When "Sustainable" is a Four-Letter Word


gtydeutschebank2dm110914wgSo Anabella and Barbara, I think you’re right, but you still go to jail. The Planning Ministry powerpoint leaked to ABC.es certainly made for some juicy reading showing how bad things got over the last year and a half.

But then, we always knew it wasn’t going to be pretty bringing the economy down from the fevered sugar high of 2012, when ministers decided to send Chávez off in style by buying him the kind of re-election victory only a genuinely insane public spending spree can secure.

What’s notable about that powerpoint is just the fact that, in Venezuela, you need a high profile leak to get the kind of humdrum public information sane countries just publish as a matter of course. (Well, that and the execrable graphic design skills of the flunkies who made this visual atrocity.)

But none of this gets us closer to the discussion that really matters: is the adjustment Venezuela’s been put through since April last year working? Are we towards the beginning of the end of the adjustment or the end of the beginning? We know it’s bad, but is it likely to get worse than this? And, is the current policy stance sustainable?

Sustainable. It’s a funny word. Enviro-ness has endowed it with a certain positive spin it doesn’t really deserve. Lots of horrible things are sustainable, in the basic sense that if no outside force intervenes it can just keep going on forever. Childhood blindness caused by Vitamin A deficiency is sustainable in Burkina Faso. Black Lung Disease mortality rates are sustainable in West Virginia. And, I’m afraid, chavista economic management is getting sustainable in Venezuela, too.

Take Deutsche Bank’s latest Special Report on Venezuela. Nobody would confuse it for a ringing endorsement of chavista economic management. The most laudatory thing they say is that Ramirez and Merentes are probably driving us towards stagflation rather than hyperinflation. These people are bad at their jobs: that point’s not really in doubt. The question is, are they sustainably bad at their jobs?

For Deutsche Bank, the answer looks like yes. After a massive reduction in import volumes, the government’s figured out a way to patch up its fiscal problem through a messy, ugly, hairy devaluation.

“SICAD II – through which the government implements stealth devaluation with minimum political cost – will likely be a successful policy move. It helps reduce exchange rate distortions, improve fiscal balance, and attract foreign investment (especially benefiting the oil sector), as well as reducing the need for monetization of the fiscal deficit through PDVSA (though it is expected this policy will continue) and allowing the private sector a formal way to access foreign currency, putting a stop to the depreciation of the parallel exchange rate.”

None of this has been done out of conviction, just out of the plain arithmetic impossibility of balancing the books any other way. But will it “work”, at least in the limited sense of ensuring Venezuela keeps paying its bonds, that inflation stays in two figures (rather than 3 or 4), and that the economic day-to-day remains merely deeply screwed up rather than escalating to simply unmanageable? It looks like Deutsche Bank like the answer is yes.

The government’s paid a high political cost for the adjustment it’s had to roll out in the last 13 months. Yet its decision last month to quietly, without great fanfare, revise prices for a slew of controlled goods sharply up suggests to me that at least the single most obnoxious part of the economic conundrum – scarcity – could improve significantly in the short run. That, together with moves that should ease the fiscal crunch and ease some forex backlogs at the same time isn’t going to win anyone any Finance Minister of the Year awards. But it could be enough to stave off the type of outright collapse that looked very possible not that long ago.

Deutsche Bank thinks they may even be trying to give themselves room to go back to expansionary policy in the few months ahead of AN elections next year!

“The Venezuelan economy is undergoing a sharp economic adjustment – although incomplete, it will allow economic authorities to restore a healthier external balance favoring external (financial) creditors while putting the burden of the adjustment on the domestic sector, where stagflation will be the most likely outcome for 2014. We argue that the adjustment is incomplete because neither the fiscal and monetary policy imbalances nor the lack of confidence from the private and external sector in the economic policy mix will be sufficiently addressed. But this year will allow economic authorities to build buffers ahead of the National Assembly elections in late 2015, when we expect the expansionary domestic policy to return with a resurgence of imports to combat scarcity.”

