BoP Crisis ain't just a river in Egypt

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...

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)