December 15, 2015

Oil & Energy

 

Venezuela oil price collapses to 11-year low

Venezuela's mix of heavy oil continued tumbling this week, hitting an 11-year low as oil prices around the world collapsed on slowing demand and oversupply in the wake of OPEC's decision not to cut production. Instead, OPEC raised quotas to reflect current over-production levels. 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 December 11 was US$ 31.24, down US$ 2.81 from the previous week's US$ 34.05. (Latin American Herald Tribune, http://www.laht.com/article.asp?ArticleId=2401732&CategoryId=10717; El Universal, http://www.eluniversal.com/economia/151211/venezuelan-oil-drops-usd-281)

 

Venezuela losing out on oil exports to Cuba, PETROCARIBE and others

Economist Luis Oliveros says Venezuela should review its oil supply agreements with PETROCARIBE, China, Russia and Cuba, which cause the nation to lose out on hard income. He says oil shipped to PETROCARIBE and CUBA have been deleterious to Venezuela since they have barred PDVSA from selling its product to markets that pay in cash and promptly. Reelected legislator William Davila, of the Foreign Policy, Sovereignty and Integration Committee says all these agreements must be reviewed because “we are not in such a privileged position that we can subsidize other countries.” He said members of his Committee and of the Comptroller Committee have not had access to the agreements. Legislator Vestalia Sampedro of the Finance Committee says they too have sought to see the agreements and have gone unheeded: “There is very little transparency, they need to be reviewed, there needs to be accountability.” International affairs specialist Felix Arellano says “it is not smart to tear up international agreements, it’s irrational and inconvenient. The important thing is to review them, and understand how they have been carried out”. Congressman Davila says they do not mean to go against regional integration but adds that “what the government wanted was to gain support in international organizations such as CARICOM. Geopolitical interest prevailed over the need to integrate”. Economist Oliveros says one of the most damaging agreements over the past 10 years is PETROCARIBE due to the conditions it sets up: Oil purchases can be financed up to 80%, payable over 25 years at 1-2% interest rates and with a 2-year grace period. In addition, the part of the bill that is due in cash has been paid for in kind, such as rice and beans. Oliveros says that between 2006 and 2014 Venezuela sent PETROCARIBE an average 186,000 barrels of oil per day, for a total US$ 50 billion and has barely collected on it. “That crude could have been sold to any other customer for cash”, he says. Cuba received crude oil deliveries in exchange for health, education, culture and sport services, and analysts have not been able to find out what price oil is used for these exchanges which would add up to US$ 14 billion at market process.  Carlos Alvarez, of ECOANALÍTICA, says that although agreements with China may be positive, they are plagued by opacity in all that is being done in this area. More in Spanish: (El Nacional, http://www.el-nacional.com/economia/Petrocaribe-Cuba-impiden-mercados-favorables_0_755924508.html)

 

 

Economy & Finance

 

CREDIT SUISSE: Venezuela on the ropes 

2016 could be a pivotal year for Venezuelan politics and economics. The opposition’s recent landslide victory in legislative elections and slim two-thirds majority in the incoming National Assembly will likely increase pressure on an already battered President Nicolas Maduro. His popular support has fallen as Venezuela has the poorest outlook for economic activity, the highest inflation and the largest fiscal deficit in our Emerging Markets coverage universe. The risk of political instability has risen. The loss could fuel greater divisions within Chavismo since it is no longer the strongest political force in the country and Venezuelans appear to be holding President Maduro more responsible for the country’s problems than they did President Hugo Chavez. Do not expect economic policy to improve in an environment of political gridlock or with the possibility of a presidential recall referendum on the horizon. Additionally, low oil prices and continued erosion of public sector assets still suggest considerable risk of a credit event in the fourth quarter of 2016, while PDVSA has another large maturity in April 2017. Frustration with economic conditions continues to wear on the population. CREDIT SUISSE is not optimistic that Venezuela’s macroeconomic imbalances will be corrected in the near term. The executive branch will probably remain empowered to make most economic decisions, and although the official exchange rates could be weakened somewhat, substantive modifications are unlikely against a more confrontational political backdrop, in our view. Both Chavismo and the opposition could be reluctant to take responsibility for enacting unpopular measures, especially with gubernatorial elections and a potential presidential recall referendum looming in 2016. Moreover, there appears to be a lack of consensus among opposition leaders regarding how to deal with the economy and the dollar-denominated debt service burden.  (CREDIT SUISSE: Full report ATTACHED.)

