August 23th, 2011

Economics & Finance

Venezuela’s debt rating cut by S&P on “arbitrary laws”, Chavez's health

Venezuela had its credit ratings cut for the first time since 2006 by Standard & Poor’s, which cited concern over the country’s “changing and arbitrary laws” as well as the health of President Hugo Chavez. The downgrade comes after Chavez ordered the central bank to repatriate as much as $11 billion of gold reserves as he battles with an undisclosed type of cancer. Venezuela’s international reserves held abroad were “a strength of the rating, and with this movement that situation is going to change, which adds extra uncertainty.” Venezuela joins Bolivia, Paraguay and Suriname as Latin American nations with the B+ rating. Moody’s assigns Venezuela a B2 grade, while Fitch also gives Venezuela a B+. (Bloomberg, 08-19-2011; http://www.bloomberg.com/news/2011-08-19/venezuela-s-debt-rating-is-downgaded-to-b-from-bb-by-standard-poor-s.html)

V-bonds fell less than expected

The behavior of the Venezuelan bonds in international markets yesterday was relatively stable, averaging a drop of 0.5%. It was expected that lowering the credit rating by Standard & Poor's would greatly affect the price of debt on the first day of operations, but Venezuelan papers remained a relatively good choice. A source said this was due to the fact that Standard & Poor's was the last to lower the rating of the country. Fitch and Moody's had punished the risk rating in Venezuela a few weeks ago, ranking it even lower than Standard. More in Spanish: (El Nacional, 08-23-2011; http://www.el-nacional.com/www/site/p_contenido.php)

Local stock market up 51.43%

Venezuela's stock market dropped slightly this week, with the index dropping 0.62% to 98,094 from last week's 99,558 close. Volume picked up, but mostly with a large cross trade in MANTEX shares, which accounted for over 900,000 shares traded. (Latin American Herald Tribune, 08-22-2011; http://www.laht.com/article.asp?ArticleId=418669&CategoryId=10717)

Central Bank requests gold holdings held by BOE, Merentes says gold is over 60% of total reserves

Venezuela’s central bank has requested its 99 tons of gold holdings from the Bank of England, according to a bank statement sent by e-mail, citing the institution’s president Nelson Merentes. “We’ve contacted the Bank of England and the corresponding protocols have been initiated to complete this operation as soon as possible,” Merentes said, according to the statement. “Once that’s done, the shipments will begin by sea.” He also said Venezuela’s gold is a little over 60% of total international reserves, some U$D 18 billion. (Bloomberg, 08-21-2011; http://www.bloomberg.com/news/2011-08-21/venezuela-requests-gold-holdings-held-by-boe-merentes-says.html); and more in Spanish: (Agencia Venezolana de Noticias; http://www.avn.info.ve/node/73498)

Swap of US dollars for yuans or rubles ruled out

Venezuelan reserves will be moved, but kept in US dollars according to Central Bank President Nelson Merentes. Venezuela will move its operating international reserves from Swiss, British, French, and American banks to financial institutions in Russia, China, or Brazil, but that does not mean that US dollars would be swapped for Chinese yuan, Russian ruble, or Brazilian real. He justified the decision to move reserve funds by saying that "we are protecting our funds, in a first phase. If there is a region affected by an economic disturbance, the most prudent and advisable decision is to change the location of these reserves (...) We are protecting ourselves from the risk of contagion. We seek better safeguard (for the funds)." (El Universal, 08-22-2011; http://www.eluniversal.com/2011/08/22/venezuela-rules-out-swap-of-us-dollars-for-yuans-or-rubles.shtml

Merentes: "It is not true that China asked to extend credit guarantees"

The president of the Central Bank of Venezuela, Nelson Merentes, says it is false that China has asked for guarantees to back credits. He says they will diversify their portfolio and only a small amount will be placed in China in order to anticipate markets. “China is virtually the second world power in production. Our studies say the yuan will become convertible very soon and those who get ahead will come out favorably”.  More in Spanish at (El Nacional, 08-22-2011; http://www.el-nacional.com/www/site/p_contenido.php)

Chavez’s gold grab prompts dash for physical, Citigroup expects increase to $ 2,000 gold per ounce

