We’re Gonna Party Like It’s 1989 (UPDATED)

/ August 6, 2013
Gotta love the fact that on the day the paquete was announced, the A1 photo in UN was of Miss Venezuela...

Gotta love the fact that on the day the paquete was announced, the A1 photo in UN was of Miss Venezuela 89…

Victor Salmerón’s latest in El Universal left me rechecking my calendar to make sure we’re not in January 1989.

Las reservas internacionales, el tanque de divisas que permite otorgar dólares para importaciones, pagar deuda externa y respaldar la moneda, desciende vertiginosamente y culminó la semana pasada en 23 mil 350 millones de dólares, un nivel que representa una caída de 22% en lo que va de año y el monto más bajo desde el 30 de diciembre de 2004. De este monto, explican fuentes financieras, solo 1.600 millones de dólares están en efectivo, el resto son barras de oro y bonos que no permiten elevar la oferta de divisas en el Sicad y Cadivi de una manera importante.

Time was when this would not have been cause for undue worry: BCV could discretely cash out some of the gold it had stored at the Bank of England and ease the pinch, at least for a while.

But after Chávez’s brilliant gambit of physically repatriating BCV’s gold, any attempt to dip into those reserves – assuming they’re even still physically there – would involve a highly public, very visible, deeply humiliating climb-down, with actual trucks-full-of-gold filing out of Avenida Universidad headed to Maiquetía on their way to China.

For all intents and purposes, then, Venezuela has $1.6 billion left in Central Bank reserves – about two week’s worth of imports – and falling fast. [UPDATE: Plus, of course, whatever is scattered around BANDES, FONDEN, the Fondo Chino, and other para-statals that don’t publish their balance sheets. Hat Tip: Beelzebub Scatology Man.]

The government’s natural response is to try to borrow the shortfall; in this case, to re-edit the old SITME swap mechanism, where bonds are sold in bolivars in Caracas and buyers can then sell them on for dollars in New York. We know what a brilliant success that was, right?

Anyway, the borrow-the-difference route works…until it stops working. At some point our finances will get fucked up enough that no one wants to lend to us, even at the credit-card rates we’ve been offering for some time now. Shenanigans like refusing to pay holders of bonds issued by companies you’ve expropriated can only hasten the moment – but then, when the money’s just not there to pay up, whatchoogonnado?

One thing is for sure: keep walking down this path and you can only reach its logical llegadero: dollar expenditures far outstripping income, no liquid dollars left in reserves, no one willing to lend you more. February 1989.

Chavismo has always sustained itself on the fiction that the adjustment package of 1989 was an ideological choice rather than an arithmetic imperative. Welcome to the bajadita, bitches.

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65 thoughts on “We’re Gonna Party Like It’s 1989 (UPDATED)”

  4. There is at least one huge difference between 1989 and today. Back in 1989, almost nobody was willing to tolerate the “paquetazo”. Everyone got mad, and the consequence was the “Caracazo”. Today there is a very large sector of the population that hates the opposition so freaking much that they will always support the government, no matter how bad the situation may get.

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    • one would think that there is always a limit, but then you’d see Zimbabwe and prove me wrong, I guess that the change is going to have to be forced by the opposition’s action (I could mean a revolt/coup but not necessarily), hope they don’t jail me for desestabilizacion

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    • Its a sad thought that the promotion of savage hatred against the oppo can save the regime from the its self destructive , corrrupt , inept handling of the countrys ravaged economy and life . It says something very demeaning of a people who would rather destroy themselves than abandon their sordid , inflammed fanatical passions . It stinks of fascism in its last throes !! I would have thought that they might delude themselves into thinking that they might magically effect a turn around from todays worsening conditions, but no, its manipulated hatred which they feel that will turn the tide.!!

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    • Yes, of course. That is why the government pushes all that hate propaganda. No matter what level of economic or moral disaster they cause, they keep telling everyone the opposition are demons. Demons, I tell you!

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  5. There is one difference, in 1989 all dollars were in the Central Bank. Today they are not. Bandes, Fonden, Government banks have dollars. How much? Not certain, but I think it is premature to think the adjustment is coming, if it were, SICAD would be selling dollars at Bs. 20, not 11.

