Bulking Up

Venezuela’s Central Bank reports the country’s international reserves have increased 11.20% since early December 2008, to $43.09 billion as of January 8, 2009. The bank also says about $10 billion of these reserves can be transferred at any time to development funds managed directly by the central government (i.e. President Hugo Chavez).
Given that the price of Venezuela’s oil has averaged under $40 a barrel during the past three or four months, and given that the Chavez government needs an average price higher than $80 a barrel to maintain its big-spending populist policies, what accounts for the large one-month jump in reserves reported by the Central Bank?
Several possibilities come to mind.
1. The Central Bank is cooking its monthly financial data. Practically all of the Chavez government’s oil and non-oil data is inflated, massaged, cooked, or simply made up, so it’s possible the Central Bank is now cooking its data too. A source at the bank says the institution’s data isn’t being cooked. The Central Bank is an independent entity free of any government interence, he insists. But this source also admits that he, and all of his colleagues, are required to attend all public rallies and marches organized by the government, where attendance is taken and anyone who doesn’t participate can kiss their government jobs goodbye.
2. Foreign exchange reserves secreted in offshore accounts by the government are being transferred back to the Central Bank to bulk up the numbers. We think it’s doubtful that the government has foreign exchange reserves totaling over $100 billion, as Chavez claims, but it’s possible that there could be some spare cash stashed at interest-earning accounts outside Venezuela. Also, hard currency reserves stashed in hidden offshore accounts can be stolen more easily by Chavez and his corrupt cronies.
3. The Central Bank’s foreign exchange reserves are rising quickly because Venezuela’s government, including Pdvsa, has stopped paying its debts. As a result, the government’s cash outlays have dropped and the “savings” realized are reflected as higher foreign exchange reserves at the Central Bank. There is some empirical evidence to support this hypothesis. For instance, Pdvsa is not paying its suppliers and contractors. Pdvsa’s accounts payable as of fourth quarter 2008 totaled close to $10 bn, by some accounts. Pdvsa also has slashed cash transfers to social programs since first semester 2008. Other government entities, including the basic industries in Guayana, reportedly also have stopped paying their debts, at least locally.
We think it likely that Central Bank’s international reserves are increasing because the government has stopped paying its debts. Oil revenues have not increased, the government is not suddenly operating more efficiently, corruption has not declined. The government simply is not paying its debts. Perhaps the government thinks that debts not paid on time today will be worth much less in US dollars or euros over the coming months as the bolivar devalues. As the Wall Street-Washington financial debacle has demonstrated, one doesn’t have to be a Bolivarian revolutionary to advocate and practice stupid policies which ultimately screw voters.
But by not paying its debts on time, the Chavez government is ensuring that the economic crisis about to engulf Venezuela will be much worse in coming months. However, Chavez doesn’t care. His economic policies are dictated by a single overriding political goal: to perpetuate himself in power indefinitely.
By not paying his government’s debts now and bulking up the Central Bank’s international reserves, Chavez is seeking to win time until oil prices rise again and his revolution can be refloated financially. Chavez is gambling that oil prices will be rising robustly again by first quarter 2010, with a price recovery actually starting no later than fourth quarter 2009. Meanwhile, screw the Venezuelans who will lose their jobs because the government isn’t paying its debts.
UPDATE: A reader offers another possibility. The Central Bank booked as “reserves” one or several of the loans payable in future oil deliveries which Pdvsa contracted in 2007-2008. To the best of our knowledge, Pdvsa has borrowed about $12 billion in the past two years payable in oil, mainly from China’s government and Japanese trading companies. But if any part of these loans has been booked as Central Bank reserves, it’s still debt (hence not ‘reserves,” properly speaking) which payable in oil undoubtedly under terms which highly favor the Chinese and Japanese creditors. In fact, we are familiar with some of the terms and conditions of the Japanese loan-for-oil deals, and the creditors are receiving high value light crude at below-market prices, plus interest. TOH RB.

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About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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