For over a year we’ve been writing about the economic reforms needed in Venezuela. The frame is always the same: we tend to write on the assumption MUD might have a chance to govern soon.

It will be an adjustment that lets chavismo continue being chavismo: an organized plundering party.

Now that our dreams have been shattered by a sledgehammer labeled “dialogue”, it’s time to face the facts: from now until at least 2019 (fingers crossed!), any adjustment will be carried out by chavismo.

How can chavismo avoid the economic precipice, while remaining chavismo? We can assume confidently that, whatever they do, they won’t surprise us with something competent. It will be an adjustment that lets chavismo continue being chavismo: an organized plundering party.

So let’s don our red berets, channel our inner Giordani, and put ourselves in the shoes of Maduro’s favorite economic advisor Alfredo Serrano, chavismo’s very own Josef Mengele, brought here to experiment on the poor and defenseless.

Their goals are narrow: they need to make it to December 2018 in better shape than today; even if just marginally better. And they face several restrictions in their policy choices.

First, adjustments can’t, under any circumstances, disturb the shared plundering of the country that keeps the different factions in the government at peace. This means, for example, that exchange controls will remain in place, and the military will continue to control food distribution.

Second, they can’t be seen to betray their so-called ideals, or their voting base. Thus, no one’s calling the IMF, price controls and subsidies will continue in some form or another, and the price of gasoline won’t increase up to international levels.

And lastly, there will be little deviation from what they had done in the previous 18 years, especially if it might violate the first two restrictions. No experimenting with things that worked in other countries, and no default.

How can chavismo avoid the economic precipice, while still being chavismo? We can assume confidently that whatever they do, they won’t surprise us with something competent.

Putting these goals and restrictions together, the government might be able to make it to late 2018 if they make the following half-assed, completely dumb and irresponsible “adjustments” that neither I  nor anyone that writes for Caracas Chronicles would ever, ever, ever endorse, even if very drunk on cocuy while high on mushrooms.

Close the external gap

The government needs to come up with $8-10 billion to be able to keep paying the external debt this year, and pay for the already dangerously low level of imports (assuming there are no other surprise expenses, such as arbitration awards, and the price of oil stays around $45). Venezuela still has a lot of gold in its foreign reserves –around 189 tons, worth $7.4bn today. They could sell or swap a good chunk of that, like they’ve done before. They can cover the rest with help from China. If that’s not enough, they could cut public imports a bit more. Who cares? Wall St. has to get paid.

Devalue the bolívar

Maduro’s been reluctant to devalue the official rate as much as his mentor did, but he needs to do it this year, to temporarily erase part of the fiscal deficit. Within their framework, they can go about this in two ways. They could simply merge the two official rates, with the new rate around the middle point between 10 and 700 Bs/$, and leave it at that (like in the old days of CADIVI). Or they could devalue the CENCOEX rate, and sell more dollars at the SIMADI rate (closer to the SICAD 2 model).

Under either plan, the black market stays alive and well. However, both options could be complemented with a return of the legal parallel market that was outlawed in 2010 by our chosen guide into this underworld, Giordani. This might sound fanciful and unlikely. But, what if I told you that this time, the government would give licenses to operate this market only to brokerage firms owned by their front men and to public banks? Then it sounds perfectly in tune with the first restriction: more party favors to distribute.

Do something about inflation

Solving very high inflation is straightforward; stop printing money to finance the fiscal deficit. That’s it. Since the government has no assets or financing to cover such a large deficit (circa 10% of GDP), it must try to reduce the gap between revenues and spending. The devaluation would increase government revenues in bolivars, and reduce the deficit even if just for a while. They’re already doing other things that can reduce the deficit, such as cutting spending and raising taxes, and could do more, like raising energy prices.

The government is too deep in the red to stop printing money, but these measures would help. On top of this, opening a new channel in the official exchange markets for private companies would also help with inflation; let them buy and sell dollars at a more sensible rate, instead of forcing them into the super high and unpredictable black market.

