Archive for May 2010
President Hugo Chavez said on 27 May that 21st Century Socialism will tear down (“derribar”) the “three pillars of the capitalist system.”
Chavez says that the three pillars his revolution aims to demolish are private banking, imports and land ownership.
Referring to what’s left of Venezuela’s traditional productive sectors, Chavez says that “they control two-thirds of the banking system. They give loans to each other and live from public deposits. They cheat in one and a hundred ways.”
Chavez warned that he may order all public deposits withdrawn immediately from the private banking system. A couple of weeks ago he threatened that if private banks don’t start to fund his regime’s social programs with loans he might seize the banks.
Chavez also is determined to reduce imports significantly. He dismisses the economy’s 5.8% contraction in first quarter 2010 as being part of the necessary collapse of the capitalist system. Never mind that Venezuela is extraordinarily dependent on imports for everything, including its food supply.
Venezuela’s future industrial development depends “almost exclusively on agricultural development,” he said on 27 May.
Chavez’s nutty remarks tend to confirm several things:
*The regime has a critical cash flow crunch. It’s almost out of money, literally. That’s why Chavez wants to replicate the special Venezuela-China loan-for-oil money mechanisms with other countries. He’s fishing for cash anywhere he can get it. If forced to choose between allowing imports needed to keep the economy running, or curbing imports sharply to direct more of the country’s dwindling cash supply to revolutionary activities (i.e. keeping Chavez in power), the president will screw the economy in a heartbeat.
*Chavez is on the brink of seizing many (all) of the country’s private banks in order to take the money owned by depositors and spend it on keeping his criminal regime afloat a while longer. It’s the people’s money and must be used for the nation’s economic development, he said on 27 May. Chavez apparently thinks the private banks are hiding mountains of cash, which isn’t true. And apparently he thinks that people who deposit their savings in private banks are not “pueblo.”
*The revolution also plans to seize full control of the food sector, from the farm to the grocery store shelf. This is a strategy inspired by Chavez’s Cuban advisers. If the state has total control of the national food supply, it can control the people. This has been the case in Cuba, and Chavez’s advisers apparently (and mistakenly) think that it can be replicated in Bolivarian Venezuela.
Chavez is trying to survive at any cost until his fortunes (i.e. oil prices) rise again. That won’t happen in the near-term, certainly not before the 26 September legislative elections. In fact, the imploding Greek economy threatens to drag Spain and Portugal in its wake and derail the Eurozone, causing ripple effects in the US particularly, and China. If anything, oil prices may go down again over the next 6-12 months.
Chavez also announced a week ago that Venezuela will raise crude production by 300,000 b/d starting at end-2010, and within three years or so add 1 million b/d of crude production to its current official output of just over 3 million b/d, which of course is BS, real output being closer to 2.1 million b/d. The president said this will be done mainly with China’s help (Cuba is very big in Venezuela now, but China soon could eclipse Cuba, if Chavez has his way).
But Chavez is talking trash. Pdvsa doesn’t have the cash to carry out its 60% end of whatever financing is needed for the Orinoco production deals it has signed with the Chinese, Russians, Cubans, Italians, Vietnamese, Angolans, Repsol, Chevron, etc.
Chavez is focused increasingly on the legislative elections, where it looks like the regime will get a “people’s” whuppin’ that will cost the PSUV control of the legislature. Caracas Gringo thinks that Chavez will cheat to retain control of the National Assembly if he can’t win fairly.
But even if Chavez admits defeat, the regime is rapidly setting up its parallel Federal Council/Communal Council system that will effectively strip all power and financial resources from the traditional municipal and state authorities elected by voters. If Chavez loses control of the legislature, it too will be displaced by the new centralized (in Chavez’s hands) federal system.
Opposition legislators who think they will have a real voice and vote in the next National Assembly should consider the plight of Greater Caracas Mayor Antonio Ledezma, who was effectively neutralized as soon as he won the elections when Chavez stripped his office of all funding and set up a parallel authority to govern Greater Caracas.
However, the revolution isn’t invincible, according to no less an authority than Ilich Ramírez Sánchez aka Carlos the Jackal, who is serving a life prison sentence in France for murdering three French police officers in 1975.
During a recent telephone interview from the prison at Poissy with an AFP reporter in the office of the Venezuelan terrorist’s French wife and attorney, Isabelle Coutant Peyre, “Carlos” said that Chavez is alive today “thanks to Fidel and Raul…thanks to Ramiro Valdes…But one bullet and the revolution in Venezuela is finished because it would not resist the death of Chavez.”
