February 14, 2014

Economics & Finance

Venezuelan bonds down 3% and still dropping...

Venezuela and PDVSA's global bonds, which fluctuate sharply on political tension and news of unrest, were down as much as 3% yesterday and are reported tanking today. (Reuters: http://uk.reuters.com/article/2014/02/13/uk-venezuela-protests-idUKBREA1C1FG20140213; pic.twitter.com/tmm1EytIao; and more in Spanish: El Mundo, http://www.elmundo.com.ve/noticias/economia/mercados/bonos-venezolanos-bajaron-tras-resultados-de-prote.aspx#ixzz2tI4tNrsr; El Universal, http://www.eluniversal.com/economia/140214/aumenta-percepcion-de-riesgo-y-caen-los-bonos-de-la-republica)

Bonds create a bind for Venezuela

When it comes to choosing between its own people and Wall Street, Venezuela's socialist government has picked the latter—at least in regard to allocating foreign currency. The country has paid its overseas bondholders right on time. But the cash-strapped government is in hock to the tune of U$D 50 billion to the private companies that service its economy. They range from oil contractors and airlines to supermarkets that need dollars to import everything from flour to toilet paper. "They've forgone paying private companies because they feel the cost of not doing so is manageable, but they've continued paying the bonds," said Asdrubal Oliveros, head of consultancy ECOANALITICA. Any default on its more than U$D 60 billion in bonds would turn the nation into an international pariah, cutting it off from loans it needs to run its oil industry, which provides 96% of Venezuela's hard-currency earnings. Despite high oil prices, the government estimates it lost nearly U$D 20 billion in hard currency through fraud and corruption in its central foreign-exchange agency last year. Economy Vice President Rafael Ramirez says debts with private companies need to be negotiated, offering no guarantees to pay all that companies say is owed. He also has sought to comfort bond investors by saying that Venezuela "hasn't failed nor will it fail to comply with any of its commitments with respect to its external debt." Still, Miguel Octavio, who manages U$D 500 million in assets for Venezuelan clients with BBO Financial in Caracas, said he stopped investing in the country's bonds after Maduro took office: "It's nice to say that you're not going to default, but two, three years down the road, when you can't even feed your own people, what are you going to do?" (The Wall Street Journal, http://online.wsj.com/news/article_email/SB10001424052702303874504579377542520825148-lMyQjAxMTA0MDEwMzExNDMyWj)

With oil economy running on fumes, Venezuela 'on the edge of the apocalypse'

Venezuela is a leading candidate for next collapsed state. “To be Venezuelan today is to live on the edge of the apocalypse, convinced it will happen tomorrow,” says Alberto Barrera, biographer of the late Venezuelan president Hugo Chavez. “But then, we’ve been expecting the crisis at any moment for years now.” The apocalypse hasn’t come yet. “The crash never comes because Venezuela has an insurance other countries don’t have – one of the largest oil reserves in the world,” says Jorge Roig, president of the Federation of Chambers of Commerce. Venezuela’s economic indicators defy logic, he said, but the international thirst for oil has postponed the day of reckoning. Meanwhile, the safety net is starting to tatter. Production by the national oil company, Petroleos de Venezuela, S.A, or PDVSA, is declining, although the government won’t say by how much. The company is crippled by debt, has no cash to invest in operations, must operate on the posted exchange rate, and has been turned into a bizarre do-everything organization that makes jam and processed chicken, builds houses and runs neighborhood health clinics. The runaway inflation rate and shortages call for harsh economic medicine: a currency devaluation, an end to state subsidies, a lifting of exchange and price controls, but President Maduro has given no sign he intends to take more dramatic steps, and risk the ire of both his base and the hard-left political powers behind him. Richard Obuchi, the public policy expert, predicts another year of rising inflation and greater shortages. Mr. Barrera, believes the end of the Chavismo project may finally come, in an instant. “The day that oil prices so much as flicker,” he says, “we become a cannibal society.” (The Globe and Mail, http://www.theglobeandmail.com/news/world/venezuelas-economy-on-the-edge-of-the-apocalypse/article16845406/)

Let's watch Venezuela destroy itself

Venezuela, a country blessed by vast oil reserves, seems to have an uncanny knack for killing businesses. At least three airlines have grounded flights to and from Venezuela so far this year, in part because the nation's government owed the carriers U$D 3.3 billion in foreign exchange they need to pay operating costs. The government suggested it could pay them with government bonds and cheap fuel, but precious little cash. This should do wonders for getting planes flying again. Carmakers are also in trouble. TOYOTA Motor Corp. is halting production in Venezuela, while FORD Motor Co. is reducing output. A mere 722 vehicles were sold in a country of almost 29 million people last month. Trade group CAVENEZ reckons this amount to an 87% drop in sales in one year. FORD’s chief financial officer, Robert Shanks, understated the problem when he told Bloomberg that “price controls and a very limited and uneven supply of foreign currency to support production, have affected output adversely.” So adversely that CHRYSLER, FORD and GENERAL MOTORS produced no vehicles in Venezuela last month. (Bloomberg, 02-13-2014; http://www.bloomberg.com/news/2014-02-13/let-s-watch-venezuela-destroy-itself.html)