Direct subsidies

Any adjustment, whether competent or not, will hit the poor the hardest. A good option to help them deal with this shock is to give them money with a cash transfer program, as we have explained before in Caracas Chronicles.

The government is building and expanding the Carnet de la Patria, which could easily turn into a Cash Transfers platform. It’s likely to be terrible at targetting poor poeple, just like the Misiones are.

Instead of trying to identify who needs the transfers the most, they are giving cards to anyone willing to stand in line and sign up. It’s a wildly inefficient program, that will cost a lot more than one targeting only the truly poor, and yield inferior results. Still, it’s better than nothing.

Curtail indirect subsidies and let the private sector breathe

They could keep their beloved Law of Fair Prices, but stop enforcing the direct price controls on basic goods. This, coupled with the easier and legal access to dollars mentioned above, could allow the private sector to fill at least part of the empty shelves in supermarkets and pharmacies, and avoid more closures of idled companies and mass layoffs.

Keep giving PDVSA operations to foreigners

The drop in oil production by Venezuela is mostly due to steep falls in the output of oil fields managed by PDVSA. Fields managed by foreign companies are doing a lot better, and have compensated the terrible yields in the PDVSA ones.

The government —desperate to keep this boat afloat— could give more fields to foreign companies under unfavorable terms, but that are nonetheless preferable to the disastrous local management.

This terrible plan could improve conditions a little bit, allowing the government to stagger to December 2018 without a worsening of the humanitarian crisis, leaving them free to keep crushing MUD, and giving them a non-negligible chance of winning and unfair, lopsided and uncompetitive presidential election.

A now, if you’ll excuse me, I need to take a shower.

34 COMMENTS

  1. “Maduro’s been reluctant to devalue as much as his mentor did…”

    Maybe you missed the memo where madroga devalued over 105000% when shiabbe managed to get it up to 3500%.

    • I’m talking about official rates, not the black market. Under Maduro, the lower rate has moved only once: from 6.3, to 10. Yes, SIMADI opened at 170 and then moved to close to 700. But the one that really matters is the CENCOEX rate; they sell 90% of their dollars at that rate.

      • But the black market is the one that leads almost 90% of the economy, in 1998 the market rate was about 0,535 Bs / $.

        Also, the lowest rate moved from 4.3 to 6.3 at the beginning of 2012 (Which propelled the black market rate from 18000 to 25000) and by that time, Chávez was already dead (If we accept the thesis that the RR wouldn’t have any effect after january 10, because Maduro took over in april of 2013)

        So that leaves Maduro having devalued the lowest rate by about 232% (4,3 to 10), while devaluing sitme from 50 to 170 in simadi (340%), which now stands in about 690Bs / $ (1360%).

        That’s another problem with these thugs, they can claim they’re selling 90% of the dollars at 10Bs, but that might be as true as that other claim about the misión vivienda 1 millionth house, when other sources claim that there are less than 300.000 houses built.

  2. Pedro,

    Your recommendations are probably consistent with Chavismo ideology, but it requires plausible execution, i.e. management talent. But, as you say “they won’t surprise us with something competent”. And that is exactly the point. They are unable to execute a plan, instead they stumble in a reactive way.

    At this point Venezuela is like a terminal patient. You control symptoms as they present themselves until one random symptom just overwhelms the body and death follows.

    Now, the likes of Cuba, North Korea, and Mao’s China show that the populace can be brutalized in this manner. Hence, Chavismo may survive in spite of the humanitarian crisis that they may unleash, but this needs a modicum of proper execution, and ruthlessness.

  3. So these are the seven steps the regime can take to improve its political base of support by improving the economy without publicly forfeiting their proud ideological conceits .
    1. Sell the country’s gold reserves
    2. Devalue the Currency
    3. Restore the parallel currency market, thus allowing private parties to access foreign currency
    4. Fight inflation by reducing the amount of money being printed and instead raise taxes and use proceeds from devaluation to cover govt costs
    5.Use the Carnet de la Patria to directly dole cash to carnet holders.(no strings attached ?)
    6. Silently lift price controls on basic stuff sold by private businesses
    7. Transfer most Pdvsa oil field operations to more competent international oil businesses .

