BoP Crisis ain’t just a river in Egypt

Allegorical depiction of the BoP Crisis we've just battled through...

Allegorical depiction of the BoP Crisis we’ve just battled through…

There’s an awful lot to digest in FRod’s latest research note on Venezuela’s national accounts for Bank of America, enough to keep me going for more than a couple of posts. The headline finding is that the national accounts the Banco Central de Venezuela (BCV) presents are, if not outright fudged, then seriously misleading. (See Translator note at the end of the post for background on the terms)

In one way, as Rodríguez points out, that barely counts as news. The BCV has long reported ample, comfortable Current Account surpluses that didn’t make any sense in the context of a country very clearly going through a painful external adjustment.

It takes an outright moron to look at a country where the government is slashing spending, the currency has just been devalued by 32% and even then dollar disboursments have dried up and the street exchange rate is nine times higher than the official one, then turn around and look at BCV’s national accounts, hold the two up next to one another “nope, all that adjustment stuff must be a collective hallucination because … the Current Account looks fine!”

What we hadn’t known is exactly where the fudge was, and this is where FRod’s research comes into its own, diving into the nitty gritty, and coming out with answers.

After a fascinating little riff decrying the pathetic return Venezuela gets from its assets held abroad, he identifies four areas where the BCV’s accounts depart from reality as the rest of the world understands it:

We show that the country’s policy of handing out foreign aid through trade loans, its large reliance on import prepayments, its restrictions on dividend repatriation and its underreporting of public sector imports have led to a systematic overestimation of the economy’s current account position.

The section where he goes through and puts an actual dollar figure to each fudge is fascinating.

Of special interest is his take on the government’s oil “financing” deals with political allies, which we’ve known all along contain a large, juicy, implicit handout to the recipients. (There’s just something repellent about foreign aid from a country where you can’t find milk in the stores, isn’t there?)

But while the politicos just bitch and moan about this, FRod actually sets out to quantify the giveaway involved in Petrocaribe, the Caracas Energy Cooperation Agreement (ACEC) and the Integral Cooperation Agreement (CIC). He concludes that out of every $100 in financing we give out through these deals, we can kiss $52.80 goodbye. For technical reasons, that giveaway isn’t reflected in BCV’s national accounts.

Just like banks that give out bad loans cannot, for prolongued periods of time, count these loans as “assets” if they know they won’t get paid in full, so the BCV should not list all these giveaways using their paper value. Doing things the right way knocks $3.19 bn. off of Venezuela’s Current Account surplus for 2012 … about a quarter of the total!

Then we really get into the weeds, as FRod goes through the problems of accounting for agreements where we ship out oil and get back imports of goods like Chinese appliances, or services like Cuban sports trainers.

Based on discrepancies between PDVSA and BCV data, he surmises that the BCV is badly over-reporting how many of these shipments are still to come in, or under-reporting how many have come in. This is a more technical point, but also a bigger figure: $5.68 billion is wiped out of last year’s Current Account surplus if you get real and figure that if it’s not a PDVSA account receivable, it’s not likely to be flowing into the country any time soon (or, um, ever.) In other words, if the BCV thinks we are supposed to be getting $100 worth of Chinese dishwashers, PDVSA puts the figure at, say, $80. This means the BCV thinks we are richer than we really are.

He ends the section with a fascinating look at pre-paid public sector imports. This is something you don’t really hear much about but makes almost as big a difference to the current account as the Oil Financing giveaways. Turns out we spent $2.87 billion in 2012 on stuff that’s wasn’t meant to be shipped to Venezuela until later, a spending figure also not reflected in last year’s national accounts. This quickly becomes un peo entre contadores, as the correct interpretation of the accounting rules for this kind of operation seems to be under dispute. FRod’s position is that BCV is following the letter of the BOP5 rules, but not their spirit.

Put it all together and what you get is a country that ran a small Current Account deficit last year.

Let’s just pause a second to marvel at that. It takes a special kind of stupid to get a massive oil exporter during an oil boom to run a Current Account deficit. It’s an almost impossible feat.

Long as this post is, it’s covered about a tenth of what’s in the paper. It’s a riveting read, or, well, as riveting as a paper that includes sentences like “the registration of advance payments as offsetting capital account movements (a credit in the line containing the means of payment used, a debit in the trade credits line) is a somewhat counterintuitive implication of the accruals principle that underlies the BOP5 rules” can be.

