Peru's International Currency Reserves

Here's a chart because we do requests. Peru has U$40Bn tucked away these days, a pretty penny and a good economic shock-absorber if ever needed.

Reader FH, we doff cap.

Another lesson in macroeconomics for Miguel Centellas

This time from Brazil. As pointed out recently, international currency reserves cost money to hold and once they get to a certain level a government is much better off finding a decent use for the revenues received. The previous example was Bolivia, this time it's Brazil. The point being made is exactly the same, that social programs funded by these incomes are not expensive at all (as the dumbasses like to make out as they jump to ill-informed conclusions), but a cost-effective method of sharing the bonanza and promoting growth.

Dec. 22 (Bloomberg) -- Brazil should stop increasing international reserves as the local currency stabilizes and economic growth quickens, former central bank director Carlos Eduardo de Freitas said.

“It’s a totally logical moment for the central bank to stop buying reserves,” Freitas, who was part of the central bank’s monetary policy committee from 1999 to 2003, said in a telephone interview from....

"...“If they don’t stop buying reserves now they will be paying a high cost for no reason,” Freitas said yada yada continues here

There is one difference between Brazil and Bolivia on this subject, however. Brazil will get praise from the chattering classes for its sound macro policy, while Bolivia will get ignorant pseudos criticizing it once again.

Learning anything yet, CentellasFool?

Venezuela Parallel Exchange Rate Update

Here we go with the latest in this semi-regular series.

First the main chart, that of the VEF/USD parallel (permuta) exchange rate...

...and as things stand, you need VEF6.49 to buy a dollar on the streets of Caracas today. The recent news has been that Chávez&Co is now studying a new multibanded exchange rate system to take pressure off the official 2.15-to-1 fixed rate. Or put into simple English, as this blog predicted Venezuela is in the process of a currency devaluation. We also predicted that the deval wouldn't happen in the first half of the year, but run the risk of getting Argentines shouting "¿Che, no tenés abuela?"* if we start preening too much.

Anyway, back to the subject in hand. The driving force of the weakness in the VEF (as we've explained many a time) isn't inflation. The cause of inflation is the problem, and that's a monetary thing known as M2, which measures the amount of currency in circulation inside the country. Here's how M2 stands right now..

..with the VEF equivalent of U$101.79Bn sloshing round inside Venezuela. This amount of money is up from under U$90Bn (equivalent) at the beginning of April and explains why Venezuela's inflation rate stays stubbornly in the high 20s to 30% range. Put in the most basic terms, if you add 30% more money to a country there are 30% more pieces of folding paper trying to buy the same amount of goods, which means you'll find you're using 30% more of those folding pieces of paper to buy that thing you want to buy. Just good ol' fashioned supply and demand stuff, ask Adam Smith.

However, the Central Bank keeps a store of wealth that backs up the money in circulation. Called International Currency Reserves, it provides backbone to the fiat system. So if we look at the amount of reserves in Venezuela right now....


....we see they've tucked away U$31.45Bn. This means (and the calculation is pretty straightforward), for every single dollar the Central Bank keeps in reserve, there are 6.96VEF circulating in the country. This gives us our theoretical equilibrium point for the VEF/USD exchange rate.

So right now the rate is lower than the theoretical rate by about half a Bolivar Fuerte. This indicates that the financial brains out there in Venezuela expect good things from the government and its plans to tame the permuta. What IKN can say right now is that if the Vz gov't does devalue (or stealth devalue by adding different exchange bands...it's the same thing, really) the parallel rate will drop further as people see arbitrage value in buying dollars at a lower price and selling them higher. However if the Vz Econ team make a SNAFU of plans and the new devaluation system brings no extra flexibility to the exchange rate, the VEF parallel rate will certainly float back up to 7:1 and probably go higher still.

DYODD.

