Thursday, 29 January 2009

Here, There and Everywhere: Venezuela Trip Notes from Cartagena, Colombia

Here, there and everywhere, such is the life of the MM blogger these days. One interesting thing about these trips is that you end up stumbling across some old friends, from many other places in the world, who are always willing to talk. In this case, I saw four good friends, all them Venezuelan bankers who were coming to Cartagena to attend the Hay Festival, a literature festival taking place here in this city, and were -- much to my surprise -- quite vocal about the situation of pre-referendum Venezuela. Let's share these comments with you, dear reader.

People changed their minds radically in Venezuela, especially the businessmen close to the regime, since President Hugo Chavez's defeat of his first referendum attempt in Dec. 2007. Chavez has deflected some of that ''dissent´´ with more prerogatives and perks, but the sensation is, according to these bankers, clear: ''This is becoming quite tiresome,´´ one of them confided me. Why?

The inflation situation has become apart from entrenched quite bad for the common Venezuelan citizen. The lack of dollars is squeezing businesses, more seriously hurting the smallest ones, as imported goods get scarcer by the day. President Chavez invades the homes of 28 million Venezuelans every Sunday (not new) for eight hours, but this time people aren't even laughing at his peculiar comments nor his horrible clothing. ''Let's say that he has lost his mind. When he says 'You dear countrymen, have to vote for the fatherland because I am the fatherland,´ you know there's something wrong',´´ one of them told me.

One thing we were talking about with much interest was the PDVSA situation and the opaque Fonden accounting. In general, there is some sort of consensus about the situation that PDVSA is going through, that is, highly unlikely probability of default on bondholders but rising chances that payments to suppliers aren't honoured in a six-nine month period. Cash holdings are drying out too fast, and debt refinancing is becoming too difficult for a company that is seen as a political puppet of the extravagant Bolivarian revolution. In general, these bankers, who you could have thought were sympathetic and tolerant to the mess that Chavez created for years -- the banking industry thrived under the lieutenant colonel's currency exchange controls and lending revolution, -- are finally seeing the situation as unsustainable. ''We saw the commander in a weird mood in recent months´´ they are clear about it. Another banker told me: ''He is panicking out.´´

Yesterday, Venezuelan Finance Minister Ali Rodriguez stated (well, let's say he had to communcate this to the markets so they have little doubts of the Bolivarian Revolution's financial firepower) that, following the $12.5 billion reserve transfer (seizure) from the Banco Central de Venezuela, the Fonden, its off-balance sheet sovereign fund, has now about $16 billion in funds that are yet to be earmarked to projects. The Fonden, apart from receiving billions of dollars in transfers from the central bank every year, is fed with weekly transfers coming from ... guess who: PDVSA. When asked about the future of those weekly transfers, these people said they are uncertain. A Goldman Sachs & Co. report this morning says predicts that, due to the ''large decline in oil prices, PDVSA might stop the regular transfers.´´ I think it is an unlikely situation -- not macroeconomically speaking, but politically speaking, and that point of view tends to be more accurate in describing Venezuela. The Goldman Sachs reports says that ''there is growing speculation in the local press that PDVSA might be selling some of its increasingly scarce dollars in the non-official (parallel) market where it can fetch 5.6 bolivars per dollar, rather than selling the dollars to the central bank where it only gets the official 2.15 per dollar parity.´´ We have said this in several postings, and it's a ''secreto a voces,´´ as we say in Spanish. Clearly PDVSA dollar sales are one more step towards a devaluation. Whether they want ot devalue or not remains a question. Why?

Rodriguez yesterday acknowledged that a devaluation ''would magnify the local proceeds of oil exports,´´ only to reaffirm the government's commitment not to devalue the currency. A devaluation would further spark inflationary pressures. As PDVSA and therefore the government budget suffer the impact of tumbling oil, ''financial distress is starting to emerge in both places,´´ writes Goldman's Latin America economist Alberto Ramos. ''The government still counts on a fair amount of funds spread out through several accounts, but a devaluation in the near term seems increasingly likely,´´ he writes.

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