March 11, 2014

Economics & Finance

Government again delays dollar supply boost amid discrepancies over brokerage

Venezuela’s government has failed to publish details of an announced new foreign exchange market. There was no mention of rules in the Official Gazette, where they must appear before the system can be implemented. Economy Vice President Rafael Ramirez said March 7 that the so-called SICAD 2 market would begin yesterday and that the government wouldn’t impose any restrictions on trading. Francisco Rodriguez, an economist at Bank of America, says the Bolivar would probably weaken in the new market to between 25 and 40 to the dollar, after trading at 11 in an auction at the end of February. The new delay in launching the system seems to be due to technical difficulties, and discrepancies among authorities over which parties may act as brokers within SICAD 2. Finance Minister General Rodolfo Marco Torres wants to limit trading to banks, while Ramírez and Central Bank President Nelson Merentes would include brokerage houses. Economist José Guerra has reported that SICAD 2 will not be a free market but will function as an auction with no certain allocation. (Bloomberg, http://www.bloomberg.com/news/2014-03-10/venezuela-looks-to-ease-dollar-shortage-fueling-mass-protests.html; and more in Spanish: El Nacional; http://www.el-nacional.com/)

Experts say new trading system is insufficient to fill fiscal gap

Experts say the new SICAD 2 system alone is not enough to tackle the fiscal imbalance and boost the economy.
José Guerra, former head economic researcher at the Central Bank, explains that state-owned oil corporation PDVSA is likely to sell some U$D 30 million daily within SICAD II at a exchange rate of VEB 30/U$D, which would cover only 3% GDP - and the crisis will continue. (El Universal, http://www.eluniversal.com/economia/140310/experts-venezuelas-sicad-ii-is-insufficient-to-fill-fiscal-gap)

Venezuela renews U$D 5 billion China credit line, seeks Russia financing

Venezuela is renewing a U$D 5 billion credit line with China that will be repaid in oil and other fuels and is negotiating a financing deal with Russia for an undisclosed sum, the country's economy vice president said on Friday. Rafael Ramirez said Venezuelan officials had visited China and Russia and held meetings with officials, including Russian President Vladimir Putin, to arrange new financing deals. The Joint Chinese-Venezuela Fund, which focuses on infrastructure and economic development in the South American country, will receive U$D 5 billion from China as part of a renewal of one of three tranches, Ramirez said. Ramirez declined to provide details on terms of the agreement with Russia or the amounts in question, though he said it had been approved in a meeting with Putin. Ramirez did not provide details of how much Venezuela owes China under existing financing arrangements. But he said total shipments to pay for outstanding loans amount to less than 250,000 barrels per day (bpd). The China fund is tied to infrastructure projects. (Reuters: http://www.reuters.com/article/2014/03/07/venezuela-financing-idUSL1N0M41L320140307)

Government plans card for rationing subsidized food sales

The Government is planning to offset the impact of inflation and scarcity by establishing an e-card which would allow consumers to buy a limited number of goods in state-owned food retail networks such as MERCAL and PDVAL. It has become unsustainable for the government network to maintain subsidies on products sold at its outlets, some of which are sold there at 62% beneath the fixed price and have not been revised since 2009. The National Consumers and Users Union (ANAUCO) also calls it a "rationing card"; and Luis Vicente León, head of DATANALISIS, concurs and says MERCAL and PDVAL outlets are "rationing sales as one is not allowed to make daily purchases there". Tomás Guanipa, Secretary General of the opposition Primero Justicia party, says it is simply a rationing card that is no different from the one used in Cuba. (El Universal, http://www.eluniversal.com/economia/140310/venezuelan-govt-designs-e-card-to-ensure-food-supply; and more in Spanish: http://www.el-nacional.com/politica/Primero-Justicia-rechaza-propuesta-racionamiento_0_370163066.html; El Universal, http://www.eluniversal.com/economia/140311/la-presion-recae-sobre-subsidio-de-la-red-estatal-de-alimentos, http://www.eluniversal.com/economia/140311/la-tarjeta-es-mal-vista)

CAPITAL ECONOMICS Report - Venezuela: Creaking current account points to default

The Chavez legacy of fiscal largesse and rampant inflation has left the economy on the brink of a balance of payments crisis. With social unrest growing, there is an increasing threat that the government will default on its mounting external debt in order to ease widespread shortages that are crippling the economy.