Look, it’s a miserable policy mix, that much is plain. As long as the Law on Fair Prices and LOTTT stay in the books, there’s no hope at all for any kind of productive sector resurgence outside the oil sector.

So we’re looking at ongoing, deepening dependence on energy exports, leaving us badly exposed to medium-term risks on oil prices. All it will take is a future where Libyan oil is back in the market or Keystone XL gets the green light or Mexico finally adopts a serious energy reform for production values to spike, the price of oil to come down 10 or 20 or 30/barrel and then it’s very much a llorar pa’l valle: another round of adjustment, more protests, rinse, lather, repeat.

We have no Plan B, no resilience to shocks, no hope for sustained improvements in livelihoods. But also little sign that any of that could imperil chavismo’s hold on power, or on the sweet, sweet rents that hold brings.

I think that’s a settlement they’re more than willing to go for. Don’t you?

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  1. Yes it is sustainable. When many of the middle class, the educated, of Venezuela discover this core truth, they will begin to flee. That’s been the Cuban-inspired plan all along.

  2. The person who developed this report needs some serious help graphing information. Well, maybe it did not want to show it so clear in case anyone might understand we are in deep shit.
    Is really scary the Central Bank Reserves graph and the Cuenta Capital y Financiera, it basically shows that this plane is vertically falling and the pilot is talking about the internal decoration.

  3. IDK, Francisco, it seems to me that this is a very unstable equilibrium, like a marble sitting on top of a pole. There are so many things that could go wrong with this plan.

    In addition to an oil price drop, what if there is another natural disaster like that of 2009? Do they have the cement and steel to make houses like crazy? Speaking of those, how about the gazillion expropriated companies in red numbers? Sure, they can always give them away to the Chinese, although they won’t be able to do so without paying the political cost. And it’s not like they have much political support to spare do they?

    Moreover, what if they are forced to pay Conoco-Phillips $10 kM? Would they be able to take that hit? How about all the money they already owe?

    • What happens if we get the long called/long due earthquake on Caracas? I think I will pack and leave the country the next day

  4. Great post! I like the way you put it:

    “These people are bad at their jobs: that point’s not really in doubt. The question is, are they sustainably bad at their jobs?”

    And of course, the answer seems to be yes, although I’m not completely sure if they are really bad because I’m not sure if having a healthy economy is one of their goals at all. If all they think is “[email protected] the economy, we just want to stay in power and get our hands on the money without much trouble”, then I would say they are not that bad.

    It was also good to see there are other people who have already realized that the government is going to engineer another massive victory next year by going back to their usual big spending habits. They are certainly preparing for that. They’ll have less room of maneuver this time around, but three months of give aways should be enough for people to forget the miserable 20 months they had before that.

  5. Well, outside of the oil industry, you can be assured there will be no DFI. (Not that the DFI has actually been improving much.)


    I think it is also the government’s intent to completely strangle any external private sector business ties. Is this not, to a certain degree, also part of the Cuban model? Who in their right mind would invest in Venezuela after all the ongoing repatriation fiasco, the risk environment, the crime and the corruption, amongst a litany of other issues?

    I suppose this is economic sovereignty, since Venezuela will have to solve its own internal economic issues since no one wants to touch them at this point. Well, aside from China and Cuba… Sovereignty indeed.

  6. Excellent post, Quico.
    Just wanted to know, how do you get hold on these research papers? Is there a way for a simple mortal to get a glimpse of them with a reasonably short delay? Btw thanks a lot for sharing this info, if it weren’t for you that’d be very difficult to get access to.

      • Jajajaja… Doing it every day already mate 😉 Again, thanks a lot. It made for a deeply insightful reading. Didn’t know Venezuela has to pay back almost USD 9Bn of bonds per year until 2017… If you put that into perspective, plus all the commercial debt outstanding and the increasing importing needs of a 30-million-people country with such levels of scarcity, it’s kind of bold to say that the situation remains “sustainable”.

        Unless there´s another tranche of the Chinese Fund under negotiation atm, i dare to say i’m not so sure about the sustainability of Venezuela’s external position. And even in that case, the high yields on sovereign debt would be broadly justified, as representing second-in-line claims on the nation’s liabilities (the first always being Beijing, of course), minus a possible normalization of the yield curve that’s taking shape in the market now.