*"Hey, don't you have a grandmother?", an expression that says " grandmothers kiss you and love you, but it seems like you have to love yourself, so presumably you don't have a grandmother to do all that for you"

Ecuador: Good news is no news

When it comes to South American financial news, the only things that English language newswires are allowed to report about Colombia and Peru (Amerika's friends) are good. When it comes to Bolivia, Ecuador and Venezuela (those nasty commiepeople) the reverse is true.

Take, for example, the story of Ecuador's international currency reserves. Here's the chart year to date and we can see how reserves dropped in the first part of the year, reaching their low point at the end of May.

Bizarrely, the newswires were full of stories about those reserves when the drop was on. Here are just a few examples (of many, believe me) culled from the wires between March and May:

March 16: "...Ecuador’s foreign reserves fell to their lowest since June 2007..."

March 19: "... The country’s foreign reserves declined 5 percent to $3.31 billion in the week ended March 13, the lowest since June 2007..."

March 26: "...leftist President Raffael Correa could be forced to drop the dollar, throwing the country's monetary system into chaos ..."

April 27: "....Correa dismissed concerns about the economy, even though Ecuador's foreign exchange reserves dropped by half over the last six months...."

May 11: "... A 30 percent tumble in the central bank’s foreign reserves since the December default is draining the money supply..."

But then weirdly, bizarrely, strangely, when May left the scene and those international currency reserves began to rebound (due almost entirely to the better prices for crude oil), the newswires decided that the subject wasn't interesting any longer. By way of proof, check out this link to Bloomberg that notes how the keywords 'Ecuador', 'currency' 'reserves' returned a whole swathe of reports in 2009....but not a word since May. Not a single word.

Funny that, innit?

And you wonder why I call bullshit on the mediocre media that covers LatAm? The only truth you get is the version the newswire controllers want you to get. True for every single country down here. Truly pathetic coverage of Latin America, brought to you by Cheese-O-Mint™, for all your cheese/mint needs. Ask for it by name at your favourite store.

Venezuela Parallel Exchange Rate Update

I've done a lot of mining posts in the last two days and they're getting boring. So here's the long overdue update on a chunk of macroeconomic commentary that's probably just as boring for all but about eight of you. However I know those eight or so like this subject, so off we go.

First, let's start with the Venezuelan Bolivar Fuerte (VEF) parallel headline rate. As carnaval is in full swing in Caracas there's been no trading this week so far, so the most recent price for the VEF against the dollar is 5.75. We can see from the chart that since the pre-Christmas hike it's stayed on or around that level.

If we look at the next two charts it seems that the above current level is about right, at least for the time being. This one shows the Venezuelan international currency reserves and please make note that this chart (for its own weird reasons) reads from right to left.

The main thing to note is the big recent drop (on the left) back down to the U$30Bn level. That was the withdrawal made by....well, made by Chávez really....to fund social programs going forward. Currency reserves are not a big problem here and the current $30Bn level is more than enough for a country of Venezuela's size and macro wealth.

We've recently had a whole bunch of blog-based Venezuelan 'experts' doing mutual handwringing sessions over that supposedly polemic withdrawal of reserves. These people seem to miss entirely the real point while preaching to their own little choirs. Venezuela's reserves are in good shape, but the next chart shows the problem.

This is the amount of money and quasi-money in circulation (if you like, imagine all the cash bills and all the virtual money stored on digitial and electronic systems in banks...that gives you the broadstroke idea). This money is called M2 by jargon lovers. Here we see that M2 has been increasing very rapidly over the last couple of years. This is a problem, because the money in circulation (in a soft currency country* such as Venezuela, at least) is, in theory at least, backed up by the reserves in the Central Bank. So if we start with every VEF backed up by a dollar but then suddenly double the amount of VEF in circulation and don't add any more reserves, it means that for every dollar there are two VEF and therefore the VEF loses purchasing power. In short, it causes inflation (e.g. you need more bits of paper to buy something worth one US dollar).