 

Reserves fall to lowest level in 15 years

The Central Bank’s international reserves have fallen to their lowest level of the past 15 years, at an average US$ 14.5 million, according to data published by the bank on December 10^th. This level is lower than that reached after the 2002 oil strike, when it fell to US$ 14.8 billion. According to ECOANALÍTICA projection, considering liquid and non-liquid reserves, current levels can cover only 5.1 months of imports. More in Spanish: (El Nacional, http://www.el-nacional.com/economia/Reservas-internacionales-minimo-historico-ultimos_0_756524513.html)

 

Shortages in Venezuela can be solved with 10% of incoming foreign currency

Manuel Felipe Larrazabal, President of the Venezuelan Food Industry Chamber (CAVIDEA), says that the main problem the Venezuelan food industry faces is that the supply chain "is weak, which means the industry is producing intermittently." He reports that all international suppliers have stopped granting credit lines to Venezuelan food companies, and that the State, which is "the great supervisor of the economy" still has not settled the debt food industries have accrued with international suppliers for raw material procurement. "Something that needs to be understood is that per every finished product that is imported to Venezuela, the country can manufacture five times more products, there is also employment generation, and a virtuous circle begins," he explains. (El Universal, http://www.eluniversal.com/economia/151214/shortages-in-venezuela-can-be-solved-with-10-of-incoming-foreign-curre)

 

 

Politics and International Affairs

 

Venezuela: The fall of the myths 

The final count of the votes confirmed a super-majority (two-thirds of the seats) in the National Assembly for the opposition. The result exceeded expectations of a simple majority and proves that the market has been underestimating the probabilities of a political transition. It is now clear that it is not easy for the government to avoid an election even knowing that it will lose it. The results show that the capacity to manipulate the electoral results is limited. The campaign was neither fair nor balanced, but the government cannot disown the result. And the armed forces have proved they are not completely controlled by the government. At a tipping point, they adopted an institutional position and swung to the clearest alternative of power. Venezuelans have also demonstrated a strong pacifist attitude.   The election result vindicates the pro-vote wing of the opposition that has been consistently calling for following the electoral path and building a popular majority. This faction will likely assume the leadership of the new National Assembly.  The opposition is waiting for the government to make its move first. So far, it has not given any signal of moderation or intention to negotiate. A radicalization of the government could deepen the political crisis and precipitate the transition. The opposition will not be an obstacle if the government decides to take economic adjustment measures, but it will likely not look proactively for an economic adjustment because it will not be willing to share in its political cost. The idea of a constitutional amendment to shorten the presidential term and force a presidential election in 2016 and a political transition is gaining support. Which are the transition channels?  There are two options: one in which the institutions remained aligned with the government and move into a more radical scenario and one in which a rebalancing of the institutions open the doors for a transition scenario. After the breaking of the myths previously discussed, the most likely outcome will be the latter option. In that sense, there are three transition channels: a recall referendum, a constitutional amendment and the resignation of the president. Maduro has so far not given signals that he would resign. The recall referendum and the constitutional amendment both imply some risks, but the idea of the amendment seems to be gaining support, since it can be approved by the National Assembly if the opposition has a super-majority; and reduces the vote threshold to just 50% to validate the constitutional change. The idea is to shorten the presidential term from six to four years to eliminate the indefinite re-election cycle and put in a transitory clause to force a presidential election in 2016 to adapt the mandate of the president to the new rules, as happened in 2000 after the approval of the 1999 Constitution and in 2009 after it was amended.  If the government becomes radicalized and the constitutional transition mechanisms are blocked, we see risks of a non-constitutional exit. In such a scenario, episodes of violence cannot be discarded. We believe this type of event would lead the military to intervene and impose order. If the fourth myth again proves false, they will swing to the clearest alternative of power. (BARCLAY’s: https://live.barcap.com/PRC/servlets/dv.search?contentPubID=FC2198262&bcllink=decode)

 

Maduro orders military out of public administration jobs

President Nicolas Maduro has ordered all military personnel working in public administration jobs to return to their units immediately, after the country’s opposition party earlier this month won a majority in congress for the first time in 16 years. “I have ordered all components of the armed forces, that all military working in public administration, must return to their forces,” Maduro said. “It’s time to bring more unity and to strengthen the armed forces.” Maduro said Dec. 9 that he would seek a “revolutionary strategy” to deal with the crisis, including changes in his cabinet. Maduro remains president until 2019, and the Supreme Court and Central Bank are still packed with his appointees. (Bloomberg, http://www.bloomberg.com/news/articles/2015-12-12/maduro-seeks-to-strengthen-venezuela-military-forces-amid-crisis; Reuters, http://www.reuters.com/article/us-venezuela-politics-idUSKBN0TV0PO20151212)

 

Ministries managed by military officers control 54% of the Budget

The nine ministries headed by military officers managed 54% of this year´s budget. This includes the following ministries: Economics, Finance and Public Banking; Interior and Justice; Defense; President’s Office; Nutrition; Electric Energy; Air and Water Transportation; Industries; Eco-Socialism; and Habitat and Housing. President Maduro has announced that most officers currently in the administration will return to their quarters. More in Spanish: (El Nacional, http://www.el-nacional.com/politica/Ministerios-manos-militares-manejaron-presupuesto_0_756524518.html)

