The Venezuelan Deval: dos centavitos

Bizarrely, I'm now getting crits from readers wondering why I haven't written anything on the Venezuelan devaluation. Well, in fact I have.



1) This time last year I was saying that Venezuela would devalue in the second half of 2009 (here's one example post, plenty of others if you're that bothered to check back). So I missed my prediction by nine days. Bite me.



2) This weekend your scribe put together a note on the deval as part of IKN37 that was published yesterday to subscribers. So ahhhh, what da hell..here it is below. But really, with the world and his wife all throwing in their opinions (from the smart to the stupid to the downright dishonest revisionist theories of the Caracazo), I really don't see why you need this humble corner of cyberspace chipping in, too. But hey...that's just me.



Anyway, here are the mumblings that came as part of IKN37 yesterday.

Venezuela: The fixed currency moves

So, I missed on my forecast of “Venezuela will devalue the VEF in the second half of 2009” by nine days, having said on plenty of occasions that I thought Venezuela would deval in the second half of 2009 ( example (6)).

The surprise here is not the fact that Venezuela has devalued its currency, the Bolivar Fuerte (VEF), as it was obviously overvalued against peers and fighting a parallel rate nearly three times its official face value. After all, I’m writing for an audience that understands gold the metal here...I feel no need to explain how fiat currencies naturally devalue over time as the concept is clear to all and any attempt to artificially prop up a currency value is doomed to failure over time. Neither is the surprise those shills that call it a humiliation for Chávez, as the real humiliation would have been to hold the status quo and watch the country go to the dogs. For sure Chávez has been stubborn about not devaluing the VEF for about a year or so (because he’s really not very good at economics) but he’s finally bitten the bullet. Finally, there’s no surprise about the sudden rise in pseudomath around this subject; as just one example we have Venezuela’s El Universo newspaper (opposition bias) telling its readers that the basket of goods needed for basic needs will exactly double in price as of tomorrow (7). The kind of silly stuff written by people that don’t understand money’s role. Expect plenty more.

The surprise here is the depth of the deval. The new official rate (to be used for certain infrastructure and food related imports) of 2.6/1 is basically for show, as the real new rate is the so-called “oil dollar” rate of 4.3/1, the one used for oil revenues brought in to Venezuela by PDVSA. This revenue is the lifeblood of the economy, and suddenly PDVSA will be adding plenty more VEF into the local economy for every dollar deposited. Many were expecting this deval, but not as drastic a measure as a doubling of the forex. In effect, Venezuela has, in one fell swoop, turned its currency from “expensive” to “reasonably cheap”.

It smacks of getting all the bad news out of the way in one go. The main bad news will take the form of an immediate dose of high inflation for Venezuela (perhaps ‘even higher’ is a better term, as 2009 CPI came in at 25.1%). This is the bitter pill for ordinary José Q. Citizen to swallow in 2010, but macroeconomic theory says that the inflation bump should be a temporary hurdle. Venezuela has neglected its local economy and has been running on imported goods, thanks to the cheap dollar prices brought about by the 2.15/1 rate. Up to now it’s been between difficult and impossible for local manufacturers to compete on a price basis against imports. Now that the forex rate has doubled, this means imported goods should get expensive compared to locally produced goods and the Venezuelan internal economy should reactivate. True also for exports, and given time Venezuela can start making inroads into the heavy reliance it has on oil as its main export good. The problem is that such a reactivation takes time and the lag in firing up factories means that in the meantime people are obliged to buy the price-bumped goods from abroad. That’s called price inflation.

Next problem: Fiscally, Venezuela runs the risk of overstoking the economy at a governmental level. With more VEFs for every dollar, the temptation to spend its way out of trouble will be high, perhaps even irresistible. This is another aggregate to inflation that has to be watched in the medium term and the prudence (or not) of central government will be key in reining in any extra inflationary impetus.

On a monetary level, the move is positive. With U$7Bn now coming out of CenBank reserves this will leave around U$27.8Bn in the reserves. This still needs to climb compared to M2 levels in Venezuela (currently VEF236Bn is in circulation in the country) but the move to cover VEF 4.3 with every dollar brought in will help bring that under control in the medium term.

The bottom line to this quick’n’dirty on the Venezuelan devaluation is that it might be late coming, and Chávez&Co is certainly setting itself up for political flack from the inflation in the immediate pipeline, but the move is the correct one economically speaking. It would have been better perhaps last year, but doing it in 2010 is a mile better than doing it in 2011. However the inflation that Venezuela will suffer in the short term due to higher prices for imported goods may turn into a longer bout due to governmental spending spree of the extra available VEF funds. Time will tell on that score.