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      • Also, oil price was @ 18 (~@36-37 today as @veneco pointed out)

        If they make some adjustments, with oil @100, they should be able to buy time.

        For me the great mystery is how much is there in Fonden and, if there is really anything there, why has it been so difficult to access the funds? These guys have never allowed law or regulation to get in their way before so I doubt this is the reason…

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  7. I have to disagree with some of your arguments, even though I strongly oppose many of the economic decisions of the government,

    First, Venezuela can sell through several financial structures some of “non-monetary” gold stocks. Besides, not all of the “monetary” and “non-monetary” gold are located at the BCV per sé. . Furthermore, the net assets position of the public sector overseas accounts more than USD21 billion, which at least 10% is in liquid assests (inter-regional funds, public sector accounts, among others). This is without counting with the hard currency positions in Fonden, Chinese Fund and Bandes, and the constant cahs flow of PDVSA. By the way, the “monetary” gold, due to its international certification requirements is not easy to “steal”.

    On another remark, the repatriation of gold is not new and definetely is not exclusive to this government. Last year, Germany did exactly the same as Chavez in this subject. No one raised critics about that.

    Regarding the international reserves downfall lets remember the moving average of 180 days on the gold price (benchmark for the BCV), which is affecting the value of the reserves. Also, it is important to highlight the future effect of an important debt service (both capital and interest) in September, and another one in December (PDVSA’s), although this need was already covered and considered by public officials. This is not mere coincidence with the pressure on liquid reserves created by SICAD, which is the main reason to sell bonds à la SITME, creating this sort of “SICATME”.

    On a final remark, if no one would want to lend us, think twice. Remember the Chinese, and the oil giants that recently lent PDVSA, against all the negative views of the market. Despite a high risk rating, the government never stopped paying its external debt (I’m not counting other types of debts, just in case). When lending, the most important evaluation is the cash flow you generate, not the stocks you hold, so the reserves level here are not that relevant.

    Well, I just wanted to give some perspective. Excellent blog by the way.

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    • Thanks.

      You lost me here, though…

      Furthermore, the net assets position of the public sector overseas accounts more than USD21 billion, which at least 10% is in liquid assests (inter-regional funds, public sector accounts, among others).

      Con qué se come eso?

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  8. That is also known as “Posición de Inversión Internacional”. It includes direct invesment, portfolio investment, loans, credits, and other investments, that both private and public sectors hold overseas. For example, Venezuela holds USD292.534 billions in assets (private + public sectors) outside the country. In the net assets position (assets – liabilities) of the public sector, there is a USD 21 billions surplus. here you can count stocks of off-shore public subsidiaries, securities held by the government, granted loans, foreign accounts deposits, etc. The private sector has a bigger (a lot bigger) net assests position. This is why Venezuela is the 4th country in the world, that hold more assets overseas (China, Russia and Brazil are 1st, 2nd and 3rd respectively). With this significant amount of resources, we are not as broke as we may think, in a general basis.

    I hope this answers your doubt.

    Kind regards.

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      • Guillermo,
        Do you have any evidence on how liquid may be the net assets position of the public sector overseas? I suspect is not very so. Most of them if receivables from the oil agreements tipo petrocaribe and hot air like Venezuelan counterpart in the Fondos Chinos of this world.

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        • Omar,

          So far, the sources I researched were BCV statistics and Barclays Reports. Go to Balanza de Pagos section in the BCV and you will find the spreadsheet with the data I mention.

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          • I´m (very) familiar with BoP statistics, Guillermo. My question was reffering to your assertion that “at least 10% is in liquid assests (inter-regional funds, public sector accounts, among others)”.

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    • Guillermo,

      I dont get the same sense from looking at the NIP, maybe you can clarify. The Public sector net investment position includes international reserves to begin with, which as of March 2013 were US$ billion 27 billion (and the PS NIP was US$ billion 22.6). So the net PS NIP excluding reserves is negative (US$ billion -4.419). The same concept (PS NIR- reserves) was 24 billion in 2008. There just doesn’t seem to be that many extra ressources from which to draw.

      Also, the point that the private sector has a hugely positive NIP is of little help to the government. The money is not fungible.

