Known unknowns

“There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns.”

-Guru Rumsfeld

Quico says:
It was interesting reading through the comments to Juan’s latest post. Everyone seems to think Chávez will announce a currency devaluation sooner rather than later – sometime between November 24th and the February 2009 seems to be the consensus.

I find it bizarre that the range of guesses was so compact. People seem to be recklessly ignoring the wisdom of Guru Rumsfeld here. When it comes to forecasting the next devaluation, we’re mired in known-unknowns land.

Personally, my sense is that Chavez’ll do the Lusinchi thing and draaaaaaw things out as long as he possibly can. How long is that? Well, that depends on two things: how much money oil brings in next year and how much money the government has on hand for a rainy day.

Thing is, we don’t know either of those numbers!

What we know for sure is that the Central Bank is holding $39 billion in currency reserves (about 10 months’ worth of imports) and that the central government keeps $800 million in a rainy-fund FIEM account at BCV. Those totals we can be reasonably sure about of because they’re reported daily.

Trouble is, the rest of the government’s rainy day cash stashes – Bandes, Fonden and PDVSA’s cash and accounts-payable (plus, imaginably, other kitties we don’t even know about) – report bi-annually, if at all.

Which means that whenever you see an “independent analyst” putting a date to a devaluation or an oil-price threshold to the government’s fiscal viability, these people are working off of data that’s almost 5 months old, un-audited, impossible to verify and incomplete.

Depending on who’s doing the counting, the government’s rainy-day funds might come to anything from $12 to $75 billion. (That’s not including foreign currency reserves which, as I keep stressing, are made up, by definition, of dollars the government has already spent and are, therefore, not “government savings” in any meaningful sense)

$12-75 billion. That is a wide range. A ridiculously wide range, actually. A range wide enough, in fact, to make a mockery out of any attempt to forecast what’s going to happen.

If oil stays north of $70/barrel and the real rainy-day funds figure is in the upper part of the range, it could be years before Chávez devalues. If oil drops to $50 or less and the state’s reserves are towards the bottom end of the range, we could well be looking at devaluation within 3 months.

Everyone in the opposition seems to be taking it for granted that we’re heading into the second scenario, rather than the first. People point to PDVSA’s aggressive borrowing in the last two years as a sure indication that the company must not have big piles of hundred dollar bills laying around somewhere waiting to be spent. Certainly, it would be senseless, irrational and bizarre for PDVSA to be paying steep interest rates to borrow money to finance its investments while, at the same time, holding big hoards of cash.

El detalle is that “senseless, irrational and bizarre” might as well be chavismo’s fiscal management motto. These days, mere senselessness is weak grounds for excluding something as a possibility.

If we’re honest, we should aggressively hedge any forecast. Fact is, the government’s financial reporting is so deliriously opaque, we can’t really speak with confidence about the key variables at play.

We might be on the edge of a precipice, or we might be a comfortable distance away from it. One way or another, when the time comes, count on Chávez to take that step forward.