Venezuela's 2009 budget, oil revenues, deficits and all that jazz

Of all the black box economics available to play around with in South America, perhaps the worst (should that be 'best'?) is the projected revenues that Venezuela expects in any given year from its state-run oil company, PDVSA. Not only are there a mountain of pricing variables, you have the neverending argument about actual production levels in the country, basically revolving around what actually constitutes a barrel of oil. Suffice to say that, if you so wish, you can "prove" that Venezuela is in great shape financially or about to go bankrupt next week just by choosing your own favourite dataset. Thus what is needed by people who don't live in partisanlandia is a fair estimate of how oil revenues are going and, eschewing as much politics as possible, a fair estimate about the state of play in the country's economy as a result.

All that preamble is to introduce this short but very informative report from Banca y Negocios (run by consulting firm Aristimuño Herrera & Asociados) that makes as good an estimate as any I've seen recently about the whole oil revenues caboodle. It's Spanish language, but there are plenty of numbers to help those who aren't so proficient (hey...there's always Google Translate). The whole thing is very much worth reading, but here are three points made:

• Oil revenues estimated at U$19.57Bn less than the original 20o9 budget and are now roughly equivalent to 2005 revenue levels

• However, government spending is up some U$32Bn from 2005 level (The shortfall is to be made up from tapping the Fonden fund, the extra revenue from the 3% rise in sales tax and by looking to Venezuela's private banks as a credit source)
  

• The adjusted budget barrel price of U$40 takes the pressure off PDVSA as the prime mover of revenue collection and will allow the company to get on with its job. It will also allow revenues to flow into FONDEN if the Venezuela basket price rises above $40/bbl.

There are plenty more in the link. The report sets out good ballpark estimates and doesn't try to thrust any ideology down your throat, thus it is recommended. It also gives me yet another reason to suppose that 1) Venezuela is not under any great fiscal pressure this year (this will come as a disappointment to many) and 2) a devaluation will happen in the second half of this year if oil prices don't pick up. As such, inflation will become a headline-grabber.

May you live in interesting times.

Reuters' pathetic Venezuelan journalism

This corner of cyberspace might whack at Bloomberg Venezuela sometimes but that doesn't mean for a second that the competition is any good. In fact, it's crappo. Follow the bouncing ball, people:

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First we have Reuters stoking the rumours and heresay that shot the Bolivar Fuerte (VEF) up to as much as 6.6o to the dollar yesterday before it closed at 6.10.

Reuters, March 19th 5:29pm EST: "Chavez promises to this week unveil a set of economic measures that are the government's response to lower oil income. The measures could include moving the official bolivar peg........"

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Cut to today, and notice the timestamp on Bloomberg's factual report:

Bloomberg, March 21st, 7:22pm EST: "Venezuelan President Hugo Chavez said he won’t devalue the country’s currency."

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Then 27 minutes later, Reuters plays the revisionist card.

Reuters, March 21st, 7:49pm EST: "Some analysts believe Chavez is preparing a devaluation of the fixed-rate bolivar currency, although the president said in February he would not devalue in the short term."

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Moral of the story: Do not listen to these fools. The measures announced by His Hugoness today include (so far) a 3% upping of VAT/sales tax from 9% to 12% and making the obvious public debt overrun official by bumping up the 2009 budgeted debt to VEF34Bn..not exactly world-shatteringly surprising, bar perhaps the fact that the Chávez admin has come clean about its deficit.

As for the seemingly chimeric deval, it's only people that follow the MSM like sheep that thought Hugo would actually drop the currency this time around, cos for the smart folk (such as BBO, who called it perfectly) the whole thing was just a great way of making money by selling your dollars at over VEF6 this week, buying them back next week and pocketing the difference. As mentioned before on IKN, you can expect a VEF deval in the second half of this year if and only if crude oil doesn't pick up. My tipping point price is $65/bbl, but that might change. BTW, don't ask me for a forecast on whether that price will happen because I'm a total zero at picking oil. Vamos a verrrr.......

Bistromatics, Venezuelan edition

In my ongoing efforts to popularize the late Douglas Adams' stunningly perceptive concept of Bistromatics, my idea was to write a really long and wonky post about the problems Chávez&Co are unleashing upon themselves by tapping the country's international currency reserves to the tune of $12Bn, the money transfer coming up this month.

However there is good news: I've just been given a headsup that Quico over at Caracas Chronicles has just beaten me to it. And now the GREAT news; his post is much easier to understand on the subject than mine would have been, so please go over and have a look for yourself. Here's the link. But before I go, here are a couple of comments on his generally excellent article.

1) Quico is a raging Chávez hater and carries that message in everything he writes. So be it, I'm not my brother's keeper etc.

2) However, all the numbers and charts and stats he uses are, in my view at least, spot on. So Otto sez filter out the dogma, forget the politics on offer and concentrate on the fact that the numbers show Chávez is heading for an economic SNAFU. After all, Venezuela has always been totally addicted to oil and the same problems have shown themselves in any administration that lived through an oil price slump; this isn't something unique to Señor RedShirt.

3) I'd like to add this chart (which I cooked up yesterday) as this is just about the only chart relationship Quico didn't have that I would have used. It shows the Reserves-over-M2 rate compared to the real parallel exchange rate in Venezuela, January 2008 to date. It adds that final light blue spike to show where the reserves ratio predicts the parallel rate once the $12Bn is taken from Central Bank reserves.