• Multiple expropriations have eroded the economy’s supply potential, while super-loose economic policy has boosted demand. The result has been a growing reliance on imported goods. But with oil production, which is virtually the only source of export revenues, in long-run decline, severe strains in the balance of payments have come to the fore. As a result, Venezuela now suffers from widespread shortages and rampant inflation.
• It has been argued that Venezuela’s large current account surplus means that it cannot suffer a balance of payments crisis. But some of the data appear to be questionable. While the government reports that oil production is close to 3m barrels per day (bpd), independent estimates from the EIA report that production is much lower at 2.3m bpd.
• Plugging the independent estimates of oil production into the current account has a startling impact. On this basis, CE estimates that exports are around 11% lower than the official data report. What’s more, the subsequent deterioration in the trade balance leaves the current account looking much less healthy.  Indeed, CE estimate suggest that Venezuela may have actually posted a small current account deficit last year. Coupled with insatiable capital flight, it quickly becomes clear why the economy is crippled by a dollar drought.
• Looking ahead, with the government running out of options to increase the supply of hard currency, the dollar drought looks set to worsen. The recent announcement of SICAD2 has been welcomed by the market. FX bond yields have fallen back in recent days having previously spiked through our forecast of 16%. But while SICAD2 looks good on paper, the reality is that it is just a re-hash of previous announcements – none of which were successful in boosting the supply of foreign currency. In reality, SICAD2 is just another devaluation through the back door.
• In addition, foreign exchange reserves have collapsed. Cash reserves are virtually zero. And while the central bank reports total FX reserves of over U$D 20bn, supposedly largely comprised of gold, the authorities have so far been unable to use these reserves in order to boost foreign currency liquidity.
• The upshot is that Venezuela seems doomed to a balance of payments crisis. The Bolivar appears to be drastically over-valued. With the government running out of money a large devaluation seems likely. More importantly from an investor’s point of view, there are severe question marks over the government’s solvency. With people out on the streets protesting against widespread shortages, President Maduro may soon be faced with a stark choice between servicing the government’s debt or importing basic goods. With U$D 10bn of debt servicing due this year, CE reiterates its long-held view that there is a high chance of default. (Capital Economics: https://www.capitaleconomics.com/latin-america-economics/latin-america-update/venezuela-creaking-current-account-points-to-default.html)

An up to date income tax return will be a prerequisite to securing FOREX in SICAD (1 and 2), according to SENIAT (Tax Authority) Superintendent José David Cabello. The deadline for filing is March 31. (Veneconomy, http://www.veneconomy.com/site/index.asp?ids=44&idt=38385&idc=2)

Oil & Energy

Colombia plans pipeline to the Pacific without Pdvsa's help

A U$D 67 billion bi-national oil pipeline planned by state-run oil holding Petróleos de Venezuela (PDVSA) to carry hydrocarbons produced in Venezuela and Colombia to the coast of the Pacific Ocean for shipment to Asia, mainly to China, starting in 2016. Will now be built by Colombian state-run oil company ECOPETROL, not with PDVSA, but with Canadian ENBRIDGE and only in Colombian territory in light of PDVSA's delays. While Colombian Energy Vice-Minister Orlando Cabrales says ECOPETROL will continue discussing the 8 year old project with PDVSA, ECOPETROL has contacted ENBRIDGE to lay an 800-km pipeline from Colombian central plains to the Pacific coast. (El Universal, http://www.eluniversal.com/economia/140310/colombia-plans-pipeline-to-the-pacific-without-pdvsas-help)

Venezuela oil price slips

Venezuela's weekly oil basket stayed below the country's desired U$D 100 a barrel floor and slipped slightly.

According to figures released by the Ministry of Energy and Petroleum, the average price of Venezuelan crude sold by Petroleos de Venezuela S.A. (PDVSA) during the week ending March 7 was U$D 97.76, down U$D 0.20 from the previous week's U$D 97.96. (Latin American Herald Tribune, http://www.laht.com/article.asp?ArticleId=1735224&CategoryId=10717)

International Trade

Panamá won't block Venezuelan ships going through the Canal, Maduro says debt will be paid

