September 09, 2014

International Trade

FOREX agency causes delay in imports

In 2013, the government created the Venezuelan Foreign Trade Corporation (CORPOVEX) to conduct imports and supply of goods to the public-private sectors. During 2014, the corporation has been the intermediary for different sectors requiring imports, yet the process has been slow. But business considers CORPOVEX has delayed imports as foreign suppliers have not been paid on time. The official figures show that out of the US$ 4.3 billion approved by the Ancillary Foreign Currency Administration System (SICAD 1) so far this year, only US$ 1.2 billion (28%) has gone through CORPOVEX. (El Universal, http://www.eluniversal.com/economia/140908/venezuelan-forex-agency-causes-delay-in-imports)

Import decline indicates recession

The Central Bank of Venezuela (BCV) has failed to publish the latest GDP figures; but there are growing signs that the country has fallen into recession. In its latest report on Venezuela, Bank of America says the decline in imports in the first semester resembles that recorded in times of severe economic adjustments in Venezuela. The National Statistics Institute (INE) reports imports were US$ 17.3 billion in the first semester this year, a 22% drop compared to the same period in 2013. Francisco Rodríguez, an analyst at Bank of America, explains that if imports keep their downward trend in 2014, they will decline by 35.5% compared to 2012. This would translate into the fourth biggest downturn in imports here since 1946. (El Universal, http://www.eluniversal.com/economia/140908/decline-in-imports-suggests-recession-in-venezuela)

Oil & Energy

Andres Oppenheimer: Obama’s plan to counter Venezuela’s oil clout 

Venezuela’s oil industry is in a free fall and Venezuelan oil-dependent Caribbean countries may soon find themselves in a major crisis, while U.S. energy production is booming, and is seeing an opportunity to come to the rescue of energy-strapped Caribbean Basin countries. Vice President Joe Biden visited Trinidad and Tobago and met with Caribbean leaders to discuss greater energy cooperation. In June, Biden visited the Dominican Republic, and announced that the United States would launch a “Caribbean Energy Security Initiative” to help the region become more self-sufficient in energy. The Sept. 3 U.S.-Grenada energy cooperation provides greater details about the plan. U.S. officials describe it as a “pilot program” to help Caribbean Basin countries change their energy laws and improve their infrastructure to encourage private and international financial institutions to invest in wind, solar, geo-thermal, natural gas and other energy sources. A recent Atlantic Council report entitled “Uncertain Energy: the Caribbean’s gamble with Venezuela” warns that the Obama administration’s evolving plans to help Caribbean Basin countries develop their own renewable energy industries is a good long-term strategy, but won’t help much in the near term. With relatively little money — as little as US$ 30 million per country, according to a recent Inter-American Development Bank study — Washington could help build re-gasification technology and off-loading facilities in the Caribbean. That’s very little money, would help Caribbean Basin countries reduce their dependence from Venezuela, and would do more than a thousand speeches to improve U.S.-Caribbean Basin ties. (The Miami Herald, http://www.miamiherald.com/2014/09/06/4332141/andres-oppenheimer-obamas-plan.html#storylink=cpy)

PDVSA, ANCAP agree to drill oil

Uruguayan state-run oil company ANCAP has signed US$ 50 million oil drilling agreement with Petróleos de Venezuela (PDVSA). The deal will help resume drilling in an area located at 200 kilometers of the Orinoco Oil Belt, in partnership with an unspecified private company. (El Universal, http://www.eluniversal.com/economia/140908/pdvsa-ancap-agree-to-drill-oil)

Commodities

Mitsubishi halts Venezuela plant due to imports snag

Japanese automaker Mitsubishi's subsidiary in Venezuela has halted operations due to a delay in the import of parts for assembly. Mitsubishi's local unit, MMC Automotriz, began a month-long stoppage on Monday, says union official Jahaziel Bolivar. "We're waiting for materials to arrive," he said, adding that they were held up at a port in western Venezuela. (REUTERS, http://www.todayonline.com/business/mitsubishi-halts-venezuela-plant-due-imports-snag-union)

Striking TOYOTA union has paralyzed production

Striking union workers at the TOYOTA production plant say they will continue to keep operations at a standstill until an agreement is reached with the company. More in Spanish: (El Universal, http://www.eluniversal.com/economia/140909/sindicato-de-toyota-mantiene-paralizacion-de-la-produccion; El Mundo, http://www.elmundo.com.ve/noticias/economia/laboral/protesta-laboral-paraliza-actividades-en-la-planta.aspx)