L’Express of Paris has published a series of excellent articles by award-winning French investigative journalist Delphine Saubaber: “Plongée au coeur de la violence à Caracas,” reinforced by the powerful images captured by Venezuelan photojournalist Juan Toro. Ms. Saubaber’s articles are below the slide show.
Update: A longtime Gringo friend who has lived in Caracas since the early 1980s accompanied French investigative journalist Delphine Saubaber during her recent plunge into the bloody alleys of the barrios that surround Caracas.
“She’s fearless,” he marvels, while relating what he saw first-hand in parts of the city where sensible Gringo “musius,” and Venezuelans that do not live in the barrios, never venture into. He says that in the barrios they entered – Ms. Saubaber, photojournalist Juan Toro and our longtime friend –poor Venezuelans were unreserved in expressing their intense discontent with President Hugo Chavez and his Bolivarian revolution.
“The attitude of the poor is total disenfranchisement with the revolution, the government and the entire political establishment,” he says. “The mood is that this guy (Chavez) was the last hope, and he turned out to be the greatest rip-off in Venezuela’s history. If Chavez can’t do it, if he didn’t do it, if he screwed up, if he stole, then nobody can do it, and we’re fucked as a result. A deep cynicism is taking root among the poor of Venezuela in ways never seen before.”
A reader in the interior emails this anecdote: “I had to pay 45 bolivars for a container of margarine (mantequilla) that is officially price-regulated at 6 bolivars, but I went to 14 abastos before I found one with any margarine in stock.”
The “salario basico” – the basic wage – is only about 33 bolivars per day. The Central Bank reported a few weeks ago that food price inflation in April was highest in the lowest socioeconomic strata. In fact, rising food prices are having the heaviest impact on poor Venezuelans, and the Chavez regime’s actions are making the situation worse.
The performance of real activity deteriorated significantly since late 2008 as the decline in oil export revenue exposed brewing imbalances that had been contained by a wall of liquidity during 2003-08. Under the weight of years of interventionist policies, hopeless central planning, lax fiscal and monetary policies, and currency misalignment, the economy is now experiencing clear symptoms of Dutch Disease (withering of non-commodity tradable sectors of the economy) and stagflation (inflation remains high despite the ongoing severe contraction of the economy).
Real GDP declined a large 5.8% yoy during 1Q2010 (the same magnitude of yoy decline recorded during 4Q2009 and the fourth consecutive quarterly yoy decline). This is line with our -5.5% yoy forecast. There are, however, lingering doubts whether the official statistics are currently capturing the full extent of the real economic contraction. Activity during 1Q2010 was impacted by serious emery supply issues, difficulties in accessing foreign exchange to finance imports critical for the many production chains, and the growing burden of macro and micro inefficiencies.
The very poor performance of real GDP during 1Q2010 was driven the very large 17.8% yoy decline in domestic demand. Private consumption declined -5.9% yoy during 1Q (-6.7% yoy during 4Q), and investment spending retrenched a very large -27.9% yoy (from -19.6% yoy during 4Q). Public consumption posted a marginal -0.2% yoy variation during 1Q. Private consumption spending continues to slow down as entrenched inflation (average core inflation above 34% yoy during 1Q2010) is eroding real disposable income and credit growth is decelerating fast while investment has been impaired by a business-unfriendly policy mix.
The external sector prevented a deeper contraction in real GDP, but the level of import repression is unsustainable. Exports declined 8.1% yoy in real terms during 1Q2010; we highlight that over the last 17 quarters only once did real exports show a positive yoy growth rate, which attests to the growing lack of competitiveness of the Venezuelan economy. The retrenchment of imports reached a very high -39.7% yoy during 1Q, driven by declining domestic demand and the limitations imposed by CADIVI in the delivery of dollars to the economy. Due to the very sharp decline in import penetration the contribution of the external sector (net exports) to growth reached a whopping +12.0 percentage points of GDP during 1Q2010. That is, was it not for the external sector the economy would have contracted in double digits.
Non-oil GDP growth decelerated to -4.9% yoy during 1Q2010 from -4.0% yoy during 4Q2009. The oil sector declined 5.0% yoy during 4Q2009.