 

Analyst: Venezuelan parliament vote will weaken Maduro's leadership

Luis Vicente León, President of Venezuelan pollster DATANÁLISIS, says the “Chavista” movement "has been shrinking, but still is very representative," and feels that the Venezuelan government "is not appropriate, does not solve problems, and does not represent Chávez's legacy either. Chávismo diminished. In addition, inside what remains, the sector that supports President Nicolás Maduro was also reduced." León says "this is the hardest moment Chavismo has ever experienced, with the highest inflation rate in the world and in the history of the country"; and adds that with the past election Maduro loses politically and also loses legal control. There will be a crack inside Chavismo that will seek a scapegoat, and the only guilty one is Maduro. This will weaken his inner leadership and create pressure inside the government. It will weaken President Nicolás Maduro's control relationship in other institutions that will see that there is an unhappy majority. (El Universal, http://www.eluniversal.com/nacional-y-politica/151212/analyst-venezuelan-parliament-vote-will-weaken-maduros-leadership)

 

Opposition says "ideological manipulation will come to an end" in Venezuela

After meeting with the 112 National Assembly deputies-elect of opposition United Democracy Coalition (MUD), the groups’ Secretary General Jesús Torrealba announced their priorities for the incoming legislature in 2016. He said the opposition would work on social problems, “particularly amid the current economic and social ordeal” and added that "There will not be power struggle."  He further explained that the opposition will raise the issue of a law to benefit all Venezuelans through the country's welfare policies "without having to dress in red or flattering political parties. That is immoral and unfair." (El Universal, http://www.eluniversal.com/nacional-y-politica/151211/mud-ideological-manipulation-will-come-to-an-end-in-venezuela)

 

Incumbent National Assembly will decide Supreme Court appointments

The incumbent National Assembly, with a pro-regime majority, intends to fill 13 vacancies in Venezuela´s Supreme Court. Assembly President Captain Diosdado Cabello has called a special session with this purpose. The Finance Committee will also discuss several new credit authorizations requested by the government. More in Spanish: (El Universal, http://www.eluniversal.com/nacional-y-politica/151215/cargos-en-tsj-debatira-an-en-sesiones-extraordinarias)

 

Capriles suggests “Padlock Law” to avoid international giveaways

Two time Presidential candidate Henrique Capriles has suggested that the new National Assembly pass a “Padlock Law” to keep President Maduro’s regime from “giving away” national resources to “buy international loyalty”. “Oil diplomacy must be stopped. The regime uses national resources to buy allies, not to benefit Venezuelans. A Padlock Law will stop them from signing costly international agreements to the detriment of the nation…Dollars that are given to other countries out of political convenience must be directed to buy food and medicine for the people due to the difficult situation we are undergoing”, he said. More in Spanish: (El Mundo, http://www.elmundo.com.ve/noticias/actualidad/politica/capriles-propone--ley-candado--para-evitar-que-gob.aspx#ixzz3uNhfjIPa; El Nacional, http://www.el-nacional.com/politica/crisis-economica-encuentra-prioridades-AN_0_756524543.html)

 

Spain's Rajoy grants López's parents Spanish nationality

The Spanish government has granted Spanish nationality to the parents of Venezuelan opposition leader Leopoldo López as a guarantee "against the political and judicial prosecution they go through" due to the current situation of their son, sentenced to a 14-year prison term. López's father "is facing a special family and personal situation as a consequence of the political and judicial prosecution his son is involved in," the Spanish Ministry of Justice said.
López Sr. was served with a subpoena to appear before a Venezuelan court and an arrest warrant for being abroad when he was submitted to a judicial proceeding, which banned him from leaving the country, DPA reported. (El Universal, http://www.eluniversal.com/nacional-y-politica/151211/spains-rajoy-grants-lopezs-parents-spanish-nationality)

 

Guyana rejects Venezuela's explanation for landing of aircraft

Guyanese Minister of State Joseph Harmon refused to accept the explanation given by Venezuelan authorities after one of its military aircraft landed in Kaikan, very close to the border with Venezuela's Bolívar state on December 3.
At a press conference on Thursday, Harmon said that it was unacceptable for trained Venezuelan military men to be unaware of their coordinates, Guyana Times reported. "Sometimes you can actually say these things happen because when you are flying across jungle territory, sometimes the definition of the border is not clear... but we cannot accept this explanation because a Venezuelan military pilot must know where he is going, he must see that this is not Venezuelan territory. I can understand maybe if it was a civilian aircraft and it was disoriented, but we cannot accept that to be a mistake," Harmon posited. (El Universal, http://www.eluniversal.com/nacional-y-politica/151211/guyana-rejects-venezuelas-explanation-for-landing-of-aircraft)

 

 

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.