The past two weeks have been tense on the political front, eclipsing some brutal news on the economics side that point to a depressing humanitarian outlook for the coming months.

The most worrisome news is the drop in PDVSA’s oil output. Figures reported by PDVSA to OPEC, as well as OPEC’s own estimates, and those by IPD Latin America, point to a drop of between 5% and 7% in oil output.

That would put Venezuela’s oil output at around 2.5 million barrels per day. In 1998 it had reached 3.5 million, and even under chavismo, in 2005, it was 3.3 million.

That puts the only piece of good news – the increase in the price of the Venezuelan oil export basket to $35 – in a different light.

If PDVSA had kept output at the same levels as 2015, that increase would have meant an improvement of close to $6 billion in the country’s finances, compared with oil prices in January. Thanks to the drop in output, the improvement would be of around $4 billion.

Two billion lost, when every dollar counts.

To make up for those lost billions, and all the other billions still left to find over the course of this year, we’re going to have to tighten our belts a lot more.

That’s what the Vice-President for Economic Affairs, Miguel Perez Abad, implied last week when he announced what amounts to the carpet bombing of Venezuelans’ living standards.

He said imports were on track to close the year at USD 20 billion, a 46% cut from 2015; but that they would aim to cut even more, to hopefully USD 15 million, a 60% cut.

Yes, he really said “hopefully”, like it would be something to be happy about.

Three months ago, I wrote about how our dependence on imported food could mean food shortages would increase dramatically this year. I thought total imports would be cut to around USD 27 billion; any more than that was unthinkable for humanitarian reasons.

How naïve of me.

The last time Venezuelan imports were lower than what Pérez Abad is now “hoping for” was 2002 and 2003, the years of the PDVSA strike and the coup. Before that, you have to go back 17 years, to 1999. Back when there were 6 million fewer people, back before Chávez’s expropriations, back before exchange and price controls had decimated our capacity to produce… anything.

It’s like we’re already under an IMF program, just one without the billions in loans to ease the pain.

See, when the IMF lends money, its primary objective is to get that money back, on time and in full. They are loaning money from other countries, and those countries don’t want to see it squandered. So their policy demands are geared towards repayment, not economic growth.

Imagine you go to a bank and ask for a loan. The bank says they can loan you some money, but since they want to be sure you’re going to pay them back, they have a few conditions: cancel your cable TV and mobile phone; sell your TV, car and jewelry; no more cinema, bars or restaurants; find a better paying job and destroy your credit cards. If you don’t agree, well, the door is right there.

That’s what the IMF does: they want countries to cut expenses and increase revenues, fast, to make sure they can repay the loans. The “get the money back” imperative is why the IMF is so reluctant to lend fresh money to Greece: they believe it’s impossible for Greece to repay it unless they get massive debt relief and decades of moratoriums, no matter how many other reforms they enact.

Those IMF prescriptions are recessionary, and usually undertaken by countries already in a recession. That’s what made the IMF’s name so toxic in leftist circles in the region.

This is where things get weird, though: the Venezuelan government is thinking like the IMF. They only seem worried about debt repayment, cutting expenses left and right (besides imports, government spending in real terms has dropped significantly), selling assets and increasing taxes. And in doing so, it’s deepening the already catastrophic recession.

They want to avoid a default in October, at any cost, including humanitarian costs.

The difference is that the Venezuelan government is doing so without the mountains of cash the IMF could bring in to help pay old debts, avoid a costly and chaotic default, and soften the blow to society. And they’re doing so without the credibility boost you get from having the IMF rubberstamp your plans, which can improve your chances of restructuring foreign debt.

Needless to say, the government is also forgoing other parts of an IMF program, like lifting price and exchange controls.

It’s like they’re hiking Everest without oxygen when there are tanks for lease. Because they hate the guy leasing the tanks.

There might be worse news in the horizon. Given PDVSA’s difficulties paying contractors, the electric energy crisis, lack of maintenance and parts, and rumored structural damage to vital oil fields, some analysts expect PDVSA’s output to drop even farther this year.

Watching all these news the past week, and the political crisis playing out before our eyes every day, I can’t help think of the recently late Humberto “Beto” Perdomo, the play-by-play baseball commentator in television.

When the pitcher got in deep trouble, he’d always say: “Esto está feo, muy feo”.

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27 COMMENTS

  1. Keeping the bolikids’ pockets and accounts full is more important than the newborns dying from simple infections in hospitals or malnourished kids after months of eating arepas with mayo once a day until they’re killed by some stray CAVIM bullet fired my a malandro.

    And, keeping the tributes to Castro is extremely more important than any other matter, only in chavista socialism.

  2. You’re nicely hitting the meollo of the asunto with this one, Pedro. Good piece.

    This strategy of putting the priorities of the nation’s creditors above anything else, especially the same pueblo they always swear to prioritize, is just another token of the ideological corruption of the Maduro administration. And maybe some literal (as in, insider-trading with the debts of the Republic) corruption. Time will tell.

        • During the Great Famine in Ireland, enough foodstuffs were exported that could have fed the country twice over. Almost half of all British troops in the Empire were in Ireland at that time to ensure there would be no rebellion or threat to these exports (mainly to Britain and Europe).

  3. Dogma is a belief or set of beliefs that is accepted by the members of a group without being questioned or doubted (from wikipedia).

    Chavismo dogma: IMF is anathema to Chavismo.

    Pedro clearly shows the error of the previous dogma.

    Therefore Chavismo is philosophically crippled to address the Venezuelan economic crisis in a sane manner.

    We could do this exercise with the intellect of their leaders and their morality.

    El Chavismo no fue parido sino cagado.