On the supply side, the most dynamic sectors during 1Q were allegedly communications (+9.7%) and government services (+2.8% yoy). The contraction of manufacturing production accelerated to -9.9% yoy. Again, the non-tradable sectors of the economy were the most dynamic—which is symptomatic of Dutch disease triggered by the significant appreciation of the real exchange rate—but even the non tradable activity posted a significant contraction from a year ago.
Comment: (-) Venezuela is currently trapped in a bad stagflation equilibrium. In addition, in recent months, distressed monetary and FX dynamics have taken center stage. In fact, while all other economies in the region are currently experiencing a solid cyclical recovery (even in countries that are pursuing heterodox policy experiments, such as Argentina), Venezuela is still mired in a protracted recession despite favorable oil prices, and nominal variables (such as inflation and the VEF) have developed a worrisome drift. Finally, the policy approach is turning definitely more state-centered and private sector-unfriendly as we move closer to a classic command economy. These developments are understandably raising concerns about the medium-term outlook for the credit.
Lax fiscal and monetary policies, a policy framework and official rhetoric that discourage domestic and foreign investment, stifling regulation that distorts the optimal allocation of resources, and weak protection of property rights and the sanctity contracts, are just a few examples of the broad range of problems facing the economy and the private sector. Hence, it comes as no surprise that the economy’s overall efficiency has been deteriorating (with the pace of deterioration likely accelerating at the margin), and that inflation has been entrenched at a very high level for quite some time: core annual inflation has been cemented above 30% since December 2007. Finally, we underscore that investment spending retrenched by 3.3% in 2008 and another 8.2% in 2009. Furthermore, with the -27.9% yoy variation posted during 1Q2010 the level of investment at end March 2010 (in real terms) is at the level seen during 1H2005.
The outlook for non-inflationary growth is poor as potential GDP continues to decline due to lack of private investment and the inefficiencies created by the ever-growing reach of the public sector: directly through spreading nationalizations and expropriations, and indirectly via overpowering regulation and moral suasion. For instance, the value added generated by the private sector declined 4.5% during 2009 and -6.0% yoy during 1Q2010
In addition, the economic base is increasingly narrow. Despite statements by public officials early in 2009 that the economy was well-insulated from the global economic and financial crisis and declining oil prices, the deep contraction of activity in 2009 attests to the fact that oil export income is still the ultimate engine of growth in an increasingly less diversified economy.
The capacity of the government to stimulate the economy is being impaired by the fact that the growth-multiplier of fiscal spending is declining rapidly due to the clear inefficiencies in fiscal execution (driven often times by political, rather than economic criteria), unsatisfactory internal spending controls, and the ongoing fast expansion of the public sector (retreat of private-sector activity) through a number of nationalizations/ expropriations of private businesses.
As we go forward, we expect the economy to benefit from a positive fiscal impulse ahead of the September legislative elections, but the positive impact of firmer terms of trade and fiscal activism is likely to be somewhat offset by engrained inflation, growing supply bottlenecks, power- and water supply restrictions during 1H2010, social and political confrontation, and a business/ investment-unfriendly environment which is discouraging private investment. In all, we expect the economy to contract again in 2010 despite the presence of markedly loose fiscal and monetary policies.
Source: Goldman Sachs
President Hugo Chavez said during his weekly “Hello President” on 23 May that he plans to discuss soon with Italy’s ambassador to Venezuela “a special financing mechanism similar to what we now have with China.”
Venezuela has two credit-for-oil mechanisms in place with China that are worth a combined $28 billion.
One consists of a special $12 billion Venezuela-China infrastructure fund that was created in 2008 to finance infrastructure projects in Venezuela. China’s contribution to this fund totaled $8 billion and is structured as a loan payable with approximately 60,000 b/d of crude oil and refined products over three years. About $11 billion of this fund already has been spent. Chavez said on 23 May that half of this loan, or $4 billion, will be repaid in full by end-2010.
The second is a $20 billion credit, half in dollars and half in yuan, that is payable with 100,000 b/d of crude oil or refined products over the coming ten years. This loan, granted in April 2010, will be used to finance oil and other projects in Venezuela in which Chinese companies have a direct stake or are equipment suppliers.
Chavez said on 23 May that Venezuela could borrow up to $6 billion from Italian (government?) lenders, payable over five years with 50,000 b/d of crude oil assuming a price of $70 per barrel. He added that the 50,000 b/d earmarked to repay a possible Italian loan to Venezuela’s government would be taken from Pdvsa’s planned 1 million b/d increase in its crude oil production capacity between 2010 and 2015.