PROCTER & GAMBLE cuts profit forecast on currency effects

PROCTER & GAMBLE Co. (PG), the world’s largest consumer-products maker, lowered its forecast for profit and sales growth this year because of currency exchange-rate fluctuations and policy changes in Venezuela. Core earnings per share, which excludes some restructuring charges, will increase 3% to 5% this year, down from a previous forecast of 5% to 7%, the company said yesterday in a statement. Revaluing some portions of its business in Venezuela at the government-set exchange rate will result in a charge of as much as 10 cents a share, P&G said. (Bloomberg, 02-12-2014; http://www.bloomberg.com/news/2014-02-11/procter-gamble-cuts-profit-forecast-on-currency-effects.html)

Venezuela planning third dollar supply system as scarcity rises

Venezuela is reforming its currency laws to start a third dollar allocation system in the “coming hours,” says President Nicolas Maduro as a shortage of greenbacks pushed product scarcity to a record. “The idea is to have supply of foreign exchange beyond the state, regulated by the state, combining market mechanisms with state direction,” he says. The mechanism would come in addition to the state’s currency board that sells dollars at the official rate of 6.3 bolivars per dollar and an auction system that last sold U.S. currency at 11.36 bolivars per dollar, he said. Economy Vice President Rafael Ramirez said last week the country planned to start operating a new currency swap market before the end of the month that would be different from one that was shuttered in 2010. The new market is being called SICAD II, and as financial sources explained, the idea is to incorporate a new controlled mechanism where not everyone can buy foreign currency and the exchange rate will fluctuate within a band. FOREX would be supplied by both private and public companies, including PDVSA. (Bloomberg, 02-12-2014; http://www.bloomberg.com/news/2014-02-12/venezuela-planning-third-dollar-supply-system-as-scarcity-rises.html; El Universal, 02-13-2014; http://www.eluniversal.com/economia/140213/exchange-rate-imbalances-lead-to-incorporation-of-a-new-forex-market)

Central Bank of Venezuela to establish ceiling in SICAD auctions

Under the newly established exchange system, the National Center for Foreign Trade (CENCOEX) will determine sectors that will be allowed to buy US dollars in auctions by Ancillary Foreign Currency Administration System (SICAD), while the Central Bank will set the ceiling for each auction. The minimum amount to be auctioned has been set at USD 220 million. (El Universal, 02-13-2014; http://www.eluniversal.com/economia/140213/central-bank-of-venezuela-to-establish-ceiling-in-sicads-auctions)

January food shortage the highest in five years

Staple shortage hit 26.2% in January, 8% up with respect to January 2013. The figure is also the highest for the first month of the year since 2010, according to the Central Bank. In general terms, scarcity extends to 26 out of 100 staples as a result of the imbalance in the Venezuelan economy, afflicted by a supply-demand mismatch. Luis Vicente Leon, of the DATANÁLISIS research firm, explains that even if the Government tries to solve this problem, shortage will escalate in the next two months given the production gap. (El Universal, 02-13-2014; http://www.eluniversal.com/economia/140213/venezuelas-food-shortage-in-january-the-highest-in-five-years)

Oil & Energy

PDVSA and REPSOL to sign U$D 1.2 billion financing agreement

Petróleos de Venezuela (PDVSA) and Spain's REPSOL are today signing an agreement for the European firm to invest U$D 1.2 billion into the PETROQUIRIQUIRE mixed venture. (El Universal, http://www.eluniversal.com/economia/140214/pdvsa-y-repsol-firmaran-financiamiento-por-1200-millones)

Logistics & Transport

Cost of port services increased by 80%

Just as President Maduro is asking the private sector to "self-regulate" the price of products and services, the Government itself is adjusting their charges to the public along the lines of the new SICAD rate of VEB 11.36/U$D. The Port Authority has now increased charges for port services by 80%, to be paid by importers and shipping companies. One customs agent says: "The impact is enormous. What will companies that have controlled prices do? What will happen is that they will reduce imports."  The Port Authority (BOLIPUERTOS) intends to continue adjusting costs upwards as the SICAD rate rises. Increased charges apply to aeronautic services, airport, port and nautical services, rentals, landing and docking rights, loading and offloading, piers, parking, storage, expedition, and all services by the government. More in Spanish: (El Universal, http://www.eluniversal.com/economia/140212/bolipuertos-incremento-80-el-precio-de-servicios-portuarios)