That's just a chunkette of very basic monetary theory for you, but the bottom line is; the more VEFs in circulation, the weaker the currency is. And right now if we do the necessary calculation, one US dollar in the Central Bank is covering 6.25 VEF. This explains (to a theoretical extent, at least) why the current parallel rate of VEF5.75 is so much higher than the official VEF2.15/USD1 rate the government does its business at via its CADIVI body.

There are other factors, of course. These things are never as cut and dried as economists would have you believe. Just as one example, with dollar inflation currently dropping worldwide we can expect less inflationary pressure in Venezuela as well. This means that the VEF currency is likely to hold up a bit better than 6.25 and kind of explains the gap between the current sub 6 numbers and the theoretical 6.25 number.

The question going forward for Venezuela is how to stop that money supply from growing even further and weakening its nominal value, because that's the cause of future inflation we're looking at right there (far worse than anything the USA might be about to experience). There are several answers; one is to "take money out of circulation". This can be done by emitting government bonds in foreign currency (presumably dollars) and exchanging those VEF on the street for nice pieces of paper that say the government owes you greenbacks. Fine in theory, but right now with oil so low it's difficult to see where the government can get its hands on enough dollars without tapping reserves. Another way of taking money off the streets is hiking banks' reserve requirement, a fancy way of saying to a bank "you dudes have to keep at least 10%/20%/30% of the VEFs you say you have on your books in your safes and don't let 'em out...or else you're in trouble".

Another possible is, of course, the devaluation that many are expecting. I also expect Venezuela to devalue this year, maybe moving the official rate to 2.9 or even perhaps 3.0 to the dollar. However I don't expect it just now and I've pencilled in the second half of the year if, and only if, oil stays below $65/bbl or so.

We shall see what happens.


*think of it as a currency that people don't like to save in

Venezuela Exclusive: The Reserves Transfer is Completed and IKN has an image of the cheque

A few minutes ago Prensa Latina announced that the U$12.543Bn money transfer from Venezuela's Central Bank reserves to the Venezuelan state FONDEN fund had been completed.

As a WORLD FREAKIN' EXCLUSIVE dudettes and dudes, IKN has managed to get its grubby hands on a copy of the cheque used to transfer the big moolah.

Venezuelan economics and "forgetting" the facts that don't fit your rant

Over at Caracas Chronicles, Quico has today continued his diatribe against the Venezuelan economic policies concerning international currency reserves (IKN picked up on his politically charged but generally excellent post of a couple days ago right here). But today Quico has obviously decided to "forget" some pretty basic economics in his rush to condemn the Vzla gov't and its economics, basically because he's the kind of partisan analyst that hates Chávez so much he could never say anything remotely in favour of the guy. As I said the other day so be it, I'm not my brother's keeper etc, but he does himself a disservice by his error of omission.

So what's the problem? The problem is that Quico picks up on this official MINCI PR and takes issue with a passage thus (his full post linked here):

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"...Most irksomely, the press release parrots the meaningless concept of an "optimal level of foreign currency reserves", which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves "optimal" is simply meaningless. It's a bit like confidently declaring that 2 kg. is the "Optimal Level of Harina Pan reserves.".."

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That, unfortunately for Quico, is simply untrue. In serious economics circles there is a clearly defined concept of optimum foreign currency reserves. I'm not going to get all wonky on you here (those so inclined to dust dry economics can run the names "Garcia and Soto" though Google with keywords like 'currency', 'GDP', 'reserves' etc and have a nice afternoon) but to hit it in simplified bullet points:

• It actually costs a country money to hold currency reserves. This cost is usually defined as local interest rates minus world benchmark interest rates (usually LIBOR). Even in these rocky times that equation is not to be ignored. This cost is more akin to an opportunity cost than real "gotta pay a bill" cost....but a cost is a cost. Period.

• There is always debate about these things, but a consensus among economists revolves around having 10% of a country's GDP available in the reserves to avoid sudden stop shocks etc.