Panama is about to take steps against Venezuela in response to President Maduro freezing negotiations over the U$D 1.2 billion debt Venezuelan importers have with Colón Free Zone exporters, but these steps do not include restricting cargo to and from Venezuela through the Panama Canal, says Roberto Henríquez, Panamanian Minister for the Presidency. Maduro has said Venezuela will pay Panamanian companies that "truly shipped products" and says he will set up a negotiating group, "without corrupt intermediaries". Panamanian exporters, through Luis Germán Gómez Giraldo, head of the Colón Free Zone Merchants Association, who in response to accusations of corruption from Venezuelan officials responded they "have nothing to fear", and they are open to Venezuela scrutinizing their invoices. The Maduro regime had claimed 90% of the debt is fraudulent. Panamanian businessmen from the Colón Free Zone suspended all shipments of merchandise to Venezuela until the scope of the “freeze” of commercial relations announced by Nicolás Maduro on Wednesday is known. By the end of October 2013, the value of the imports from Panama was $1.2 billion, according to figures from the Venezuelan National Institute of Statistics.( Fox News, http://www.foxnews.com/world/2014/03/09/following-break-in-ties-venezuela-says-most-1-billion-debt-to-panama-companies/; Veneconomy, http://www.veneconomy.com/site/index.asp?ids=44&idt=38394&idc=3; http://www.veneconomy.com/site/index.asp?ids=44&idt=38383&idc=3; and more in Spanish: Ultimas Noticias, http://www.ultimasnoticias.com.ve/noticias/actualidad/mundo/panama-no-bloqueara-paso-de-buques-venezolanos-por.aspx#ixzz2veMReMa0; El Mundo, http://www.elmundo.com.ve/noticias/economia/internacional/panama-no-bloqueara-paso-de-buques-venezolanos-por.aspx; El Universal, http://www.eluniversal.com/economia/140311/descartan-restringir-paso-de-carga-local-por-canal-de-panama; El Mundo, http://www.elmundo.com.ve/noticias/economia/internacional/maduro--venezuela-pagara-a-empresarios-panamenos-q.aspx#ixzz2vYVNT1pj; http://www.elmundo.com.ve/noticias/actualidad/noticias/panamenos-no-temen-investigacion--siempre-que-vene.aspx#ixzz2veNdCDEu;)

...as Panamá threatens to expose 'Chavista' officials bank accounts

Minister Henríquez went on to say: "how can Maduro speak of corruption, when they have used the banking center to hide fortunes. They have plundered their country...Maduro has placed Venezuela at the service of the small group that supports him and controls the country by force, and much of that money is in the (Panamanian) banking center". More in Spanish: (Infobae, http://www.infobae.com/2014/03/10/1549200-panama-amenaza-destapar-las-cuentas-bancarias-funcionarios-chavistas)

Logistics & Transport

Trade Minister says distribution down 60%

Venezuela's Trade Minister Dante Rivas reports that carriers, merchants and associations say barricades along key routes have brought distribution of key products down by 60%, and signals Aragua, Carabobo, Táchira and Mérida states among the hardest hit. More in Spanish: (AVN; http://www.avn.info.ve/contenido/dante-rivas-acciones-grupos-violentos-mermaron-60-abastecimiento; El Mundo, http://www.elmundo.com.ve/noticias/economia/politicas-publicas/mincomercio-asegura-que-el-abastecimiento-bajo-60-.aspx; El Universal, http://www.eluniversal.com/economia/140310/rivas-dice-que-las-protestas-mermaron-en-60-el-abastecimiento)

Politics

Maduro unexpectedly cancels his trip to Bachelet inaugural in Chile

President Nicolás Maduro is reported to have cancelled his planned trip to Chile to attend the inaugural of Michelle Bachelet. A source at the Venezuelan Embassy in Santiago said: "He will not arrive". His arrival had been reported delayed. Foreign Ministers of the South American Union (UNASUR) are scheduled to meet in Santiago to discuss the situation in Venezuela. Venezuela's delegation will be headed by Foreign Minister Elías Jaua. Many demonstrators had rallied at Santiago's La Moneda Presidential Palace the night before, to protest Maduro's visit. More in Spanish: (AFP/NTN24, http://www.canalntn24.com/node/124226; Ultimas Noticias, http://www.ultimasnoticias.com.ve/noticias/actualidad/mundo/protestan-por-llegada-de-nicolas-maduro-a-chile-pa.aspx#ixzz2veJjdAue)

OAS Secretary General Insulza suggests South American foreign ministers or Church could mediate between the government and the opposition in Venezuela. "It could be the Church, or some other international organization, I am not saying it has to be the OAS." He added that Venezuela is going through "a crisis of trust" in which each side does not recognize the other as a legitimate party to talks in order to reach agreements; and said that each side must address the other "more respectfully". More in Spanish: (El Nacional, http://www.el-nacional.com/mundo/Insulza-Iglesia-cancilleres-suramericanos-Venezuela_0_370163109.html)

Lula says Maduro "made a mistake" in not engaging in talks with the opposition

Former Brazilian President Luiz Inácio Lula da Silva says President Nicolás Maduro made a mistake in not engaging Venezuela's opposition in a dialogue. "The country is going through a period of turbulence: it is not easy to survive the loss of a leader like Chavez and I think Maduro made a mistake in not doing more to start necessary talks with the opposition", he said. More in Spanish: (El Universal, http://www.eluniversal.com/nacional-y-politica/140311/lula-cree-que-maduro-se-equivoco-al-no-dialogar-con-la-oposicion)