The gold price reached a new nominal high of $1,913.50 in Asian trading today, while silver, platinum and palladium all also recording gains. Gold has been propelled sharply higher in recent trading sessions by the news that Venezuelan strongman Hugo Chavez plans to repatriate Venezuela’s gold holdings from banks mainly in the UK and the USA. Given that the “physical market” in gold is approximately 100-times the size of the amount of actual metal by which it is purportedly backed, this is raising concerns of a dramatic short-squeeze. According to a study by the analysis unit of Citigroup, the price of gold in the nearest term will continue to rise, expected a price of U$D 2,000 per ounce underpinned by market uncertainty and unsteadiness of monetary policy. More in Spanish: (El Universal, 08-23-2011; http://www.eluniversal.com/2011/08/23/citigroup-preve-que-el-oro-aumentara-hasta-$2000-por-onza.shtml and Gold Money, http://www.goldmoney.com/gold-research/chavezs-gold-grab-prompts-dash-for-physical.html?page=3088&utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+GoldMoneyGoldResearch+%28GoldMoney+-+Gold+Research%29)

Tax revenue share declines in 2010

The 2010 economic report issued by the Central Bank of Venezuela (BCV) showed that the tax revenues share of Venezuela's total fiscal revenues declined last year. According to the central bank, "as a result of increased oil prices and foreign exchange adjustment there was a change in favor of oil revenues and at the expense of funds of domestic origin." In 2010, the share of oil revenues climbed from 35.1% to 40.6%, while the weight of tax revenues fell from 64.9% to 59.4%. (El Universal, 08-22-2011; http://www.eluniversal.com/2011/08/22/tax-revenue-share-declines-in-2010.shtml)

401 companies reported taken over by the Government since January 2011

In 2011 to date 401 companies have been taken over by the Government, according to Carlos Larrazábal, president of the National Industrial Council, who adds the situation generates legal uncertainties, scares away investments and hurts chances of raising production. He made the statement after the expropriation of Forjas Santa Clara, TETRACERO and Cartonajes GRANICS. Larrazabal says over 80% of takeovers have taken place since 2009 and are growing. More in Spanish at: (Noticias 24, 08-22-2011; http://economia.noticias24.com/noticia/76024/conindustria-asegura-que-401-empresas-han-sido-intervenidas-durante-2011/)

Commodities

Venezuela has world’s largest oil reserves: OPEC

The Organization of Petroleum Exporting Countries, a notoriously conservative organization, has stated that Venezuela has world’s largest oil reserves, even exceeding those of OPEC’s top producer, Saudi Arabia. Oil production in Venezuela is under the control of the state-owned Petróleos de Venezuela, S.A. company, or PDVSA. Petroleum Intelligence Weekly lists PDVSA as the world's fourth largest oil company, due to its proven reserves, production, refining and sales, MercoPress news agency reported. (Commodities Now, 08-19-2011; http://www.commodities-now.com/news/power-and-energy/7467-venezuela-has-worlds-largest-oil-reserves-opec.html)

Iran, Venezuela start building Petchem complex, Press TV says

Iran and Venezuela started construction on a petrochemical complex in the southern Iranian province of Bushehr, Press TV reported, citing National Iranian Petrochemical Organization Managing Director Abdolhossein Bayat. The countries are building a methanol unit in the southern port town of Assaluyeh, Bayat said yesterday, according to a report published on the website of the state-run news channel. Agreements for a similar project in the South American country have yet to be completed, he said, without giving details of the costs. (Bloomberg, 08-21-2011; http://www.bloomberg.com/news/2011-08-21/iran-venezuela-start-building-petchem-complex-press-tv-says.html)

Companies acquired by PDVSA report losses

Diverse responsibilities assigned to state-run oil company Petróleos de Venezuela (PDVSA) have boosted its operating costs. Most industrial and agricultural companies purchased since 2008 are no longer profitable and report losses during the 2010 fiscal year. According to PDVSA's operating report, the companies purchased by the oil giant reported U$D 14 million in losses as of December 31, 2010 (VEB 60 million, at the exchange rate of VEB 4.28 per US dollar.) At the end of 2009, PDVSA's accounting ledgers showed the companies reporting earnings amounting to U$D 12 million (VEB 26 million at the exchange rate of VEB 2.15 per US dollar). (El Universal, 08-22-2011; http://www.eluniversal.com/2011/08/22/companies-acquired-by-pdvsa-report-losses.shtml)