Merchandise with over 30 days in Venezuelan ports will be deemed “legally abandoned” and will be allotted “to the ministries of the corresponding areas so that it can be used for the benefit of the people,” says Major General Hebert García Plaza, Aquatic and Air Transport Minister Major General Hebert García Plaza. (Veneconomy, 02-13-2014; http://www.veneconomy.com/site/index.asp?ids=44&idt=38071&idc=3)

Politics

Student protest ends in deadly violence

At least three people were shot dead as violence erupted during anti-government protests in Caracas, on Wednesday. The violence broke out after most demonstrators had gone home following a mainly peaceful rally. Two people died after gunmen on motorbikes opened fire on the remaining crowd. A third died in later clashes. The march was the latest in a series of mass protests against the policies of President Nicolas Maduro. A crowd of demonstrators, many of them students, marched to the federal prosecutor's office to demand the release of 13 protesters who they say were illegally detained in previous marches. A small group of protesters stayed behind after the end of the main march and clashed with the security forces. It was at that time that a number of armed men on motorcycles shot at the crowd, triggering a stampede. One anti-government protester was hit by a bullet and killed. Also shot in the ensuing chaos was a government activist who is part of the pro government motorcycle squads that usually harass opponents. It is not clear whether the two victims were hit by the men on motorcycles or by other assailants. The president of Venezuela's National Assembly, Diosdado Cabello, blamed the killing of Montoya on "fascists", without further clarifying who they might be. A third man was shot dead during anti-government protests in the east of the capital. President Nicolas Maduro condemned the incidents, which he blamed on a "neo-fascist upsurge". The president called for peace, but stressed that those who engaged in violence would not go unpunished. Metropolitan Caracas Mayor and opposition leader Antonio Ledezma said:"Just as we condemn the violent incidents, we say to all Venezuelan families that we have to remain ready to continue fighting, calmly but with determination..."You have to know, Mr Maduro, that whatever you do, what started today will not stop until change is achieved in peace and with democracy for all Venezuelans," he added.(BBC, http://www.bbc.co.uk/news/world-latin-america-26166094)

Maduro bans street protests, yet protests continue nationwide

President Nicolas Maduro banned street demonstrations after at least three people died as protesters clashed with government supporters. About 50,000 pro-opposition Venezuelans marched through Caracas to protest product shortages, violence and to demand the release of students arrested in provincial towns this month. Students have continued to protest in the streets of the main cities in Venezuela, which are being heavily patrolled by the military, despite Maduro's order. Protesters in Barcelona (Anzoátegui state) were dispersed with tear gas and pellets; protests continued in Ciudad Guayana (Bolívar), throughout Táchira state, in Valencia (Carabobo), Maracaibo (Zulia), Punto Fijo (Falcón) and the island of Margarita.  (Latin American Herald Tribune, 02-13-2014; http://www.laht.com/article.asp?ArticleId=1599634&CategoryId=10717; Reuters, http://www.reuters.com/article/2014/02/13/venezuela-protests-idUSL2N0LH11420140213; Bloomberg, http://www.bloomberg.com/news/2014-02-12/venezuelan-protests-turn-violent-as-two-people-killed.html; Fox News, 3 Venezuelans shot and injured in anti-government protests; and more in Spanish: El Universal, http://www.eluniversal.com/nacional-y-politica/140214/recrudecieron-las-protestas-en-calles-de-ocho-ciudades)

Minister of Interior says protests are of a conspiratorial nature

Major General Miguel Rodríguez Torres, Minister of the Interior, Justice and Peace, claims the violent events occurring on Wednesday "are not protests of a social character but of a conspiratorial nature... It is not a spontaneous event, but there is plotting intended to set the country on fire in an irrational manner," he reasoned. (El Universal, 02-13-2014; http://www.eluniversal.com/nacional-y-politica/140213/venezuelas-minister-of-interior-protests-are-of-a-conspiratorial-natur)

Colombian's TV network NTN24 has been cut off the air from DirecTV and Movistar cable systems on orders from CONATEL, the government agency regulating communications. NTN24 was the only TV station broadcasting the opposition march in live, along with the events that took place soon after the march concluded. NTN24 can still be followed via its YouTube channel live. During a later speech, President Maduro said he ordered the shutdown and called it a "State decision". (Veneconomy, 02-13-2014; http://www.veneconomy.com/site/index.asp?ids=44&idt=38072&idc=3; El Universal, http://www.eluniversal.com/nacional-y-politica/140213/ntn24-ceo-it-is-an-affront-to-freedom-of-expression)