  4. The IMF softens the blow not to just “society” but also to the debtors. Transferring the “liability” away from Russia and China would be in those countries best interests too.

  5. Point of information: what percentage of debt owed with high interest rates is held by Venezuelans, of those how many are in power or are associated with the regime? It looks and smells as though these thieves are not only content with what they have obtained through fraudulent means, but are also holding the nation for ransom. Is that the case?

    • There is no public official or non-official data on that, and there are no estimates out there (as far as I know). That’s very hard to know. But, everyone believes, as you do, that many corrupt officials of all ranks hold a lot of their ill-gotten fortunes in Venezuelan bonds.

  6. According to the IEA, Venezuela’s oil production for 1st quarter 2016 was at 2.36 mm barr./da., has been there for some time, and is probably lower now with Sclumberger/Halliburton cutbacks. Cutting imports further and “carpet-bombing Venezuelan living standards”, when those standards are already at carpet level, will only chew up what’s left of the carpet, and send Venezuela back to a dirt floor/poor level.

      • Pedro: do you have a break down for bls used for local conmsumption and for export , ??also of the latter which are ordinary crudes and which the extra heavy volumes from the faja ,?? do you have any number for the bls of products and light crudes being imported??. I guess whats important is not just the total of bls produced but the revenue that Pdvsa is receiving from their sale…..!! Have you done a calculation ??

        • Yes, I made estimates, and also checked estimates from other people, and reached this sort of average: 500k for the domestic market, 100k for Petrocaribe/Cuba, 450k for China (it’s probably less, closer to 350k), That leaves around 1.45mm for oil exports if total output is 2.5mm. That may be a generous number; some analysts believe there’s less than 1.4mm left for oil exports. I don’t have the breakdown of that 1.4mm for heave and ordinary crudes, I just used the weighted average price of $35 per barrel.

          As for the light crudes and other imports, I used an estimate of $6.5 billion during this year. When I estimate the $6 billion and $4 billion “improvements” mentioned in the article, I’m of course taking into account the $6.5 billion in imports.

          • Pedro, could I check a couple of figures with you, please? So total oil exports will be valued at around USD18.52bn is that right? I also have a question about GDP. I am trying to work out Venezuela’s true annual GDP. The IMF says at constant prices Ven is expected to have a GDP of 27,404bn bs this year, divided by the black market US dollar rate of 1,100 bs to the dollar, that amounts to USD24.91bn, is that correct? The IMF estimates that GDP will be USD185bn — the USD24.91bn and USD185bn, cannot both be correct or does it have to do with the exchange rate used? What interests me is that if Ven has a GDP of USD24.91bn that equates to a GDP per head of around USD819 annually, which sounds right. Bolivia’s overall GDP is about USD33bn, now significantly bigger than Venezuela’s. Thanks, Jason

          • The Golden Rule is, if it’s about the Venezuelan economy and it doesn’t seem to make sense, the answer is: multiple exchange rates.

          • I believe your estimate of $35/barrel is too high. Most Venezuelan crudes sell for significant discounts, and I believe the average discount is around $10-12/barrel

          • Thanks Pedro, I think the local consumption figure might be a bit low , Pdvsa itself has spoken at various times of 700/750 kbd per year , do remember that part of the refinery production has to go to feed thermo power plants to replace former Guri energy generation and to blend with Faja Crude to make it saleable .(some speak of the latter consuming up to 200 kbd ) , In 2013 Ministry said Faja production is now some 1,250 kbd and that needs a lot of light crude /diluents to export (40% of mix ?) , Agree that Chinese export volumes appear a bit on the high side , maybe part of the volumes are used to pay loans and part as straight sale exports , In 2013 US imports of Products alone exceeded 80kbd, If increasing part of Faja crude exports include 40% of imported diluents then the 35$ per bl price yield a lower net export revenue than 35$ .Very difficult calculation !!

          • Jason, the first thing I would check is that you say the GDP is estimate is at constant prices. As such, you can’t divide it by the current exchange rate. If you want to divide by the current exchange rate, then you need the GDP at current prices. You can also look for what is the base year of those constant prices, and bring it forward to 2016 using the inflation data. In any case, once you have the GDP at current prices, then you can divide by the current exchange rate.

            As for the exchange rate, as Francisco says, that’s the key issue. I wouldn’t use the black market rate. I would use a “weighted average exchange rate”. I explained that in this comment in a recent post: https://www.caracaschronicles.com/2016/05/04/debt-2-0-cadivi-worlds-profitable-mcfiesta/#li-comment-117588

          • Bill,
            I got the 500kbd from the March report by Barclays. They say that according to data published by the Ministry of Energy, domestic consumption dropped by 100kbd in the last two years (to 500, down from 600). I don’t know if it’s completely accurate. As for the China exports, I purposely left them on the high side. At least as of March, it look like they were 450 kbd, but from what ‘ve read recently, it could be 350 kbd today. In any case, between 1.4 and 1.45mbd for cash-generating exports sound about right.

  7. Can they get back the $4 billion that Chavez’s daughter has? That would buy a lot of diapers. Hard to understand what has happened in Venezuela. I mean they did everything the economic genius Castro said to do, right? Must be the fault of the evil empire. Maybe they should cozy up to Obama and go for the tourist dollar LOL!

  8. There’s about as much of a chance of getting the $4 billion from Chavez’s daughter as there is a chance of these criminals surrendering the millions of dollars from their narco trafficking. At least until they arrested and forced to do so 🙂

  9. One thing you might need to take into account is that Venezuela’s expenses are going up, because many vendors are now demanding cash for products and services. This is due to PDVSA not paying vendors in the past, and running up huge bills.

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