• In the case of Venezuela, the current U$42Bn really is too much according to these accepted parameters. In fact the U$30Bn that will be left once Chávez extracts his $12Bn soon is as close to optimum as possible.

• Or put another way, the cost to Venezuela of holding that extra U$12Bn in reserves would be around U$1Bn annually. That's a significant amount of moolah, folks.

In other words, yer man Quico over there at Caracas Chronicles is telling half-truths and preaching just what the converted want to hear instead of being intellectually rigorous and telling the whole truth. The problem in Venezuela is NOT, repeat NOT the size or non-size of its international currency reserves. The problem in Venezuela (in this case at least) in the amount of money being printed by the Central Bank aka M2. If Quico stuck to that he'd have a decent argument, but until then he's just another anti-Chávez ranter and can be ignored. A pity, really.

Chart of the day is............

....International Currency Reserves per Capita for the nine major South American states plus Mexico.

Click to enlarge

The idea behind this chart is simple; we've heard often enough how LatAm is protected from the financial storm by having accumulated currency reserves in its various central banks. The amount in each country varies considerably (Brazil over $200Bn, Uruguay $6Bn etc), so by showing the reserves as a ratio of each country's population it gives a better idea as to the amoount of protection afforded by each pile of money.

Of course it isn't as cut'n'dried easy at that, as each country has different demands on that reserve (debt servicing, capital outflows, pressures on its currency that depend on copper (Chile) or soya (Argentina) or ten thousand other variables). But the chart does give a general idea of strength.

The strongest country by far is Chile; this because as well as the $26.49Bn in official reserves used in the chart, it also has around $23Bn tucked away in overseas accounts to call on...add these together and Chile enjoys the backup of over $3,000 per capita. Next comes the quiet achiever Uruguay, once again showing itself in excellent position for the turbulence to come. Argentina and Venezuela are relatively rich at the moment, but both of those are more likely to tap reserves heavily in the near future.

Surprises include Bolivia, as the Evo Morales gov't has been fiscally prudent over the last two years (but don't spread that around...we don't need no stupid facts, right?). Also surprising but for the wrong reasons is the relatively low level of reserves that Colombia can call upon.

In general, the question to ask here is "Is $1,000 per head enough to protect a country?". That's one of those subjective, piece-of-string questions I suppose. But it does give us an idea of the numbers involved.

South American currencies offer excellent value right now

Consider this the official headsup post. Reasons:

1) The panic flight to dollar bills and bonds has likely ended. As best signal, look for the T-Bill yield to jump tomorrow. This will signal the top in the USD.

2) Commodities of all shapes and sizes rebound in dollar terms. South America is the land of commodities, people. From precious metals to base metals to grains/softs to sugar/ethanol, to hydrocarbons...we got the lot.

3) In broadstroke terms, the US bailout package is inflationary and baking higher prices into world economies going forward (unless of course you believe you can create a couple of trillion's worth of money out of thin air and think it won't dilute the pool). This will kick in after the storm has passed.

4) South America is implementing policies that will strengthen currencies right here and right now. The latest (and pretty typical) decision is the lowering of Brazil banks reserve requirement (following on from other regional states). Other tactics likely to be used include asset repatriation and continuing tasty high interest rates.

5) The run on many local currencies has been little short of dramatic, and there is plenty of rebound space in the short term. Check the Brazilian Real, the Chilean Peso, the Colombian Peso, the Peruvian Nuevo Sol, the Mexican Peso for excellent exmaples and trading ideas.

6) There are no, repeat no countires about to default on bonds. Not Ecuador, not Argentina, not Venezuela. we've talked about this one before. Or put another way, if any LatAm state goes down, about a dozen other Eastern European, Asian and MidEast states will have to go down first. And then there are all those currency reserves down here that add strength. Brazil $200Bn, Mexico $80Bn, Argentina $50Bn, Peru $34Bn, Venezuela $38Bn....hell, even Bolivia has over $8Bn tucked away these days. Chile, Ecuador, Paraguay etc etc etc As risk management goes, LatAm offers a logical alternative right now.

