The Trouble With Those International Reserve Numbers

Turns out my post on BCV’s falling reserves had some serious problems:

1. Our International Reserve figures aren’t like those published in normal countries. When Thailand, say, or País X report the international reserves their central banks hold, you have reasonable certainty that they’re reporting the full amount. Not here. The reserves number BCV publishes is better understood as a “greater than” than as an “equal to”.

The reason is the country’s off-budget black box funds, in particular Fonden, but also the Chinese Fund, and assorted other black-box accounts (que si el Fondo Alan, Fondo Renot y otras hierbas aromáticas).

We already know the public sector finances some of its imports directly from Fonden and from the Fondo Chino, without the money ever passing through the Central Bank. In important ways, then, these funds already operate exactly like parallel, secret BCV international reserve accounts. What we don’t know is how much money is involved, or when it’s spent, or what their balance is at any given point.

The relationship between BCV Reserves and the black box funds is complicated and exceedingly opaque. You can see what I mean if you look carefully at the chart I published yesterday:

Slide1There are five sharp spikes in the chart, when the BCV’s official reserve figures jump up suddenly. What the heck are those?!

Some of them seem to be transfers from Fonden (and other nether-funds) into BCV Reserves. Others are apparently discretional transfers into BCV Reserves from PDVSA, carried out just before the cut-off date to calculate the next period’s level of “excess reserves” (i.e., reserves that can be transferred back out to Fonden.)

In other words, there’s a complicated dance between all these pots of money, and it’s not easy to discern the logic behind it. For instance, even this year, with the value of reserves in free fall, BCV transferred $3 bn. in “excess” reserves to Fonden!

Perhaps the better way to think of all this is that there are lots of communicating vessels between a declared portion of International Reserves that are held by the Central Bank and an undeclared portion of International Reserves spread through a dozen highly opaque pots of money outside BCV’s direct control. It’s exactly as orthodox a way of managing your reserve assets as you’d expect from the clowns who now pullulate around Carmelitas.

This strange situation makes standard analysis of reserve levels highly problematic. Sure, there have been various valiant attempts to reconstruct Fonden’s balances on what amounts to the backs of more-or-less-sophisticated envelopes, but the limitations to those kinds of exercise are obvious.

With no balance sheets, no audits, no paper trail and no accountability at all, there’s just no telling how much of that money is now ferreted away in Jerarcas Rojos’ discrete Cayman Island accounts, to name just one obvious possibility.

Fact is, we just don’t know how much money is left in the undeclared portion of foreign reserves. So we can’t really tell whether overall reserve position is going up or down or sideways. All we can say for sure is that they’re no-less-than a number that has been falling this year.

2. The fall in the value of the declared portion of reserves this year is, to a startling extent, just a function of the falling price in gold. Gold, lest we forget, has made up the lion’s shared of declared portion of reserves for years now.

In a way, the declared portion of BCV Reserves has been remarkably stable for the last couple of years: they have about $4 bn. in IMF Special Drawing Rights, 336 metric tonnes of gold and a liquid portion somewhere between $1 and $5 billion. The biggest slice by far is the gold, though, and gold prices have fallen a lot this year, which is why the value of declared reserves has been going down so fast. But that’s very different from saying that reserves have been falling because BCV has been dishing out more and more dollars.

It may be that the implicit rule Giordani’s been following all along is fairly simple: declare your gold reserves, declare your SDRs (porque ¡ni modo!) and declare about $1-5 billion of the rest of your reserves, but no more. If the liquid portion of declared reserves starts to challenge that band, shift a bit of cash to or from the undeclared portion to bring it back within range. That’s it.

The punchline here is that it’s probably not a good idea to place too much analytic emphasis on the not-less-than number that BCV declares as its International Reserve position. Truth is, our overall reserve position might be falling fast, or it might be holding steady, or it might be rising.

We don’t know, because they don’t tell us.