Perhaps the most interesting finding is one that I haven’t even touched on yet. The Maduro adjustment has been hard, but it also looks like it’s been somewhat successful, at least in terms of re-establishing external balance. FRod’s revised national accounts suggest BCV both understates how bad things were in 2012 and how much they’ve improved (in purely macro terms, ojo) in 2013.

The adjustment we’ve seen has been via diminshed imports, fewer Cadivi dollars, and empty shelves. It’s been rough, really rough…but it’s not necessarily the case that it’s going to get a lot rougher than this.

(Translator note, skip if you know this: the current account is the difference between exports and imports – a deficit means you are importing more than you are exporting, a surplus is the opposite. The capital account is the difference between money that goes out and comes in via things other than exports and imports – for example, when a company invests in Venezuela, or a multinational takes money out of Venezuela as dividends repatriation, or interest rates paid for foreign debt. The balance of payments includes the current account and the capital account – basically, the sum of dollars that leave minus the sum of dollars that enter)

48 thoughts on “BoP Crisis ain’t just a river in Egypt

  1. Thanks for this! For a while it has seemed to me that something didn’t add up, but your ability to summarize the FRod work is really helpful.

    Honestly, how could anyone fully understand Venezuela without Caracas Chronicles?


  2. Thanks for this, Francisco.

    I was trying to get a clearer overview of trade for Venezuela and I was going through BCV reports against guesses from the Dutch and Colombians. There was one thing that interested me a lot: according to the BCV, Venezuela had a clear surplus with Cuba in 2012, a couple of billion dollars. There was no information about what that was really about and I was wondering when the government will have to admit that that is money we will never see. Perhaps it will be the first opposition government that will have to put that as loss.


  3. Nothing new but helpful having it quantified. If the worst of the readjustment is behind us then Maduro could be around for the long term. Gracias a Cuba.


    • oh FRod goes a lot further than that…he thinks the Paquetazo is basically done, or close to done. It’s a miserable place to end up – there just clearly aren’t enough dollars to go around. But he doesn’t think we need to tighten any more than this to reach external sustainability (a.k.a. avoid running out of dollars outright).


      • It may be done with oil at close to $100 a barrel. But the trend is not looking good for Maduro. Seems like FRod should keep his schedule open – he might have to write another one of these ditties some time soon.


        • That’s what I thought. And given what we know of Chavismo, just stable prices at $100 will mean increasingly tough times in 2014.
          Maduro must be praying for war in the Middle East.


        • Not only prices, but the oil has to be kept flowing which is the greatest challenge facing the govt specially as it lacks both the huge resources and operational and technical capacity needed to exploit the extra heavy crude reserves and maintain and develop the now falling production in the aging light and medium crude fields,.in a business climate where the foreign companies have little reason to trust Pdvsa’s promises.!!


      • Well, the Paquetazo is not only adjusting near-term external imbalances… There’s some pressing issues outstading in our economy:
        – The accelerating budget deficit.
        – The explosive increase in liquidity (partly related to the previous point).
        – FX distortions resulting from our de-facto dual-(or triple/quad?)currency regime.
        – Declining international oil prices (Venezuela crude touched 92$ last week, in sustained decline since August).
        – Lagging, too-low regulated prices (which the Central Bank already said will be adjusted ‘periodically’).

        And this is only on the macro environment…


        • Oh absolutely. Nobody’s arguing the policy mix we’ve been left with is anything like sane. It’s just that a lot of people have this sense that the government will have to cut back on spending even more and tamp down on dollar disboursements even more to stave off a BoP crisis. And while the oil price remains a wild-card, the message in this research – not necessarily, chamos, not necessarily – is valuable.


      • I think that what you can get from this analysis is that, at least for the next few months, the government has managed to “correr la arruga” and the collapse that everyone is predicting will not happen as soon as expected, and that, at least in BoP terms, the Maduro government is not as crazy and misguided as most of us think, otherwise he wouldn’t possibly be telling people not to sell their Venezuelan bonds.


          • And don’t discount the tension from sending the paquetazo to hell before shit gets worst. Apparently, there was a huge battle between Ramírez, who wanted to issue more debt now and Giordani who opposed it. Apparently, Giordani won (for once he was not the craziest one) But its a temptation I mean the consequence of the adjustment to barely avoid the BoP crisis have been so dire, that the incentives to go back to issuing debt like crazy will allways remain.