The response from Italy’s embassy in Caracas: “Nessuno commenti.”
But Caracas Gringo’s sources in the Energy and Finance Ministries confirm that the regime wants to replicate with other countries the debt-for-oil deals it has in place with China, with a small difference: the oil that Chavez proposes to repay such loans with is still in the ground, and as yet there is no production infrastructure in place to extract that oil.
The ministry sources said that the Venezuela-China special credit-for-oil agreements provide the Chavez government a way to monetize the country’s crude oil reserves before the crude comes out of the ground.
But they declined to disclose how much new debt the regime hopes to secure by offering payment in crude oil, because no decisions have been reached yet on how much money will be sought. The officials also declined to identify the countries that the Chavez regime hopes to negotiate credit-for-oil deals with. But they add that Venezuela’s crude oil reserves provide the country with very substantial borrowing capability.
Pdvsa claims that Venezuela’s certified proven reserves of crude oil totaled over 211 billion barrels as of 18 March 2010, and are expected to rise to over 315 billion barrels by end-2010 when its Magna Reserva reserves certification initiative in the Orinoco oil belt is scheduled for completion. The US Geological survey reported last year that the oil belt may hold recoverable reserves of over 500 billion barrels.
These certified crude oil reserves give Venezuela the leverage (“palanca”) to borrow tens of billions of dollars that could be used to pay for all of the revolution’s energy, power, basic infrastructure and social programs, and still have billions left over, says an Energy Ministry source. Looking at the paper numbers that Pdvsa and Corpoelec routinely toss around, this adds up potentially to close to $200 billion.
However, the president’s plans to mortgage the country’s crude oil reserves while still in the ground are, in a word, insane. More importantly, it tends to confirm that the revolution is scraping the bottom of the barrel in terms of cash resources available to keep the regime afloat. Assuming that other governments besides China’s are willing to lend tens of billions of dollars to the Chavez regime, mortgaging billions of barrels of crude oil still in the ground to finance current spending programs is a surefire way of burning up the bulk of the revenues that Venezuela could receive in future years when (and if) the production infrastructure is finally developed.
But Chavez has a plan: In 10 or 15 or 20 years, he said on 23 May, the average international price of oil could be as high as $150 per barrel, perhaps even higher, which means that securing loans today payable with oil shipments over the coming years would not deplete Venezuela’s future oil earnings. Just the sort of thinking “Manimal” (thank you, Venepiramides) Giordani excels at.
Caracas Gringo thinks that the president’s idea of replicating with other countries the financing mechanisms it now has with China is proof of the regime’s growing desperation.
Chavez has achieved the seemingly impossible: He bankrupted the Venezuelan state despite the fact that Venezuela during the past decade has seen its oil export revenues climb to the highest levels in its history as a democracy – before Chavez arrived and systematically destroyed the country. The signs of the Bolivarian revolution’s insolvency are abundant.
The Finance Ministry claims that Venezuela’s total debt, including Pdvsa’s debt, is about $63.58 billion, of which $21.41 billion is owed by Pdvsa. The ministry also says that the internal debt is about Bs.F. 53.17 billion, which at the official exchange rate of Bs.F. 2.60 per dollar is $20.45 billion. Thus, the regime’s total officially acknowledged debt is about $84.03 billion. However, these official numbers significantly understate the Chavez regime’s total debt.
For example, the ministry’s official debt numbers do not include $28 billion owed to China, so the real total rises to over $112 billion, but that’s still the tip of the iceberg.
The official debt numbers also do not include the billions owed by the regime to the legal owners of the more than 750 productive assets including lands stolen since 2005 by the revolution. For example, Noticias Centro estimates that the regime owes Spanish creditors alone between $20 billion and $24 billion. Additionally, another $20 billion to $30 billion are owed (estimates vary depending on the source) as compensation claimed by foreign companies whose assets were expropriated unlawfully. The official figures also do not include other liabilities like an estimated $15 billion worth of past-due government obligations to workers which have been piling up since before the Chavez era.
The bottom line is that no one really knows precisely how much the Chavez regime’s debts total. But there certainly are no doubts at all that the regime isn’t paying anyone.
Evidence of the revolution’s bankruptcy include Pdvsa’s demands that its minority partners pay front-end bonuses and also secure billions in project financing loans on Pdvsa’s behalf. Also, Citgo’s just-announced $1.5 billion bond issue, Pdvsa’s continued refusal to pay oil companies and services companies for their expropriated assets, its failure to honor debts owed to the oil workers, and its inability to advance even a single major oil, refining and gas project all point to a cash-starved revolution.