    Much of this stuff doesn’t necessarily go counter to what a conventional economist would suggest …..have I missed something ?? What would a more conventional economist suggest ??

    • 1. Don’t sell your gold reserves: Get financing from abroad (IMF, debt issuance, etc) to replenishment your reserves. You need more reserves.
      2. Lift exchange controls, have only one exchange rate, and allow that rate to be determined mostly by market forces (in an oil economy, almost by definition, the government always intervenes in the exchange markets, even if they don’t want to).
      3. Stop (not just reduce) monetary financing of the deficit. Use new financing (internal and external) to pay for deficit. Raise energy prices.
      4. About taxes: it depends on your taste, and the mix of policies. Raising taxes, while it would help with the deficit, it’s also a recessionary measure. This country needs expansive measures.
      5. Design an implement a proper Cast Transfer Program, with good targeting of beneficiaries (i.e., the poor, vulnerable, old and/or disabled). Not just give money to everyone.
      6. Lift all price controls: both the indirect ones (Law of Fair Prices) and the more direct ones (Sunde).
      7. Raise capital, from debt and new partnerships, to refloat the company (this part, as you know, requires a very long answer)

      • Hear! Hear!
        And step 0. Re-institute the rule of law.

        But really, articles/threads like this are just idle fantasies. Can the chavismo leopard change its spots? Can El Pueblo?

        • Have heard from the grapevine that there is full awareness inside the regime that the causes of the current crisis lie in their own past decisions and policies , they now openly recognize among themselves that the whole economic warfare tale is pure fantasy ….they also have an idea of the kind of measures which have a chance of improving things, problem is they cant agree on exactly what those measures should be and until they do nothing is done , thus allowing things to get progressively worse………maybe some of their ideas are somewhat like those described above ……, not much comfort in believing that , but thats all there is …..’eso es lo que hay’.

          • Haven’t you read chavismo’s source documents? Engels, et al spelled all this out over a century ago. All the results were known in advance, desired, and intentional. “Full awareness inside the regime” preceded 1999.

  4. The corrupt military thugs are the ones really in charge of Chavismo. Padrino and colleagues. Most of them are criminals, thieves, responsible for the mess, responsible for many deaths, lack of food and medicines, high crime and murder rates, plus drug traffic.

    Most of them should really go to jail, have their international bank accounts frozen, and properties seized. Will a different MUD government dare to persecute them, send them to jail, with a new TSJ? Where would they hide, in Cuba? I doubt the MUD would dare to mess with the powerful, rich, corrupt military thugs. Just like no one will dare to incarcerate the mega-thieves in PDVSA and elsewhere. Any economic or financial “reform” would have to be approved by all of those mega-thieves with the real power and the guns. Thus, we can’t expect that much will change, MUD or no MUD. What could Capriles, Henry or Leopoldo do against the mighty, corrupt military, and the numerous billionaires from PDVSA? Not much. And don’t be surprised by a coup d’etat before 2019..

  5. Just tried to comment a few minutes ago and I got a warning about posting replies too fast. It has happened to me before in CC.
    I want to insist, to say that I find this article rather cynical. I don’t understand its objective.
    I once saw a cartoon in which two thieves are robbing a house and the dog in charge of vigilance is holding their flashlight. The message of this article sounded like that: “I don’t endorse any of this but this is what you could do”.
    Please, do not show these bandits a possible way out. They could take your advice.

    • Actually, this post is more an approximation at the most obvious course of action chavismo will take in order to survive until 2018 to wash its face with another fraud, considering all of its previous doings.

  6. Very clever insight in the way chavimo’s “policymaking” Pedro. I think time has proven us that politics and ideology are always ahead of economics rationality for the Chavista Bureau, and, for absurd it may sound to the most of readers, they just don’t belive in markets as a “trustable system” for their purposes.