SIDOR workers have resumed their strike in rejection of a collective bargaining agreement signed by some with the government, without the consent of union leadership. Union (Sutiss) Claims Secretary Leonardo Azócar conditioned SIDOR’s operations to resuming the discussion on the labor agreement. (Veneconomy, http://www.veneconomy.com/site/index.asp?ids=44&idt=40960&idc=3; and more in Spanish: (El Universal, http://www.eluniversal.com/economia/140909/sidoristas-exigen-discutir-11-clausulas-socioeconomicas)

State owned companies operating in the red for 5 years

Official reports show state controlled industries in steel, aluminum, cement, food and the automotive industry have been running in the red for up to 5 years due to financial limitations, lack of supplies, transportation and equipment deficiencies, and lack of training - with lowered operational capacity and negative results. More in Spanish: (El Universal, http://www.eluniversal.com/economia/140909/empresas-estatales-acumulan-hasta-cinco-anos-con-perdidas)

Economy & Finance

Venezuela bonds are collapsing

Venezuela bond prices are collapsing as oil prices weaken, investors feel the government has postponed steps to stabilize the economy, and a meager contribution into the newly created Reserve Fund intensifies doubts on the ability to meet high debt service payments due in October. This means the nation must pay high interest rates on international financing at the same time it has cut back on FOREX supply to the private sector at an artificially low rate of VEB 6.30/US$1. The Global 27 dropped 3.5 points to 68.8% and has fallen 8.5 points over the past week; the PDVSA 22 fell 5.5 points and has sharply dropped 10.5 points in the last 6 days, to 82.5% of its value. More in Spanish: (El Universal, http://www.eluniversal.com/economia/140909/se-desploma-precio-de-los-bonos-en-divisas-del-pais; Ultimas Noticias, http://www.ultimasnoticias.com.ve/noticias/actualidad/economia/en-picada-los-bonos-de-deuda-venezolana.aspx)

A default is suggested by Harvard economists

As Venezuela racks up billions of dollars of arrears with importers that are fueling the worst shortages on record, one of the nation’s top economists is questioning the government’s decision to keep servicing its foreign bonds. A “massive default on the country’s import chain” is part of what has allowed the nation to keep paying its foreign bonds, says Ricardo Hausmann, a former Venezuelan planning minister who is now director of the Center for International Development at Harvard University in Cambridge, Massachusetts. “I find the moral choice odd. Normally governments declare that they have an inability to pay way before this point.” (Bloomberg, http://www.bloomberg.com/news/2014-09-07/venezuelan-default-suggested-by-harvard-economist.html) FULL ARTICLE REPRINTED BELOW

Pro government legislator says economic actions have not been ruled out

The president of the Parliament's Finance Committee, Ricardo Sanguino, says the economic steps that former Economy Vice-president Rafael Ramírez had been working on have not been ruled out but postponed. The steps included FOREX conversion, flexibility on price regulations, and a revision of gasoline prices. More economic sectors will be included into the Ancillary Foreign Currency Administration System (SICAD 1), says the lawmaker. (El Universal, http://www.eluniversal.com/economia/140908/venezuelan-legislator-economic-actions-have-not-been-ruled-out)

Extreme poverty doubles in six Venezuelan states

The Venezuelan National Statistics Institute (INE) reveals that the poverty rate in 2013 did not rise only in the Capital District; in the rest of the country, the problem got worse. The poverty rate measured by income shows that rising prices deteriorate Venezuelan quality of life. Inflation at the end of 2012 was 20.2%, and 25.4% of the population could not afford buying the basic food basket. One year later, inflation jumped to 56.2% and poverty reached 32.1% of Venezuelans. Official data also shows increasing extreme poverty. In one year-term, the percentage of people unable to buy the food basket went from 7.1% to 9.8%. (El Universal, http://www.eluniversal.com/economia/140908/extreme-poverty-doubles-in-six-venezuelan-states)

Politics

Should Venezuela default?