Moreover, oil services companies aren’t the only ones who aren’t being paid. Eurobras Guri, a German-Brazilian consortium contracted to modernize the Guri Dam’s aging Francis turbines, has suspended work due to non-payment. The companies building the regime’s railroad from Caracas to Puerto Cabello also have practically stopped working because they aren’t being paid.
Meanwhile, hundreds of thousands of Venezuelan workers who foolishly embraced the Bolivarian revolution because they believed Chavez’s propaganda about a “people’s revolution” are now habitually scolded by a president who says that workers should stop their whiney complaining about unpaid wages, and focus instead on making the revolution a success.
Besides, adds Chavez, it’s bad to own one’s own vehicle and save a little money in one’s lifetime. Socialism is not supposed to make people wealthier, he adds. Many workers finally appear to be realizing that they were deceived by a regime that now routinely jails workers who protest against the deadbeat regime. However, no one should expect the “bravo pueblo” to rise up gloriously against the despotic Chavez regime.
After 11 years of Chavez, and before that, decades of self-serving AD-Copei corruption, it appears that the majority of Venezuelans have become a gelded pueblo resigned to waiting submissively while the Bolivarian revolution sinks into the sea of 21st Century Socialist felicity that Chavez has always promised.
President Hugo Chavez instructed his energy minister last night to schedule a meeting immediately with Citgo’s board of directors.
During a televised “reunión de trabajo” with senior government officials at Miraflores Palace, Chavez said that Citgo is “not a gringo company.”
Chavez added that Citgo must be accountable to the Venezuelan government and increase the number of Venezuelans on its payroll in the US because it simply cannot be that the majority of Citgo’s workers are US citizens instead of Venezuelans.
Chavez told Ramirez, “I want to see here the faces of the entire board of directors. That company is ours, and it has to be accountable here…”
Chavez wants Citgo to increase its financial transfers to Venezuela and hire more Venezuelan employees.
The president did not dwell on Citgo’s plans to issue $1.5 billion of senior secured notes in June that will be guaranteed with three of its refineries in Lake Charles, Lemont and Corpus Christi.
But Reuters’ Mariana Parraga noted today that the planned debt issue imposes constraints on Pdvsa’s borrowing capacity. Ms. Parraga’s analysis is accurate, up to a point.
However, the Reuters article fails to pinpoint why Citgo is already heavily indebted to the tune of some $2.5 billion after the proceeds of the June’s bond issue and a further $700 million of borrowing are used to pay down existing debt.
The Chavez regime for years has been squeezing all the cash it can from Citgo, scrimping on essential maintenance (which has created legal difficulties for Citgo), and forcing the company to borrow for the sole purpose of sending the cash immediately to Venezuela where it was promptly pissed away by the revolution.
Chavez basically has run Citgo into the ground, but now Chavez demands “accountability.”
Citgo’s president and directors are all Venezuelan nationals. No “musius” in the group, which includes CEO and board chairman Alejandro Granado, Eudomario Carruyo, the president’s cousin Asdrubal Chavez, and Eulogio del Pino.
Granado arguably knows a bit about the oil industry. But the other three are strictly bush league when it comes to managing a refining company like Citgo. Carruyo is an accountant. Chavez is a chemical engineer and del Pino is a geophysical engineer.
Moreover, Citgo’s CEO and board members are in their present jobs because, like all successful Bolivarian revolutionaries, they passed the presidential loyalty test.
Other senior Venezuelan officials at Citgo are listed here.
Chavez wants to meet with these Bolivarian homeboys to give them a good tongue-lashing, no doubt.
The president plans to demand that 1) more cash be transferred from Citgo to Venezuela, and 2. More Venezuelans than Americans should work at Citgo.
But Citgo is already heavily too heavily indebted, and has too many problems in a very difficult environment for refiners everywhere, to borrow substantially more – unless it pays very high interest charges.
Also, it’s doubtful that serious lenders will be keen on granting Citgo more credit at a time when Venezuela’s government faces compensation claims totaling over $20 billion, and Pdvsa owes over $21 billion – not including the $28 billion of debt owed to China.
As for hiring more Venezuelans to work at Citgo, that depends on the US government which, given the chilly relations between Caracas and Washington, may not be inclined to extend visas to Venezuelans approved by the regime.