Protest leader unseen amid arrest rumors

A hard-line leader of Venezuela’s opposition dropped out of sight amid media reports that an arrest order had been issued charging he incited violence at anti-government protests that resulted in three deaths. Leopoldo Lopez was last heard from Wednesday night at a news conference where he vowed that demonstrations against President Nicolas Maduro’s 10-month-old government would continue. Allies dismissed any notion the Harvard-educated former mayor was lying low. They said Lopez was at his home in Caracas trying to verify the authenticity of a judge’s order that purportedly authorizes his arrest on charges including conspiracy, murder and terrorism. Lopez’s backers also denounced an attempt by armed military intelligence officers to search the offices of his Popular Will party Thursday, calling it an effort to intimidate members. Lawyers for the party turned the officers away because they didn’t have a warrant. Maduro and several Cabinet officials have denounced him as the “mastermind” of what they called a strategy to replicate the unrest that preceded the 2002 coup that briefly removed President Hugo Chavez from power. Venezuela’s two political camps traded blame for violent clashes Wednesday that began when a group of pro-Maduro vigilantes roared up on motorcycles and fired guns at a small crowd of demonstrators who had been sparring with police. Lopez’s allies blamed the blamed the violence on the government. Lopez, the leader of a splinter faction of the opposition alliance challenging what he considers the meek leadership of two-time presidential candidate Henrique Capriles, has vowed to remain on the streets. But analysts and even some members of the opposition question whether that strategy, known as “The Exit” to mobilize people who turned out for Wednesday’s protest, could end up strengthening Maduro’s hand and undermine two years of steady electoral gains by the opposition. While Venezuela’s economy is sinking deeper every day, the moment hasn’t arrived for a Ukraine-like standoff on the streets, said Carlos Romero, a political analyst at the Central University of Venezuela. Maduro has done a skillful job winning the loyalty of the military, traditionally the arbiter of political disputes in Venezuela, and foreign governments are load the to exert too much pressure on the president, Romero said. (The Washington Post: http://www.washingtonpost.com/world/the_americas/2-killed-as-venezuelan-protests-turn-violent/2014/02/12/12182678-9445-11e3-9e13-770265cf4962_story.html; Reuters, 02-13-2014; http://www.reuters.com/article/2014/02/13/us-venezuela-protests-idUSBREA1B1K220140213; http://www.reuters.com/article/2014/02/13/us-venezuela-protests-lopez-idUSBREA1C1F220140213; Veneconomy, http://www.veneconomy.com/site/index.asp?ids=44&idt=38081&idc=1; Fox News, http://www.foxnews.com/world/2014/02/13/venezuela-opposition-leader-drops-out-sight-as-arrest-rumors-swirl/)

Capriles asks Maduro to put an end to armed gangs, release students

Miranda state governor Henrique Capriles Radonski expressed his sympathy to the relatives of the three people killed at the end of student demonstrations in Caracas. Capriles Radonski condemned violence and demanded that the Venezuelan government not to "behave like Little Red Riding Hood, as there are videos and photos of gangs armed by the government that shot at young people." (El Universal, 02-13-2014; http://www.eluniversal.com/nacional-y-politica/140213/venezuelan-opposition-leader-asks-president-maduro-to-end-with-armed-g)

OAS Secretary General Insulza condemns violence in Venezuela

OAS Secretary General José Miguel Insulza has condemned violence on the streets of Venezuela and calls upon "all parts to avoid new confrontations that could aggravate existing tensions, creating more victims". He called upon authorities to carry out a "truthful, objective and transparent investigation that assigns responsibility for those dead and wounded, according to Venezuelan laws, by courts of law, with respect for human rights and due process". More in Spanish: (El Universal, http://www.eluniversal.com/nacional-y-politica/140214/insulza-rechazo-hechos-violentos-en-venezuela)

Protests could mark a turning point

The relatively large turnout and widespread geographic distribution of this week's protests indicate that the movement may be gaining traction. The protests have turned violent in some instances when the National Guard attempted to disperse the protesters. Further violence is likely, particularly as reports emerge that pro-government urban motorcycle gangs have come out to attack protesters in at least two instances.  The challenge that the student movement will face is in finding a way to include Venezuela's laboring class, which for the most part still supports the government, and relies on its redistributive policies. Their inability to rouse broad support across Venezuela's social and economic classes was in part why previous student uprisings, including significant protests in 2007, failed to generate enough momentum to trigger a significant political shift. But as the economic situation deteriorates there is a chance that protests like this could begin to generate additional social momentum in rejection of the status quo. The government cannot afford to crack down too hard without risking even worse unrest in the future. For its part, the mainstream opposition must walk a careful line between supporting the sentiment behind open unrest and being seen as destabilizing the country. Maduro has stated that he intends to renew the law allowing him to outlaw political candidates who threaten the peace of the country. The statement may foreshadow a more aggressive government policy designed to limit political opposition. (Stratfor; http://www.stratfor.com/sample/video/venezuelas-protests-could-mark-turning-point)

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.