    I would just add 2 points to your list. The first has to be with the remainning foreign assets in PDVSA’s hands (CITGO), and the reaminning debt-related assets with Petrocaribe, that could bring some fresh cash to the treassury accounts by the way of swapping or giving up with, in the case of CITGO.

    The seccond one is related to the excercise of control of production for its discretional allocation, that is, confiscating more firms (there are few, I know, but maybe the time has come to “the big fishes” remmaining) or hardening the enforcement in “guías de comercialziación” to redirect the entire production to CLAPs, at the time you strenght the miltary’s control over food.

    As a learning excercise, we should look into the Gosplan’s “Five-year Plans” and Cuba’s “Período Especial” to understand how this kind of regimes managed to survive the economic hard times, at the time they strengthen in political power. La devacle pana.

    • There’s nothing left in CITGO to use. The news bonds issued for the recent PDVSA swap were backed by 50.1% of the shares in CITGO. And they also got a loan from Rosneft, backed by the remaining 49.9%. All the shares of CITGO are now tied as collateral. They can’t be used for anything else. Look: http://www.reuters.com/article/venezuela-pdvsa-idUSL1N1EI1FO

      As for PETROCARIBE, most of the outstanding receivables are by countries that are unable or unwilling to do, for example, what Jamaica and Dominican Rep did (issue bonds to pay for the Petrocaribe debt, at a discount). The outstanding is mostly from Nicaragua (around $3bn), Cuba ($14bn), and Haiti ($2bn). Those countries can’t issue debt at affordable rates to pay Venezuela for Petrocaribe. If they could, they would most likely done so already (at Venezuela’s kind behest, of course)

      As for the second item… yes, I would expect more of those types of controls and confiscations. I just wanted to focus on changes in course, not in reinforcement of things already happening / in place.

      • It is clear that you don’t understand the concept of leverage and debt subordination. CITGO may still issue subordinated debt which is junior to the existing debt regardless of whether the collateral is tied up, it is just a matter of price. Or do you really think that the entire debt of Petrobras or Pemex is fully collateralised? Sigh…

        And people still wonder how come Chavistas are still in power…

      • Not commonly known is that when Citgo was put on sale , the best offers only covered a fraction of the value of the swapped bonds , even if there was still a chance of leveraging some part of Citgo it wouldnt bring in any additional money …..to be remembered is that Citgo isnt worth anything because of its assets but because as an ongoing business it brings in a cash flow which depends to a large extent on the crude supplies which are used in its refineries, the refineries are designed to maximize the yield from the processing of Venezuelan oils , if these supplies are stopped then the value of Citgo is even lower ….., if Citgos assets are seized who guarantees that supplies will continue to flow ……, ?? Citgo is more important and valuable for Pdvsa than for anyone that buys it from the auctioning of its assets by its creditors….!!

        • Bill, I agree with regard to CITGO’s reliability on PDVSA, that is in fact the true value of it. However, It is also important to remember that when it was put on sale, the oil market was in much more distress than it is now and the public doesn’t even know if the intention to sell was actually true. For all we know, they might just have been testing the market for valuations ahead of the debt issuances that followed. Who knows.

          My point still stands with regard to the author not understandig the concept of leverage.

        • Forgot to add that purchase offers automatically fall when prospective buyers know that the seller is in a distressed financial situation , they feel that they can buy it cheap because ultimately the seller has no choice but to dispose of it one way or the other ……. In the case of Citgo the offers were so low that it would have been greatly embarrasing to sell the Company at such meagre price , The expression “selling at a distressed price’ is well known in the market. Part of the reason Citgo is so worthless is that Pdvsa financial situation is known to be so dire , that no one expects to pay the full price for whatever they sell (beggars cant be choosers) …..Regretably I expect that Pdvsa’s current financial difficulties are so deep and untractable that they will continue to affect Citgos disposal value for a long time……in any event we must thank the current Energy Minister ( then president of Citgo) for having convinced Maduro that the best use to be made of Citgo was not to sell it but to use it as leverage in some financial transaction …….