UN Human Rights Commissioner receives new claims of torture in Venezuela, López detention considered "excessive"

The Office of the UN High Commissioner for Human Rights has received new claims of alleged torture in Venezuela, Argentina's Juan Mendez, UN Special Rapporteur on Torture and Other Cruel, Inhuman and Degrading Treatment or Punishment, reports: "We are receiving new claims. They are varied and those within my responsibility, particularly some of them, fortunately a few of them, have to do with very severe treatment concerning torture," Méndez told AFP. Mendez also complained that opposition leader Leopoldo López is being held in isolation within a military prision, saying "one can protect a detainee without putting him into isolation. But the problem is the reason they have detained him. Organizing a peaceful demonstration is no reason to detain him, and much less in a military prison and much less in isolation. Mr. López is accused of inciting violent demonstrations and doing so on behalf of foreign nations. The government must prove it and in the meantime the action of detaining someone who has organized a peaceful demonstration, only because a part of it became violent, seems excessive." He said they found the reports of torture "credible, asked the government to respond, but have not yet received a reply". (El Universal, http://www.eluniversal.com/nacional-y-politica/140310/un-receives-news-claims-of-torture-in-venezuela; more in Spanish: BBC)

Student leader killed in anti-government clashes

Clashes between anti-government protesters and state security forces have resulted in the death of student leader who was fatally shot in the chest in the university city of San Cristobal, as protests continue to rock the country. City mayor Daniel Ceballos, said the student, Daniel Tinoco, had been killed after dark, although he did not say who might be responsible. The incident came after a full day of street clashes between both peaceful and violent protesters and the Venezuelan security forces. Ceballos accused the government forces of reacting disproportionately, claiming that “where the government sees paramilitaries, in truth there are just citizens who are defending themselves.” (Time, http://time.com/19658/venezuelan-student-leader-killed-in-anti-government-clashes/)

Maduro's position with the military appears eroding

Nicolás Maduro has given the vigilante guardians of the "Bolivarian revolution" carte blanche to violently crush the massive protests against his government. But, according to analysts, repression is simply underlining the image of a totalitarian regime, which feeds more protests and increases the risk of military intervention. Antonio De La Cruz, of Inter American Trends says: "it is increasingly obvious that Maduro's time is short. It will take a lot to prop it up as it no longer guarantees stability or governance..Maduro is no longer part of the solution for 'chavistas' who want to continue ruling...and participants have already begun to see where else the solution might be". Diego Moya-Ocampos, senior analyst for the Americas at IHS Global Insight/IHS Jane’s, says: "the only institution left standing in the nation with the power to pressure the different parties into concrete results are the nation's armed forces." De La Cruz adds: "The internal situation of 'chavismo' is truly desperate." Moya-Ocampos believes the military side of 'chavismo' is closely watching the deteriorating political and social situation, and the very clumsy handling of the situation. "Up to now there is no evidence of an internal fracture, but there is a lot of concern and constant monitoring of what is going on." If the poorer segments of the population massively join the protests could be the decisive element since they have been the stronghold of 'chavismo'. "And that is starting to happen", says Moya-Ocampos, who has been closely tracking the Venezuelan crisis. More in Spanish: (El Nuevo Herald, http://www.elnuevoherald.com/2014/02/28/1690844/se-debilita-la-posicion-interna.html#storylink=cpy)

Biden says Venezuela 'concocting' bogus stories, rules out intervention

U.S. Vice President Joe Biden calls Venezuela's situation alarming, suggesting its government is using "armed vigilantes" against peaceful protesters and accusing it of "concocting false and outlandish conspiracy theories" about the United States. His remarks drew an angry rebuke from Venezuelan President Nicolas Maduro: "We reject their aggression," he said, "they were defeated in the OAS and now they want revenge." Biden told Chile's El Mercurio daily: "The situation in Venezuela reminds me of previous eras, when strongmen governed through violence and oppression; and human rights, hyperinflation, scarcity, and grinding poverty wrought havoc on the people of the hemisphere". Rather than engaging the opposition in a "genuine dialogue," Biden added, "Maduro has thus far tried to distract his people from the profound issues at stake in Venezuela by concocting totally false and outlandish conspiracy theories about the United States." Maduro later met at the presidential palace with actor-activist Sean Penn, who was shown on state television and made no public comments. (The Houston Chronicle: http://www.chron.com/news/world/article/Biden-says-Venezuela-concocting-bogus-stories-5301798.php; Latin American Herald Tribune, http://www.laht.com/article.asp?ArticleId=1733347&CategoryId=10717; El Universal, http://www.eluniversal.com/nacional-y-politica/140310/biden-meets-with-bachelet-as-part-of-steps-for-venezuela) 

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.