Logistics & Transport

Venezuela signed new agreements with Chinese company on port modernization

Venezuelan Transport and Communications Minister, Francisco Garces, and representatives of the China National Machinery Industry Corporation (SINOMACH) have signed an agreement to purchase equipment for Venezuelan harbors. The investment adds up to U$D 25.57 million for, among other items, 11 chargers, 78 forklifts, 52 trucks and tow trucks and 10 electricity generator plants. The equipment should be in the country in the next six months and will be distributed among the six harbors run by state-run harbor company Bolivariana de Puertos (BOLIPUERTOS). (AVN, 08-19-2011; http://www.avn.info.ve/node/73294)

Politics

“I do not feel sick, but I am convalescing from the disease I had,” says Chavez

The president of Venezuela, Hugo Chavez, said this Sunday that he does not feel sick anymore, but “convalescent” from the disease he had. He made said statements during a religious ceremony held for his recovery in the Miraflores Presidential Palace, in Caracas. Chavez added that he is in a recovery process and that the next week will be very important. Depending on the results, he could undergo a third round of chemotherapy. (AVN, 08-22-2011; http://www.avn.info.ve/node/73571)

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.

June 17th, 2011

Economics & Finance

Government issues U$2D.3 billion in bonds

Venezuela's government says it is issuing the equivalent of U$D 2.3 billion in bonds to help cover debt payments and public spending this year. The Planning and Finance Ministry announced the offering of 10 billion bolivars in government bonds. It said in a statement on Tuesday that the bonds will be offered to state-run banks. The ministry said the funds obtained by the government will go toward "national public debt service" as well as public spending. In recent months, President Hugo Chavez's government has turned to state-run banks to help finance growing public spending. Government debt held by state banks increased 32% in the first four months of this year and stood at about U$D7.5 billion in April. (Forbes, 06-14-2011; http://www.forbes.com/feeds/ap/2011/06/14/business-lt-venezuela-bonds_8516814.html)

Venezuela will honor debts to Colombian suppliers

Venezuelan importers will honor debts of just over U$D 718 million to Colombian suppliers after being authorized by the Central Bank of that country, today according to Minister of Foreign Trade of Colombia, Sergio Diaz-Granados, who added: "hopefully in the near term, we can say that the entire debt is paid". Diaz-Granados explained that a little over U$D 718 million is for disbursements made ​​through the ALADI Convention towards ordinary import and airlines and insurance. He added that CADIVI has analyzed obligations for U$D 1.398 billion, has authorized U$D 877 million and rejected U$D 109 million. It is currently investigating additional requests for around U$D 409 million. More information in Spanish. (Ultimas Noticias; 06-15-2011; http://www.ultimasnoticias.com.ve/Noticias/Actualidad/Economia/Venezuela-pagara-deudas-a-proveedores-colombianos.aspx)

Forex board: Over USD 9.7 billion authorized for imports

Venezuela's forex board, the Foreign Exchange Administration Commission (Cadivi), granted USD 9.7 billion to meet import requests in areas such as health, food, industry supplies and machinery.

Cadivi's president, Manuel Barroso, said that in the first five months of the year, Cadivi allocated between 84 percent and 85 percent of the USD 14 billion that have been managed by the Central Bank of Venezuela.

"We have had positive results in the first five months of the year," Barroso told state-run TV network Venezolana de Televisión (VTV). (El Universal, 06-17-2011; http://english.eluniversal.com/2011/06/17/forex-board-over-usd-97-billion-authorized-for-imports.shtml)

Venezuela to ration electricity in several regions due to recurring blackouts

Venezuela will soon begin rationing electricity in several regions because of recurring power outages, the country’s energy minister said Wednesday. Ali Rodriguez said he has ordered authorities to start scheduling rolling blackouts in affected regions and informing residents when they will be implemented. He did not provide details or say how many of Venezuela’s 24 states would be affected. They say power consumption must be reduced by 10 percent and have warned that hefty surcharges will be imposed on consumers who don’t reduce usage. Venezuela has experienced three major blackouts in the past three months. (The Washington Post, 06-16-2011; http://www.washingtonpost.com/world/americas/venezuela-to-ration-electricity-in-several-regions-because-of-recurring-blackouts/2011/06/15/AGNw1VWH_story.html)