          Citgo , being already heavily mortgaged to creditors who are owed much more money that Citgo can possibly be worth , there is little chance that mortgaging it again to obtain a subordinate loan will bring in any money …also very likely there might be a covenant requiring current holders of the mortgage to approve any additional loans or burdens , so thinking of a second tier of mortgages to get more money seems fanciful in the extreme…

          • Bill, my point remains. Saying that “there is nothing left in CITGO to use” because 100% of its assets have been used as collateral for the issuance of senior loans doesn’t mean that you can’t get more financing. How many times do I need to explain.

            What you bring up is a separate point which doesn’t come into consideration when someone makes a statement like the above.

            Don’t tell me that thinking of a second tier of mortgages is fanciful when:
            a) The only existing debt of CITGO is first lien and secured
            and
            b) Companies like Pemex have liabilities close to $100bn. (and a negative equity btw)

            As I said before, it’s all a matter of price and yield…I don’t think they will issue subordinated debt because it’s probably not financially sound but that is my point of view and it doesn’t have anything to do with whether the collateral is tied up or not.

          • Citgo is pledged not only to secure payment of its own corporate debt but to that of a portion of Pdvsa’s huge debt ( a debt which we all know is believed by many to be pretty much unpayable ) so comparing its situation to that of a stand alone debtor or to Pemex is absurd and doesn’t stand scrutiny !!

            The abstract possibility of Citgo being mortaged again to secure payment of a subordinate loan exists but is clearly impracticable because of all the reasons stated above ……!! bald men wearing a wig cant get a hair cut even if they go to the barbers !!

    • “…that is, confiscating more firms…” and thus crushing their already pitiful output — currently 30% of domestic need. That’s precisely in harmony with everything else done by chavismo.

  7. None of the above are dramatic enough to provide the fatal shock to the imperialist empire and conclusively win the economic war.

    The carnet de la patria thingies have to be withdrawn, and replaced with government debit cards which allow the patriots to directly access funds at ATMs. The amount of the allocations will be determined by the numbers of people who show their loyalty. The more people, the more loyalty, the more money. Everybody wins! Except for the esqualidos.

    The initial monthly withdrawal amount will be BF 20,000 per card. This will vary in inverse proportion to the black market dollar rate. This will sink the esqualidos. It will also end theft of the nation’s resources and the pirating of oil shipments by the imperialistas, doubling foreign exchange inflows immediately.

    Cards will be llenados by simple insertion into ATMs. The first month, the cards will malfunction, but this is due to sabotage. Hundreds of thousands of esqualidos disguised as pobres de la tierra will be arrested for attempting fraudulent use of the cards, and will be put to work growing rice in the pantanos, in the mountains, and in the Lago de Maracaibo. ATMs will be shut down for repairs caused by sabotage. Many will miss, and even cry for, the end of the colas sabrosas, but that is a small price to pay for the integrity of the financial system and the Nueva Era del Siglo XXII. Hacia alante!

    All currency will be withdrawn from circulation over a period of 15 days, beginning 20 days ago and extending to the new elections in 2018. This is because fraud was discovered in the printing of the new bills, due to the sabotage in the guerra economica. All transactions will be with the government debit card, pure electronic transactions. This will make Venezuela the world leader in smoothly functioning socialist transparent economic transactions, the first nation in the world to go completely cashless, destroying the evils of money and fixing the exchange rate once and for all. It will also put parasitic esqualido private banks out of business, ending their corruption of socialism.

    Withdrawal of currency will reverse inflation and return purchasing power to the Bolivar Fortissimo.

    The TSJ will rule itself unconstitutional and hand over its power directly to the acting Cuban Minister of Internal Affairs and Tourism in Habana, effective immediately. In this manner, justice will be guaranteed, and this will put a stop to esqualido infiltration of the court system which is responsible for the chaotic conditions in the streets and the growing obesity problem in Venezuela. Forty meter gold-plated statues of the TSJ members will be erected along Los Proceres, standing in the fountains to honor their heroic self-sacrifice to La Patria. China will generously donate gold fish in exchange for Venezuela’s gold reserves, and will build artificial islands around Los Roques to protect the environment.