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      • Rafael,

        Of course. I understand your last point. Is not fungible. I said it to contrast many of the popular phrases like “el país está quebrado” and similars.

        On the first point, looking at “other investments” accounts to give an example, according to the BCV there is USD 24 billions in foreign accounts deposits (excluding international reserves). These deposits may range from the government per sé, public companies (mainly PDVSA, Bandes, etc.), to quasi-fiscal or regional funds. As the currency supply is given (by law) extrictly from oil exports of PDVSA, supplying BCV and CADIVI subsequently, by legislation we find the first obstacle on dollars supply: current regulations. The way I analyze this information (I might be wrong though), the problem is not in the lack of dollars, but in the obstacles to pump these non-oil-exports-dollars into the market. There is a sufficient stock of greenbacks, but there is no channel to direct them, as Bandes and quasi-fiscal funds are regulated in this matter. Why is the government not considering these resources? As usual in this country, it’s all gray regarding governmental decisions. Whether the money is marked on specific projects, debt service, or with no legal way to be inserted in CADIVI/SICAD. And with current corruption scandals, it will not be easy to allow Bandes and the Chinese Fund, for example, to pump dollars directly.

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        • Sorry, but the idea that the government is not injecting theses dollars into the economy because is afraid breaking the law is pretty naif. If the government cared about following the law, and more importantly the Constitution, things like Fonden or the Chinese fund wouldn’t exist in the first place, they are afraid of what consequence of breaking the law? A sanction from the National Assembly? A decision of the TSJ? An investigation by the Comptroller General?

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          • Exactly.

            This is what has me scratching my head every time I hear there is money outside reserves.

            Under the current extreme circumstances, and given precedents, I find it hard to believe that these fund have not made it into de economy because of regulation.

            There may be other explanations but, given how much time has passed with no adequate solution, I am starting to believe that either the money is not there, is illiquid, or it is an accounting mirage.

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            • I am starting to believe that either the money is not there, is illiquid, or it is an accounting mirage.

              But wait. A “mirage” is when you see something that’s not there. But they don’t even show us Fonden’s balance sheets! It doesn’t even rise to the level of mirage.

              It’s more like an urban legend…the Bigfoot of public sector accounting.

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            • And about the public opinion argument, if the fact that the government unconstitutionally created a parallel budget with no oversight (money that was almost literally flushed down the toilet, as it was very well documented in the Reuters piece, that almost no one, even by the opposition cared to read or spread ), gave a bunch of people preferential dollars to bring food to rot, and most recently medicines to expire (the SEFAR scandal that no one talks about) things that happen without even making dent in the government’s popularity, transferring some billions to where it should constitutionally belongs is not going to overthrown Maduro at this point.

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              • It all sounds like the plot of a mistery novel : “the Mistery of the Missing Billions” by R Maduro and Collaborators, Just guessing ( dont know how BCV builds its figures) , but part of the money must be committed to funding running Pdvsa operations and those of other govt institutions , others may not be so easily available under existing financial agreements ( e.g. The Chinese Fund requires a certain pre set portion of the oil price payable on Oil supplies delivered to China to be kept in Chinese banks as a kind of guarantee of future payments ) , Additionally this year international arbitrators will decide the Conoco and Exxon claims for payment of compensation for the expropiation of their assets ( a sum which will likely run several billion US$ and which govt accountants are likely to underrate ) . There are so many details which are kept under wraps that its difficult to tell . The thing is that for one reason or another not all the funds which the govt has abroad appear to be available for use in feeding the Country’s foreing currency needs and this is having an impact on inflation and the proliferation of all kinds of scarcities.

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          • I did not say they were afraid. Under their ideological thinking, is “convenient” for them to comply the regulations in this case. You just have to look for declarations of former Minister of Planning & Finance, Jorge Giordani. He said that he was not even interested in giving dollars to the private sector for 2 reasons. 1) In the ideological scheme of XXI century socialism, why in hell would you do that? It wouldn’t be “efficient” due to fake enterprises, fraud, and speculation of privates 2) Apart from PDVSA and SITME (in that moment), he has “no other mean” to do so in a legal basis (he’s not even interested in finding one). Public imports in the last 5 years rose significantly, and not because a lack of greenbacks. Apart from the regulations, we also have to consider the criteria to allocate dollars. This bring us to the eternal fight between the pragmatic vs radical factions within the government. We have Merentes now, but the claimed pragmatism is almost nowhere to be found. Why? Maybe Giordani did not lose too much of his power as we may think so.