  7. I wish some one would do the math on why the stealth devaluation is enough to make the situation ‘sustainable’ and moreover to bring the country back to economic growth next year , What I see is a worsening situation which might be a bit less worse because of the said devaluation but which does not stop the descent into an ever deepening crisis now and in the following years ,

    For one thing the success of the sicad II system is largely dependent on private holders of forex being willing to take their forex to sell at this market and thats not happening , In actual fact most of the demand for Forex which is channeled through Sicad II is not being met . Even people who are favoured with forex adjudications dont always get it in full or within the requisite period . .

    Maybe it will help keep the govt paying the coupons on the bonds it issues which is welcome news to Deustsche bank bond holders but I dont see any significant sign of improvement in the govt forex situation.!! . .

    • I’ll do the math for you: PDVSA used to get Bs.6.30 per $ of oil sold, now it gets cincuenta bolos. Buh bye deficit!

      But my point is precisely that the fact that it’s sustainable doesn’t mean that it’s good. Or even better. Just that it’s bad in ways that don’t imperil the government’s stability. That’s all.

  8. Francisco Convenio Cambiario 27 doesnt allow Pdvsa to sell any forex income from its oil exports into Sicad 2 , only income which it recieves from other sources ( forex from loans or bonds ) , Read it yourself ,

    The forex income from oil exports must be sold to the BCV at the 6.30 rate . Pdvsa actually gets screwed by Sicad 2 . I dont know how to do the math but my guess is that the govt doenst have much forex to put in sicad 2 because most of its must go to direclty to pay foreign suppliers contractors creditors etc or those of local private companies which have purchased or incurred in cadivi approved forex transactions so that the amount of freely available govt forex may be rather small .

    What i guessed Sicad II was all about was convincing people with USD which needed to convert them into bs who would sell them through Sicad 2 and thus sattisfy the usd demand the govt cant sattisfy itself . Sicad helps them get bs (which they can print anyway) BUT not to get any extra forex which is what they are short of. At most , to the extent they get private parties to sell their forex through sicad 2 , they can save forex by having those private parties meet demand they would not then have to meet .

    Thats why Im not sure that the effect of sicad 2 is as great as Deutsche bank makes it up to be, I m no economist but there is something in the assumptions that doesnt quite jibe in my head .Maybe Im wrong (wouldnt be the first time) , but if somebody knowledgeable checked the data and math i would feel more confident .

    My own guess ( and sorry but i dont have your gift for perfect clarity and concision) is that things are bad enough that the change in the exchange rate may make things better than they would be if it wasnt created but not be able to stop the deepening deterioration in the countrys situation which will continue to grow worse as time passes .!!

    Im not going into whether it will cause a poltical situation where the regime loses its hold on power because thats a topic for a seer ( which im not) , but I do think it probable that the longer the crisis lasts and worsens the less popular the govt will be .!!

    . , . .

    • Sicad II is a failure, because the only real actor is PDVSA, which doesn’t even have enough liquidity to pay its local suppliers in Bs. except 6/more months late. The muddled “sustainability” of the bankrupt Venezuelan economy depends only on the Chavista masses’ willingness to continue suffering long waiting lines to buy food staples, and to literally do without many other imported goods such as automotive tires/batteries, many womens’ personal care items, and a long list of etceteras. But, so far, they still have “patria”, Mercal giveaway food, and the Lotto-like chance of a free dwelling some time in the future.

  9. It’s funny to see such stupidity in that government economy briefing when one sees terms such as “¡Sabotaje petrolero! ¡Golpe de estado! ¡Crisis del capitalismo! ¡Despegue INNEGABLE!” or considering the non-existant 6.3 Bs per $ to calculate the minimum wage (Truth is that minimum wage is under 80$, because 6,3$ don’t exist)
    So, nothing new under the sun, just more policies to strangle middle class and more poor people and to make them dependant on government “gifts and favors”


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