  4. Rodriguez’s paper is quite aseptic from the political and ethical viewpoints. This makes it very useful as raw material but not necessarily as a finished product. For example, when you say that “the Maduro adjustment has been hard, but it also looks like it’s been successful, at least in terms of re-establishing external balance”… I feel the last part of your sentence is a very appropriate caveat.
    Why? because the real criteria to call the adjustment “succesful” should, of course, be the comparison with a situation in which our national income had been better managed, this is, no obscene handouts, no unnecessary imports, no high interest loans due to our bad credit rating. It is with the Venezuela that should have been that we probably want to measure current Maduro’s “success”.


  5. A thing to be noted is that people in govt are not absolute dummies in that at least they have been able to put together a program to restablish the macroeconomic balances for the time being . This means that although stupid in the way they run the economy into the ground they have certain response capacity when confronting really dire problems. I dont know whether to treat this fact as a reason for hope or deep despair.!!


      • Who put together the “paquetazo”? Merentes. Who is in the back bench, possibly on his way out of the government? Merentes.


      • Indeed. The Chinese did not enter into economic agreements with Venezuela for altruistic reasons. They did so to make money for China. Nor are the Chinese incompetent at managing an economy, judging by the results of the last 30 years. It would not take the Chinese long to have figured out that the Chavernment’s economic policy was one big clusterfuck- at least for Venezuela, if not for the Cubans. Because the Chinese have a vested interest in the success of the Venezuelan economy, to insure that they actually get paid, it is not difficult to imagine the Chinese suggesting certain changes in economic policy.
        Ad hoc observation: the Chinese economy is based on an undervalued national currency, whereas Venezuela’s economy is based on an overvalued national currency.


  6. It will get rougher. Apart from a declining oil price (at least for now), the Country. has immense multiple-billion$ debts to international oil field suppliers, farmaceutical companies, airlines, Brazil, probable CIADI settlements, as well as a substantial debt to Colombian suppliers, plus increasing international bond payments, and who knows to what others who have been stiffed by this maula Revolution. Macro BOP balance indeed!!


  7. I dont see the big fuss about the “policy adjustment”. It is true there has been an adjustment, the same way is true that you can not spend more than you earn when people stop lending you money. So, yes, there has been an adjustment…as a consequence of a “sudden stop”! Nos quedamos sin plata y ahora estamos comprando menos!!! Not really sound economic policy. The country hit a wall and could not keep forward…the result: a sharp economic contraction coming our way…I wonder if Francisco will write a paper on how the BCV deals with that other set of “statistics”


    • Great comment, Rei. We may have staved off a Balance of Payment crisis, but we did it at the expense of engendering an Anaqueles Vacíos crisis.


      • “Engendering and Anaqueles Vacios crisis in order to stave off a Balance of Payment crisis”

        I don’t know, this kind of reminds of the joke about a guy who had a hunchback son. He heard about this doctor who supposedly had developed a machine that could straighten his son’s back. So he goes with this doctor and the doctor says “Oh, this is the typical case I can treat, just give me your son, I’ll put him in the machine and after an hour his back will be straight”.

        So the guy does just that, and after one hour the doctor comes back and says: “come inside my office and have a look at your son”. His son was still inside the machine, but now clearly his back was straight, so initially he was filled with joy, but then he noticed his son had his eyes wide open, but was not moving. “WHAT HAVE YOU DONE? MY SON IS DEAD!” yelled the guy.

        “Yes, but his back is straight”, replied the doctor.


      • Naim at IESA argued that this would be Chavismos strategy. They can almost shake off the political cost of empty shelves blaming others, but hardly they can shake off devaluations and other tough but needed reforms. What concerns me right now is that Chavismo found a way to correr la arruga. But at the same time it is an extremely dangerous strategy.