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            • Furthermore, thinking like the government (dear lord save us all), why would I give dollars to privates, if it’s very costly at VEF/USD 6.3 or even at SICAD established rates, when I know that many of these dollars don’t end up in effective imports, and are just serve as a supply of the distorted black market? I’m practically financing the privates to go shopping overseas and make turism. Even though is my fault (as government), why would I allocate these dollars if I have elections every year that need public spending to raise popularity? Let’s just give it to the public sector, and pretend that corruption is not there (while they give me a share of it).

              Why is the government not using these resources of International Investment Positions then? Under their captious thinking of the private sector, they don’t see the complete point of “wasting” these dollars on them. We just have to see the enormous surge on public imports.

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              • The trouble with the “they won’t transfer funds from Fonden to BCV Reserves because of regulations” theory is that PDVSA already has wide latitutde to decide, discretionally, whether it sends high oil windfalls into Fonden or into BCV Reserves.

                Back on February 28th, there was an overnight $834 million hike in BCV Reserves, and Merentes told us it was because PDVSA decided unilaterally to send it there rather than into Fonden. Given that Fonden’s balance sheets aren’t published, there really isn’t anything keeping PDVSA from taking money out of Fonden, depositing it in Central Bank Reserves, and calling it a “windfall transfer.”

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    • Venezuela still has by far the highest inflation rate in Latin America. It is still higher than before Chávez was trying to get himself elected for the last last last last time.
      And comparatively speaking even though inflation was higher during Caldera II, it was back then lower than in several other Latin American countries.
      The country is just living off the last it can get from the longest oil boom

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    • Ah, you ducked out of my final question in that spat: “What would you consider success.” So the answer is that you now consider Weisbrot correct because inflation slowed down to still the highest rate in South America in July: 3.2%. Bowling for the special Olympics eh?

      Given the variability of Venezuela’s inflation, i wouldn’t be so quick in celebrating. Anything over 1% monthly still results in inflation above that promised by various government officials, and should therefore still be considered a failure by any normal person. I bet you it averages over 2% monthly the rest of the year (i.e. Weisbrot was still wrong).

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  11. I read the comments by Guillermo and the answer by the other people and I could not understand what the Fu…they were talking about . But the only thing I can say from my humble knowledge of economy, is that when a country loose 30 % of its hard currency reserves in six months the end result is a “paquetazo ” with a 1989 flavor. Only this time there is no industrial production in Venezuela.

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    • Hahaha. Don’t worry man. That’s the question of the year. How far are we from a social uprising like in 1989? Let’s hear the bets.

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      • I am actually very worried about that. One thing that the government learned (and has a lot of practice) is to repress in a less lethal way. in 1989 the only security forces trained for mob control were the metropolitan police who were on strike. Now pretty much all security forces including the national guard has mob control training and equipment.

        But the pressure cooker is boiling and the knob is at max heat…

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  12. And lets not take into account the “urban legends” that say that most of the BCV gold is in Cuba, Russia or China (take your pick…)

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  13. The discussion of overseas/hidden reserves is all very well and good, but, practically, even this inept Government would have used them to try to lower the parallel rate, which governs a large sector of Venezuelan economy consumer pricing, if such reserves did indeed exist. As for consumer price inflation, the highest in Latin America, and one of the highest in the world, in spite of near-record oil prices, this is generally way understated, based as it is frequently on Government price-controlled goods, which, with the exception of Mercal, et. al.,are usually sold in retail outlets at 2-3x their price-controlled level, as is being done, for example, by buhonero street sellers.

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  14. Bloomberg reports tanker freight rates for VLCC’s going down 60+ % in recent weeks and a slight decrease in Chinese oil imports ( the first decrease since 2005) , Could this portend the possibility of a fall in oil prices later in the year ?? If thats the case maybe the govt is just husbanding its offshore resources to safeguard agains such eventuality .

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