The empty piggy-bank

The BCV vault
The BCV vault

Business Insider cites a report by BofA economist (and amigo de la casa) Francisco Rodríguez, explaining how the dramatic drop in Venezuela’s foreign reserves is caused almost exclusively by the dip in gold prices.

The money quote:

Valued at market prices, gold reserves have fallen $4.2bn ytd and $5.5bn from their September 2012 peak. Not all of this decline has been incorporated into the reserves figure reported by the central bank due to the smoothing effect of the moving average formula. If gold remains at its current price, we can expect reserves to decline by an additional $1.1bn due to this effect.

Non-gold reserves now stand at $6.4bn. Of this, $3.9bn are SDRs and net credit positions before the IMF, leaving $2.6bn of FX holdings, 70% of which is in liquid instruments.

This alone won’t cause us to hit rock bottom. But it’s yet another troubling sign for the weak Venezuelan economy. Add that to the recent developments in Puerto La Cruz, which will surely force us to fork over hard cold cash to pay for imported petroleum products, and the outlook is not good.

Rest assured, though, that some people will continue to say everything is just peachy.

HT: Aquiles.

Key chart after the break…

screen shot 2013-08-08 at 3.13.41 pm

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  1. What’s really interesting is the graphic FRod digs up:

    You can see these mysterious up-ticks in liquid reserves every six months – one in June 2012, one in December 2012 and the latest one in June 2013. One account I’ve seen says this is PDVSA devoting some of its excedent from the windfall tax to BCV Reserves rather than FONDEN. Other people think these are sotto voce transfers from Fonden to BCV Reserves.

    Either way, the really difficult thing is assessing how much longer Fonden and/or PDVSA are going to be able to keep sending these periodic bailouts. Because $1.8 bn in liquid reserves is NOT an adequate level for an economy that’s importing $42 bn. a year, and has debts to service on top of that.

    • If you could run the dataset back a little bit further (just to provide more data points) and match production levels to weighted price over the six month period, the estimated taxes should roughly match the upticks, no?

  2. The other thing is that that chart clearly refutes the BusinessInsider headline: You can very clearly see a big dip in the blue block from around $5 bn at the start of the year to $1.8 bn now.

    The problem is the opacity. How many more six-monthly rescues can we really expect? And aren’t those six-monthly rescues getting smaller each time?

  3. I don’t know what “almost exclusively” means. The price of gold in reserves is calculated using a six month average. That value on Dec. 31st. was US$ 1703.7. On Friday, that value was at US$ 1410.14.

    Assuming they have not sold any gold, that is a 17.22% drop in the value of gold reserves.However, reserves have gone down by 22.5% so far in 2013, which means that 5.28% has been the dropped in liquid reserves.

    This is US$ 1.57 billion, not exactly a small amount, given that is comparable to what is liquid.

  4. Didnt somebody in this blog mention that Fondem and Pdvsa among other govt entities had some 20 odd billion US$ not counted among the reserves but which might be kept handy in case they needed bolstering ??

  5. If Francisco is right that bailouts are coming from the windfall profits tax, then a return to normal profits in the oil sector will mean no more bailouts and a declining ability to import stuff, like food.

  6. Sorry, made a mistake, here is the graph

    I still think that if things get tough, the Government will contract its own imports

    • Contracting its own imports, usually through unnecessary commission middlemen, and shipped to Cuba for trans-shipping to Venezuela on Cuban vessels, will not solve the problem….

  7. To add to the gold horror story:1) Reserve gold was until a few months ago valued at a 3-month moving average, then changed to 6-months (supposedly currently), and, who knows, maybe to 1- year to infinity in the future, all to slow the stated decline in value; 2) From a recent inside-the-vault source-there is no gold in the BCV today, and the gold moved into the vault by Chavez some time ago was moved out piece-meal subsequently over time, either to be sold to pay for imports; or, as rumored, at least in part shipped to Cuba when Chavez was sick there. Hopefully, the gold originally ordered by Chavez to be shipped to the BCV was only a few $ billion for public show, and not the entire amount as he announced, because, if not, the Country is more up the creek without a paddle than anyone can imagine. Final thought: take international investment bank opinions/information about Venezuela with a grain (pound?) of salt–they’re invariably angling to do business with the Venezuelan Government (bond issues, etc.), and surely don’t want to say anything that might anger the Government.

    • I would agree in general with your last comment, but I don’t believe BofA in particular, with the well-known critic Francisco Rodriguez (author of the note) has a chance in hell of getting much business from the Venezuelan government, same goes for Barclay’s.

      • True, the investment bank outsiders generally have more critical/believable information to offer, but, still, they usually hold out hope for future business, and can’t be completely trusted (ask Syd, who used to work in that nest of scorpions, as did I).

        • A Chinese wall separated my experiences with the investment banking arm of a nation-wide bank, where I once worked, an experience I would not have traded, in spite of the lair of wolves. In fact, that lair was worse in the traditional banking arm, since it hid behind an opposite public demeanor. My experiences with investment bankers in a more northern latitude than yours, NET, were positive, notwithstanding their ‘used car salesman’ tactics on stock. Joined them on a T-bill dog and pony show to the wholesale market (BCV et al) in Caracas, pre-bolibanana.

    • Can you provide a link on the web concerning this “recent inside-the-vault source” that claims “there is no gold in the BCV today”?

      • Sure, a link on the Web, for a confidential source, who risks all just for talking…dream on, and continue looking for third-hand research on Venezuela….

  8. The important thing to keep in mind are the pressures being put against the base across the entire board. As these continue to build on a compounded basis, and as doors continue to close for alternate sources of funding then these reserves become essential both at a real and emotional basis. The complete lack of diversification on the reserve portfolio (which is not new to the GBRV) is what makes this news, since it mean than in a rock bottom scenario the runway is much shorter.

  9. This could get really ugly. FONDEN and PdVSA may have $billions in secret reserves, and they may not. In a kleptocracy, the looting accelerates over time. If N looters can steal X with impunity one year, the next year there will be 2N looters stealing 2X each; there are no consequences, so why not?

    It is thus possible that nearly everything has been stolen. Some things are more resistant – the gold reserves, for instance. However, the suggestion that gold has been transferred to Cuba is interesting. Castro has had to worry that his Venezuelan subsidy could be cut off; having the gold would secure his future.

    Another possibility is that the gold is still in Venezuela, but essentially all the liquid funds are gone. Assume
    – a decline in oil prices as fracking takes effect.
    – reduced current oil revenue due to previous advance sales and contracted discounts.
    – continued massive imports of food and consumer goods to placate the people.
    – continued wholesale looting of Venezuela’s liquid funds.
    – continued high interest on Venezuela’s external debt

    leading to a fiscal crisis in which Venezuela has to sell gold to keep going. Massive gold sales by Venezuela into an already depressed gold market drive down gold prices further. This forces Venezuela to sell even larger amounts of gold to raise money – ending with national bankruptcy. (Looting will accelerate further as more regime insiders see the end coming and move to get as much as they can first.)

  10. Most of this is happening already, with national bankruptcy the end result….Only a Middle East oil catastrophe, or major Venezuelan political change for the better, could vary the current course.


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