    The second month of the government debit cards, ATM’s will deliver “Vote por Maduro” slips, which must be signed immediately and deposited, then the cards can be reinserted to fill them with BF 15,000. Automatically 99% of the signatures will be invalid due to fraud, and more hundreds of thousands will be arrested to grow rice in Nueva Esparta.

    Puerto Azul, Junko, and the Caracas Country Club will be expropriated and turned into People’s Parks. Palques pal Pueblo. Due to water shortages, children will be encouraged to urinate openly on the grounds to maintain the green fields of happiness. Adults may participate, too, if the urge arises. This will educate children to work for La Patria at an early age, and will improve the sewage system. Further education is not needed.

    Because of the New Prosperity, and problems of over-consumption, food consumption will be banned on Tuesdays, Thursdays, and Saturdays for those who government debit card ends in an odd number. Eating will be banned on Monday, Wednesdays, and Fridays, for those whose government debit card ends in an even number. This will combat unhealthy over-feeding which has become prevalent in the poorer classes, the most deserving of health. Medicines will no longer be necessary, due to improved health.

    All point-of-sale card readers will be confiscated and new combination voting / reader machines will be distributed. A vote for Maduro will be registered with each insertion. This will ensure smooth operations and continuous voting. A small voluntary contribution directly to select government employees will be deducted from each transaction, making Venezuela the world leader in VAT tax.

    Du to security concerns, and to ensure the flow of oil revenues, all data concerning petroleum production as well as mining and government banking transactions, will be classified as top secret and eyes-only for select high-level government servants to La Patria.

  8. Pedro, kudos on a very good article, but, probably, there will simply be more adjustment up of last year’s adjustment–Cencoex, Simadi, gasoline, etc.–and, to help the Pueblo pay for higher basic food costs, a rumored March 30% raise in wages, followed by another 50% raise in May, for + 95% from current, all to be payed for by increased money creation/new larger-denomination bills. It is doubtful that Chavismo will allow elections in any form where they could lose decisively.

  9. this is possibly the best attemp in prediction-making in CC so far, but still, i think you are looking at this with too much rationality. They will find a way to surprise us again, I guarantee it, we should assume that they simply don’t care about the humanitarian crisis, so I see likely they will just raise short term cash by expropiating the private factories that remain, possibly the banks as well and I wouldn’t discount they would just steal money from people who have 4 lochas deposited on the bank. All while denying with hardening tableface that a crisis even exists.

  10. Honest question — what evidence is there that the country indeed still has ~$7bn in gold? I.e., what evidence suggests it hasn’t been sold or otherwise promised to another entity?

    • Much if not all of the reserve gold is already pledged to secure loans from other creditors……if the loan is not repaid within a few years then th gold will be used by these creditors to recover their loan …..no sure whether the loan on pledge can be sold under such conditions !!

      • As I understand it — the link you put in the article is to the World Gold Council which gets its information from the IMF which gets its information from reports by member countries. I.e., member countries could lie or simply use different accounting standards. WRT different acctig standards — I was told that if a loan using gold as collateral uses the borrower’s custodian then the gold is still counted in reserves. So I’m just wondering if Venezuela has borrrowed money against [some of] the gold and is still counting [some of] the gold as part of their reserves.

        • I’ve asked this question many times, to no avail–only the Venezuelan gold custodian knows for sure, and they aren’t talking. And what about Chavez’s supposedly transferring most of the gold to Venezuela’s Banco Central, which gold FRod “saw”, and, which gold my source said only occupied 4 armored trucks of a more than 20 procession, and of which gold my source says none was left in BC vaults some months later? I’d be surprised if Venezuela has much unencumbered gold left, since, in spite of its oil income being decimated, and maintaining payments on its intl. debt, its international reserves have been hovering about the same level for the past 6 months….

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