These reasons add up to one thing: buy S.Am/LatAm currencies right here and right now. Top of the shopping list should be Chile, Brazil, Colombia and Peru (and that's Otto's order of preference, too). However you need to 1) keep it nimble and be prepared to take profits at any time, and 2) DYODD, dude. It might seem strange to relate South America with financial strength right now, but this is Pachakuti, remember?

Venezuela Taps its International Currency Reserves

Hugo prepares his speech for next Sunday's Alo Presidente

Hot damn, I was talking about this only yesterday with a smart person I know in Caracas. Smart person said that Chávez would tap several billion of Currency Reserves, and smart person even dug up an old story to show there was a U$29Bn roof on reserves not so long ago.

So sure enough, today the news hits (see the Bloomie newswire paste under the line). With $38Bn or $39Bn in the fund right now (depending on which way you slice), this brings things down to $31Bn tucked away and $7Bn extra play money for Chávez's social programs. Even though it'll give fuel to the Chávez haters (who would have criticized him later if he hadn't skimmed reserves) the move makes a lot of sense at this precise moment, clearing the way for the 2009 budget to be that much less onerous.

So Kudos to my smart friend, whoever s/he may be. You nailed that one. Applause.

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Oct. 8 (Bloomberg) -- The Central Bank of Venezuela will probably transfer $7 billion in "excess'' reserves to the government's off-budget National Development Fund this year, President Hugo Chavez said.

Since the fund was started in 2005 to finance government projects, the central bank has transferred between $10 billion and $12 billion in reserves into it, Chavez said. Venezuela has also collected "almost $4 billion'' from a new windfall profits tax on the oil industry this year, he said.

For Related News:
Stories about Venezuela: NI VENZ
Top Latin American News on Bloomberg: TOP LAT

--Editor: Brendan Walsh

Venezuela to buy back sovereign debt

The is the total Venezuela external debt burden by quarter. Bonds and short term
notes make up around U$21.7Bn of the current $56.2Bn total.
(Click to enlarge)

You (probably) heard it here first, dudes and dudettes. The jungle drums tell Otto that Venezuela is going to use about U$1.5Bn of its very healthy international currency reserves (around U$37.7Bn as of last week) to buy back a chunk of sovereign debt, most probably the benchmark Global2027.

Bond and 'pagaré' (short term paper) debt, 2003 to date
(click to enlarge)

This would represent about 7% of total current bonds debt and is a smart move by Venezuela because:

• With the paper at around $65, they get to buy back at a considerable discount (think of it this way, sell something at $100, buy it back later at $35, say "thank you for your business, please call again")

• Venezuela will avoid paying interest on that debt (yield at 13% or so right now)

• It improves their debt profile (a fancy way of saying the world will like the news because they don't owe so much)

• It will likely give a boost to the country risk, as people buy into Venezuela debt thinking "Well, if they do it once they may well do it again". This creates a virtuous circle and all debt paper is revalued.

• The dollars in the Central Bank sit there and do nothing anyway. Of course they are important to hold, and the bigger the reserve holding the stronger the country's position. But there is a limit to the effectiveness of a large reserve holding, and for a country of under 30m people, U$37.7Bn is arguably far too much to hold. The U$100m or so that Venezuela will save in interest payments is enough reason to do this transaction.

• Be prepared for those that can see no right in anything Chávez does to worry about the use of reserve dollars like this, by the way. Sour grapes of the highest order on the menu, because this is good financial housekeeping whichever way you look at it.

Also, there is a political message to this buyback (and as we all know, Chávez loves his political messages). At a time when the USA is frantically bailing out the largest of its large financial entities and effectively nationalizing them to the cost of the shareholder, Venezuela is adding value to its position by buying up cheap assets.

The advantages of a net exporting country over a net importing country? Plain to see, no?