PDVSA, Central Bank to create oil satellite account

Petróleos de Venezuela, S.A., the state oil company, and the country’s central bank will create a satellite account in order to measure the impact of oil on the economy, according to Oil Minister Rafael Ramirez. The account will measure crude beyond what the central bank calls oil gross domestic product by better gauging the “behavior of volume”. Ramirez also said Venezuela has no plans to increase production unless the Organization of Petroleum Exporting Countries approves a change to output quotas. (Bloomberg, 06-15-2011; http://www.bloomberg.com/news/2011-06-16/pdvsa-central-bank-to-create-oil-satellite-account-avn-reports.html)

Venezuela: Trade with China is a "strategic alliance"

Trade with China is the "main strategic alliance" for the Venezuelan government, said Minister of Trade Edmée Betancourt.

"The relationship is of foremost importance for both governments," she said within the framework of the Third China-Venezuela Trade and Industry Expo.

The top Venezuelan official said that when President Hugo Chávez took office in 1999, bilateral trade was below USD 200 million and it has now increased to about USD 10 billion. "These figures attest to our new bilateral relationships." (El Universal, 06-17-2011; http://english.eluniversal.com/2011/06/16/venezuela-trade-with-china-is-a-strategic-alliance.shtml)

VAT exemption for imports of goods for domestic production

A Value Added Tax (VAT) exemption for goods imported in order to boost domestic production came into force, and will be applied for valves imported to be used only for a project implemented by a Socialist enterprise known as the Venezuelan Endogenous Valves Industry (INVEVAL). Imports of movable tangible property used exclusively for the petrochemical, carbochemical industry and the like are also VAT exempted. (El Universal, 06-15-2011; http://english.eluniversal.com/2011/06/15/vat-exemption-for-imports-of-goods-for-domestic-production.shtml)

Commodities

PDVSA to repay $1.5 Billion Japanese loan with oil

The Japan Bank for International Cooperation is preparing a $1.5 billion loan for Petróleos de Venezuela, S.A. that would be paid back with oil, newspaper El Nacional reported, citing a Japanese diplomat. PDVSA, as Venezuela’s state oil company is called, would be able to repay the loan with as much as 3 million barrels of oil a year that would be sent to Japanese companies over a five-year period, the Caracas-based daily newspaper reported, citing Takashi Kondo, a diplomat at the Japanese embassy in Caracas. (Bloomberg, 06-15-2011; http://www.bloomberg.com/news/2011-06-16/pdvsa-central-bank-to-create-oil-satellite-account-avn-reports.html)

Crystallex to seek compensation from Venezuela

Canadian gold miner Crystallex International Corp said it will seek to restore permit to develop the Las Cristinas gold mine in Venezuela and compensation for the interim losses suffered. Alternatively, Crystallex said it may seek full compensation of more than U$F3.8 billion for the contract cancellation. A state-owned Venezuelan company had unilaterally decided to end their 2002 contract on Las Cristinas project in February. (Reuters, 06-14-2011; http://www.reuters.com/article/2011/06/14/crystallex-idUSL3E7HE3M120110614)

Minister Ramírez denies fractures within OPEC

Venezuelan Minister of Energy and Petroleum and Pdvsa CEO Rafael Ramírez denied that OPEC "is injured or with irreparable fractures," adding that the organization "is clear in its strategic objectives," even though during their last meeting the OPEC failed to reach consensus on the production quotas of its member countries. Ramírez said he will keep watching over the market, which he described as unstable due to the situation in Libya. Therefore, he argued, OPEC member countries should "work in close cooperation." This includes monitoring the spare capacity of OPEC, and the efforts of each member country to maintain a balance in production. (El Universal, 06-15-2011;

http://english.eluniversal.com/2011/06/15/minister-ramirez-denies-fractures-within-opec.shtml)

Minister claims Venezuela is one of the few countries in a real oil expansion process

