1mites)

Oil & Energy

PDVSA says consolidated debt rose 8.4% in 2013

State oil company PDVSA says its consolidated financial debt rose 8.4% at the end of 2013 versus the year before to U$D 43.4 billion, not including its debt to service providers or financing for joint ventures. (Reuters, 01-22-2014; http://www.reuters.com/article/2014/01/22/venezuela-pdvsa-idUSL2N0KW0R220140122)

PDVSA is planning to repay Central Bank with domestic gold production

Rafael Ramírez, Venezuela's Vice President for Economic Affairs, Oil Minister and PDVSA President, has said PDVSA is working on a scheme to repay its debt with Venezuela's Central Bank with local - government controlled - gold production and credit it on the books in March. He added "it will not be necessary to obtain Central Bank financing this year". More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/petroleo/pdvsa/pdvsa-acordo-con-bcv-cancelar--con-oro-las-deudas-.aspx#ixzz2rJUopLSD)

Venezuela may meet new reality, and new price, at the pump

Venezuela has the world’s cheapest gasoline, about 6 cents a gallon, a price so low that drivers often fill their tanks for less than a dollar and tip the gas station attendant more than the cost of the fuel pumped into their cars. But the illusion of inexhaustible wealth that every citizen can effortlessly tap into at the nearest gas station may finally crash into hard reality. President Nicolás Maduro has called for what was once unthinkable: It is time, he has said, to raise the price at the pump. Mr. Maduro has not said when or how much he will raise the price, which has been frozen for 15 years, but the urgency in this beleaguered economy is clear. By some estimates, the government is giving away $30 billion worth of gasoline, diesel and other fuels each year, a huge loss at a time when it is running a large deficit, forcing it to print money. The state oil company is borrowing millions of dollars from the central bank to keep running, the country endures chronic shortages of basic goods, and last year inflation hit 56%, one of the highest rates in the world. But raising fuel prices can be politically risky, especially for a president like Mr. Maduro, who has struggled for acceptance during his first year in office, often viewed as a pale shadow of his charismatic predecessor and mentor, Hugo Chávez. Venezuelan officials have said the increase here will probably be gradual, with the goal of eventually charging enough to cover the costs of producing the gasoline. (New York Times)

U.S. fuel shipments to Latin America surge on wealth gain

Latin American nations are poised to accelerate imports of U.S. refined-oil products after failing to build refineries to meet demand from a growing middle class. Freight traders booked tankers to send 19 million metric tons of fuels from the U.S. to Latin America in the spot market last year, 5.4% more than in 2012, data compiled by Bloomberg show. Latin American refiners, including state-controlled Petroleos de Venezuela SA and Petroleo Brasileiro S.A., doubled U.S. imports in the past five years amid delays in building new refineries. (Bloomberg, 01-23-2014; http://www.bloomberg.com/news/2014-01-23/u-s-fuel-shipments-to-latin-america-surge-on-wealth-gain.html)

Commodities

Venezuela’s largest food company says dollar delays threaten supply

EMPRESAS POLAR SA, Venezuela’s largest privately-held company, said food production is at risk from record delays in the release of foreign currency by the government, fueling shortages of goods such as rice and milk. POLAR, which produces everything from beer to corn flour, can’t import more raw materials, equipment and packaging, the company said in an e-mailed statement today. Dollar shortages have increased the company’s debt with foreign suppliers by 194% in the past two years to U$D 463 million, the Caracas-based company said. (Bloomberg, 01-22-2014; http://www.bloomberg.com/news/2014-01-22/venezuela-s-largest-food-co-says-dollar-delays-threaten-supply.html)

Logistics & Transport

Venezuela's government versus the world's airlines

International airlines serving Venezuela are not on good terms with the country's government. The government owes them close to U$D3 billion in ticket sales, and is now trying to "negotiate" the debt, i.e., water it down so that it doesn't have to pay as much. In fact, one could say the government is downright expropriating the airline's hard-earned profits. In essence, the Venezuelan government has been subsidizing Venezuelans' overseas travel for years. The airlines were more than glad to transport them. Sadly, the Venezuelan government hasn't upheld its side of the bargain. Months have passed since the last time airlines were allowed to repatriate their profits. But with their coffers flush with Bolívares, the airlines now have too much cash in their hands. Since the Venezuelan currency is quickly losing its value -- inflation last year was close to 60% -- they have begun investing in local real estate. Partly as a result, prices for offices in Caracas have gone through the roof. The crisis came to the forefront a few weeks ago when the Spanish airline AIR EUROPA decided it would stop selling tickets in local currency and consider pulling out of Venezuela altogether. Other airlines have hinted at similar moves. AMERICAN AIRLINES and Colombia's AVIANCA have already cut back on their sales in local currency. In response, the government made AIR EUROPA an offer it cannot refuse: it promised the company a combination of cash, government bonds, and cheap airplane fuel. AIR EUROPA has not responded, but this feels like a final offer from the government, given the dire state of its finances. By acknowledging it does not have the cash to compensate the airlines, the government is reneging on its promise and, essentially, defaulting on its debt. The prospect for the airlines seems dim. Yesterday, in an announcement that amounted to a devaluation of the official dollar rate, the government surprised the airlines by announcing that their ticket sales would now be translated into dollars at a new, higher rate. It also said it was exploring ways to honor its commitment to past sales. The airlines had better brace themselves. After the Venezuelan government expropriates their profits, many airlines will decide to leave the country altogether, leaving Venezuelans increasingly isolated from the world. (Foreign Policy)