Will Venezuela default on its foreign bonds? Markets fear that it might. That is why Venezuelan bonds pay over 11 percentage points more than US Treasuries, which is 12 times more than Mexico, four times more than Nigeria, and double what Bolivia pays. Last May, when Venezuela made a US$ 5 billion private placement of ten-year bonds with a 6% coupon, it effectively had to give a 40% discount, leaving it with barely US$ 3 billion. The extra US$ 2 billion that it will have to pay in ten years is the compensation that investors demand for the likelihood of default, in excess of the already hefty coupon. Venezuela’s government needs to pay US$ 5.2 billion in the first days of October. Will it? Does it have the cash on hand? Will it raise the money by hurriedly selling CITGO, now wholly owned by Venezuela’s state oil company, PDVSA?

A different question is whether Venezuela should pay. Granted, what governments should do and what they will do are not always independent questions, because people often do what they should. But “should” questions involve some kind of moral judgment that is not central to “will” questions, which makes them more complex. One point of view holds that if you can make good on your commitments, then that is what you should do. That is what most parents teach their children. But the moral calculus becomes a bit more intricate when you cannot make good on all of your commitments and have to decide which to honor and which to avoid.

To date, under former President Hugo Chávez and his successor, Nicolás Maduro, Venezuela has opted to service its foreign bonds, many of which are held by well-connected wealthy Venezuelans. Yordano, a popular Venezuelan singer, probably would have a different set of priorities. He was diagnosed with cancer earlier this year and had to launch a social-media campaign to locate the drugs that his treatment required. Severe shortages of life-saving drugs in Venezuela are the result of the government’s default on a US$ 3.5 billion bill for pharmaceutical imports.

A similar situation prevails throughout the rest of the economy. Payment arrears on food imports amount to US$ 2.4 billion, leading to a substantial shortage of staple goods. In the automobile sector, the default exceeds US$ 3 billion, leading to a collapse in transport services as a result of a lack of spare parts. Airline companies are owed US$ 3.7 billion, causing many to suspend activities and overall service to fall by half. In Venezuela, importers must wait six months after goods have cleared customs to buy previously authorized dollars. But the government has opted to default on these obligations, too, leaving importers with a lot of useless local currency.

For a while, credit from foreign suppliers and headquarters made up for the lack of access to foreign currency; but, given mounting arrears and massive devaluations, credit has dried up. The list of defaults goes on and on. Venezuela has defaulted on PDVSA’s suppliers, contractors, and joint-venture partners, causing oil exports to fall by 45% relative to 1997 and production to amount to about half what the 2005 plan had projected for 2012. In addition, Venezuela’s Central Bank has defaulted on its obligation to maintain price stability by nearly quadrupling the money supply in 24 months, which has resulted in a 90% decline in bolivar value on the black market and the world’s highest inflation rate. To add insult to injury, since May the Central Bank has defaulted on its obligation to publish inflation and other statistics. Venezuela functions with four exchange rates, with the difference between the strongest and the weakest being a factor of 13.

Unsurprisingly, currency arbitrage has propelled Venezuela to the top ranks of global corruption indicators. All of this chaos is the consequence of a massive fiscal deficit that is being financed by out-of-control money creation, financial repression, and mounting defaults – despite a budget windfall from $100-a-barrel oil. Instead of fixing the problem, Maduro’s government has decided to complement ineffective exchange and price controls with measures like closing borders to stop smuggling and fingerprinting shoppers to prevent “hoarding.” This constitutes a default on Venezuelans’ most basic freedoms, which Bolivia, Ecuador, and Nicaragua – three ideologically kindred countries that have a single exchange rate and single-digit inflation – have managed to preserve.

So, should Venezuela default on its foreign bonds? If the authorities adopted common-sense policies and sought support from the International Monetary Fund and other multilateral lenders, as most troubled countries tend to do, they would rightly be told to default on the country’s debts. That way, the burden of adjustment would be shared with other creditors, as has occurred in Greece, and the economy would gain time to recover, particularly as investments in the world’s largest oil reserves began to bear fruit. Bondholders would be wise to exchange their current bonds for longer-dated instruments that would benefit from the upturn.

None of this will happen under Maduro’s government, which lacks the capacity, political capital, and will to move in this direction. But the fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy. (Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development; Miguel Angel Santos is a senior research fellow at Harvard’s Center for International Development and Associate Professor at Venezuela's leading business school IESA.)

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.