Energy and Oil Minister Rafael Ramírez says “Venezuela is one of the few countries into a real process of development of its oil production,” which can be evidenced with the expansion plans of the industry that expects to double its current production (about 3 million barrels per day) through the exploitation of the oil reserves at the Orinoco Oil Belt. “We are going to have in the Belt the same production levels that we currently have; for such reason, we need to double the industrial complex to produce pipelines, valves and rigs,” Ramirez pointed out and underscored that the Government has met with industrial private sectors to boost the sector. (AVN, 06-16-2011; http://www.avn.info.ve/node/62994)

Nicaragua cattle boom in sales to Venezuela

Last year livestock production became one of the major sources of revenue and jobs in Nicaragua, thanks to a growing demand for meat and dairy products from Venezuela. "Livestock is a source of direct employment for over 800,000 people in the field, which is enough in a country of 5.8 million people," said the president of the Federation of Livestock Producers of Nicaragua, Solon Guerrero. "The activity represents approximately 27% of Nicaragua's total exports and 25% of gross domestic product," he said. The cattle boom is being driven by purchases of Venezuela acquires 44% of Nicaragua's export meat. Trade is conducted government to government. More information in Spanish. (El Nacional; 06-15-2011; http://www.el-nacional.com/www/site/p_contenido.php)

Politics

President Chavez recovers at a satisfactory pace

According to Vice President Elías Jaua, President Hugo Chavez is recovering at a good pace after an unplanned surgery he had last Friday in Havana, Cuba, due to a pelvic abscess. (AVN, 06-15-2011; http://www.avn.info.ve/node/62858)

Indefinite absence authorization ratified

The National Assembly ratified authorization given to President Chávez to remain abroad for “over five days” until he recovers from the surgery he underwent in Cuba. According to the agreement read in Parliament and passed with the votes of the government majority, President Chávez is fully authorized to exercise his duties while he remains in Havana. (Veneconomy, 06-15-2011; http://www.veneconomy.com/site/index.asp?ids=44&idt=26378&idc=1)

Venezuela on US list of alleged human rights offenders

The United States included Venezuela, China, Iran, Libya, North Korea and nine other countries in a list of nations that Washington wants the United Nations to hold accountable for alleged human rights violations. US ambassador to the UN Human Rights Council Eileen Chamberlain Donahoe on Wednesday said that "too many governments suppress dissent with impunity," reported AP. (El Universal, 06-15-2011; http://english.eluniversal.com/2011/06/15/venezuela-in-us-list-of-alleged-human-rights-offenders.shtml)

Chavez will need to overcome health problems and a vigorous opposition to win re-election

Hugo Chávez is unwell. He is running his country from a hospital bed in Havana, following an emergency operation on June 10th to deal with a “pelvic abscess”. Quite what caused the abscess, or exactly how severe it was, has not been revealed. Mr. Chávez’s medical difficulties may well be exceeded by his political ones. The opposition Democratic Unity coalition is due to choose its candidate in February for the election to be held in December 2012. Mired in recession for the past couple of years, and plagued by inflation of close to 30%, the country has recently returned to growth, thanks in part to higher oil prices. Even if growth remains modest, Mr. Chávez has squirreled away billions of dollars in unaudited public funds, and should be able to pay for a pre-election spending binge. But if the polls are to be believed, this election will be no walkover. One survey found that the leading contender for the opposition candidacy—Henrique Capriles, the youthful governor of Miranda state could beat him in a head-to-head contest. (The Economist, 06-16-2011; http://www.economist.com/world/la/displaystory.cfm?story_id=18836430)

Chavez, Lula, or Humala?

Since his June 5 election as Peru’s next president, Ollanta Humala has been the subject of intense debate.  Observers have wondered aloud whether he will be a Chavez or a Lula, or something else altogether.  The debate matters: how Humala chooses to govern will directly impact Peru’s ability to sustain its historically high growth, or whether the country will squander its recent success.  That observers are having this debate at all reflects the reality that most people outside Peru are not sure exactly who Ollanta Humala is, or what he stands for.  His previous run for the presidency in 2006 presented a candidate in the Chavez model, more interested in the distribution than the creation of wealth, more interested in currying favor with Caracas than with Washington or Brasilia. (Latin Business Chronicle, 06-16-2011; http://www.latinbusinesschronicle.com/app/article.aspx?id=4966)

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.