  8. True Juan, We did not deal with a BoP crises, the BoP crises dealt with us! And we are left with the consecuences: lower consumption, and skyrocketing exchange rate. By the way, because the demand for local currency is collapsing, despite all controls we will see a high demand for capital flights. It will happen anyway, and that source of demand is not accounted by Francisco´s paper


  9. BAC seems to think that the worst has passed with the Maduro “paquete” and that we’re running a slight deficit in current account but we are sustainable (if i’m reading this correctly). On the other hand, MS published a note (Venezuela:Risks Rising by Daniel Volberg) two or three weeks ago, and they say that the 2012 current account deficit was -7.4% of GDP as they suspect that Venezuela has been overstating oil exports and revenues since 2003 ($54 B vs the official $93.6 B for 2012)–in their restated current account situation, we’ve been running a deficit since 2007 and see “balance sheet continues to erode, increasing the risks to Venezuela’s solvency over the coming year or two if authorities fail to present a credible turnaround plan.”

    i hate dueling investment banks.


        • Thanks!

          It’s interesting, but Volberg is analysing something quite different than FRod –

          “If we are right, any meaningful turnaround in Venezuela is going to require much more than a currency fix: Venezuela needs a dramatic policy shift towards a more business friendly climate that encourages investment, especially foreign direct investment (FDI) in the oil sector.”

          FRod’s paper isn’t interested in any “meaningful turnarounds” – which is a pretty vague phrase, when you think about it. It’s much more narrowly focused on external balance – dollars in, dollars out.

          Volberg’s piece isn’t really trying to comment on the narrow dollars-in-dollars-out question in the very short term – 2013. It’s looking at a broader understanding of sustainability in the short-to-medium run. Regrettably, it doesn’t really tell us anything useful about whether Maduro’s paquete is on track to re-establish short-term external balance.

          FRod’s analysis seems, in its way, more hard-boiled and pessimistic. There’s no point speculating about increasing oil production, he seems to say, or going into any other logical fixes the government could apply to lift the misery. The government won’t apply ANY fixes. It needs external balance because it’s run out of creditors. And so external balance is what we got, rammed down our throats in the form of bare shelves. You might hate it. Pero eso es lo que hay.


  10. This post is tremendous in its clarity and readability. Thank you, Quico. I look forward to more behind-the-scenes investigations on this economic saga.

    Meanwhile, if Mark Weisbrot were a tradesman, say a carpenter, he would be bottom fishing for customers, given his penchant for lazy thinking and cutting corners. His only merit is having created a bridge between his product and users, who like him, don’t like digging for credible detail.


    • Isn’t it fun to also speculate that he may have been removed due to involvement in the sports ministry corruption scandal? (funny how that one went silent, like many of the other atrocities).


      • the corruption scandal was not silenced. But the name(s) certainly were blacked out Not that that would have stopped any thinking person from automatically connecting the dots by naming Maldonado, whose smirk in the photo noted in la patilla invites more connect-the-dots …

        After enjoying the endorsements, well after Maldonado’s sell-date/flash-in-the-pan performance, Williams distanced itself in order to clean its image and/or found itself with no more funding.

        But let’s not stop there on the Vz gusher of monies liberally spent to promote other assets abroad. Anyone ever asked themselves, how come Vz wins beauty contests, year after year, even though there are other just as “beautiful” candidates, that are better prepared? Así se los dejo.


    • I’ve been wondering about this. Williams signed Felipe Massa who, unlike Pastor, is not what is known as a “Pay Driver”. Pastor paid (well, we did, really) to drive whereas Massa does not given his experience and talent.

      PDVSA had signed a 5 year deal to the tune of 40 MILL or so per year. I have not read the definitive contract, so I am not aware if there was any clause that paid Williams whether or not Pastor drove, or if there is any penalty if PDVSA cancels early.

      Since Williams fired Pastor (basically), then probably PDVSA is not on the hook for the rest of the deal.

      As to whether or not this has anything to do with the CADIVI/Sports scandal, probably not. Massa became a free agent and Williams would be foolish not to sign him so that is what probably happened, although if I am proven wrong it not should surprise anyone, given who the actors are in this little dramedy


  11. So, perhaps, there is a sustainable equilibrium vis-a-vis foreign exchange? However, hospitals cannot provide service, food is scarce, inflation is rampant, military and police and militias are prepared to subdue civil unrest, news media are blacked out, oppo’s are practically under “house arrest”, private enterprises are operating under controls that are probably making them unsustainable, foreign investment has stopped, tourism has bottomed, oil production is in decline, infrastructure continues to deteriorate, automobiles are worth more than houses, the constitution is a joke, everybody wants to buy dollars! I see that on the international front, there may be some sort of sustainable equilibrium, but on the home front, things are getting worse!


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