Government representatives meet with airlines representatives to discuss U$D 3.5 billion debt

Representatives of airlines operating in Venezuela met with Finance Minister General Rodolfo Marco Torres, Aquatic and Air Transport Minister General Hebert Garcia Plaza and Alejandro Fleming, President of the National Foreign Trade Center. García Plaza said in a Twitter statement: "We are committed to solve any difficulty, in benefit of the population". The meeting follows an announcement by Rafael Ramírez, Vice President for Economic Affairs, that airline operations will be paid using the new SICAD rate of approximately VEB 11.3/U$D. The total CADIVI Foreign Exchange Board FOREX backlog with airlines is around U$D 3.5 billion and is hurting company cash flow and dividend repatriation. It is believed the government intends to negotiate payment with each airline, using FOREX, bonds and fuel as means for repayment. Rafael Guerra, Director of the Tourism Industry Council says that for their sector to operate those debts "must be honored at VEB 6.3/U$D." (AVN, 01-23-2014; http://www.avn.info.ve/contenido/national-govt-meets-airlines-representatives; El Universal, 01-22-2014; http://www.eluniversal.com/economia/140123/dollars-for-airlines-at-the-forex-rate-of-ancillary-system; and more in Spanish: El Universal, http://www.eluniversal.com/economia/140124/solicitan-que-se-reconozca-deuda-de-aerolineas-a-630; El Mundo, http://www.elmundo.com.ve/noticias/actualidad/noticias/gobierno-fiscalizara-a-las-aerolineas-a-partir-del.aspx)

AVIANCA drops most since November as Venezuela devalues currency

AVIANCA Holdings SA (AVH) dropped the most since November after Venezuela devalued its currency for airlines, eroding the value of new sales in the country. American depositary receipts in the Colombian carrier tumbled 4.8% to U$D 17.30 at 1:16 p.m. in New York, the biggest one-day decline since Nov. 6. COPA Holdings SA, operator of Venezuela’s second-biggest international airline by capacity, dropped 4.7% to U$D 140.18 in New York. Airlines, Venezuelans traveling abroad and foreigners sending remittances home must use a secondary exchange rate determined at weekly auctions, Economy Vice President Rafael Ramirez said yesterday. The rate set at the latest auction was 11.36 bolivars per dollar, compared with the official rate of 6.3. Bogota-based AVIANCA has U$D 270 million, or half of its cash holdings, in the country, according to a third-quarter report. (Bloomberg, 01-23-2014; http://www.bloomberg.com/news/2014-01-23/avianca-drops-most-since-november-as-venezuela-devalues-currency.html)

AIR CANADA, TAP, INSEL Air and COPA halt ticket sales in Venezuela

Several airlines have stopped selling tickets in Venezuela, according to travel agencies, includin g AIR CANADÁ. TAP AIR PORTUGAL, INSEL AIR, COPA Airlines, plus TAME. They say SANTA BÁRBARA Airlines is selling tickets only through January 26th. Most airlines have restricted reservations to one or two months ahead. More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/economia/empresas/air-canada--tap--insel-air-y-copa-dejan-de-vender-.aspx#ixzz2rJTjU2R8; El Nacional, http://www.el-nacional.com/economia/Aerolineas-ordenaron-agencias-suspender-boletos_0_342565988.html)

12.543 containers currently lie abandoned at Venezuelan ports

General Hebert Garcia Plaza, Minister for Aquatic and Air Transport, reports there are 12,543 legally abandoned containers at Venezuelan ports, along with 23,000 separate pieces of cargo. Cargo is considered to be "legally abandoned" when no one claims it after a period of time determined by authorities. Mistakes in paperwork or the lack of a given permit can cause this situation. Authorities will carry out special operations to return refrigerated containers to carriers once cargo has been offloaded, and the government must the penalties for delays incurred. More in Spanish: (El Universal; http://www.eluniversal.com/economia/140124/hay-12543-contenedores-en-abandono-legal-en-puertos; El Carabobeño, http://www.el-carabobeno.com/impreso/articulo/91793/garca-plaza-existen-12.543-contenedores-en-abandono-legal)

Politics

Capriles: Without shadow of a doubt this is devaluation

Venezuelan opposition leader Henrique Capriles Radonski says that although the Venezuelan government "makes up and changes everything," the adoption of a dual-rate forex system, announced on Wednesday, was nothing but devaluation. Further on, referring to his political position, Capriles said, "I have not lowered my guard or remained in silence. The thing is that I have been silenced by some media outlets following the government's orders." (El Universal, 01-23-2014; http://www.eluniversal.com/nacional-y-politica/140123/capriles-without-shadow-of-a-doubt-this-is-devaluation)

Venezuela will propose Puerto Rico as a member of PETROCARIBE

President Nicolás Maduro says he will propose the entry of Puerto Rico as special member of the regional bloc in the next meeting of PETROCARIBE. He said he would also propose Puerto Rico's entry into the Community of Latin American and Caribbean States (CELAC), during the meeting to be held on January 25-29 in Cuba. (El Universal, 01-23-2014; http://www.eluniversal.com/nacional-y-politica/140123/venezuela-to-propose-entry-of-puerto-rico-to-petrocaribe)

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.