You'll note that over the longer term the blue line has acted as a sort of anchor for the more volatile parallel rate. It's not an exact fit though, as other things affect the parallel market that live outside the world of theoretical economics and in the world of reality. For example in the April 2008 to July 2008 period the parallel rate was suppressed by bonds emissions that offered virtual free money for those lucky enough to be on board. Then when it became clear in August that there would be no more bonds delivered to market by Venezuela, the parallel popped back up (and overshot somewhat in my opinion). Then in the last few weeks we've seen extra pressure on the VEF due precisely to the recently announced policy of central bank reserves withdrawal. As the move was widely expected, the speculative pressure was already on the parallel VEF.

Really, this chart is just another way of presenting Quico's chart of the comparison to inflation data, but as the chart here is more pure monetary in nature it might be a better way to play. You be the judge. Anyway, all the above doesn't really stand on its own. To get the full idea of what's going on, check out Quico's really top class post. Here's the link again, just in case. now for that Bistromatics excerpt again.

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Bistromatics was created by Douglas Adams in the "Hitch Hikers Guide to the Galaxy" series. For those unacquainted with this important mathematical theory, here is the definition of the term as culled from the book:

The Bistromatics Drive is a wonderful new method of crossing vast interstellar distances without all that dangerous mucking about with Improbability Factors. Bistromatics Itself is simply a revolutionary new way of understanding the behaviour of numbers. Just as Einstein observed that time was not an absolute but depended on the observer’s movement in space, and that space was not an absolute but depended on the observer’s movement in time, so it is now realized that numbers are not absolute, but depend on the observer’s movement in restaurants.

The first nonabsolute number is the number of people for whom the table is reserved. This will vary during the course of the first three telephone calls to the restaurant, and then bear no apparent relation to the number of people who actually turn up, or to the number of people who subsequently join them after the show/match/party/gig, or to the number of people who leave when they see who else has turned up.

The second nonabsolute number is the given time of arrival, which is now known to be one of the most bizarre of mathematical concepts, a recipriversexcluson, a number whose existence can only be defined as being anything other than itself. In other words the given time of arrival is the one moment in time at which is impossible that any member of the party will arrive. Reciproverexclusons now play a vital part in many branches of maths, including statistics and accountancy and also form the basic equations used to engineer the Somebody Else’s Problem field.

The third and most mysterious piece of nonabsoluteness of all lies in the relationship between the number of items on the check, the cost of each item, the number of people at the table and what they are each prepared to pay for.

Numbers written on restaurant checks within the confines of restaurants do not follow the same mathematical laws as numbers written on any other pieces of paper in any other parts of the Universe….

Venezuela's budget, currency devaluation and a chance for the prophets of doom to win money and kudos

Feeling lucky, punk? (redux)

This week Venezuela's Congress passed the 2009 budget, coming in a touch under U$78Bn and with an air of austerity (here's Reuters in Spanish). It's typical for Vzla budgets to be thrown in lowball then any extra gravy from better oil sales is used on discretionary projects, so the benchmark oil price of $60/bbl for 2009 (50% higher than today's price) means that unless oil climbs the country will have to nip and tuck at some point.

As usual there are plenty of expert analysts (the same people who would have cost you your life savings if you followed their advice over the last two years) calling for the country to devalue its currency, the Bolivar Fuerte (VEF); the same chorus has been calling this tune every year since...well, since Venezuela's economy started expanding rapidly (and that really disappointed them), but it looks like a devaluation might actually happen this time. If the country goes into recession it makes sense to deval while there is less inflationary pressure. On the other hand, if oil picks up it'll be business as usual and the VEF stays at 2.15 to the dollar. So the bottom line is that there is unlikely to be a deval in the first quarter of 2009 at the very least. Then after that point it depends on the state of the oil market, not on much else (certainly not politics).

The last round of BS about an imminent devaluation of the VEF was back on October 23rd. At that time I offered to bet $100 that there would be no deval in what was left of 2008. Unfortunately, the shills talk the talk but can't walk the walk and I failed to get anyone to wager with me.

But here comes the second chance, sportsfans! I again offer to bet U$100 that on 31st March 2009 the VEF has not been devalued and is still at the official peg of 2.15. The bet is offered at even money (your c-note covers my c-note) and we settle on April 1st 2009 via PayPal (or whatever you prefer).....we can even arrange for the money to cover a meal at Fallen Angel (or at least the round of cocktails). Any takers?

Argentina: The peso forex hits 3.43

There has been a pretty severe move in the Argentine Peso from its recent baseline level ArgP$3.12 or so versus the dollar to the P$3.43 being printed this morning.

Argentina Peso Versus US Dollar, 12 month chart

Reports from the presidential palace are that the Kirchners' are hopping mad about this move and are trying to pin the blame on anyone, from the AFJP (bugbear of the month) to Grupo Rocca (bugbear of the week) to the "business cartel" to a more generalizaed "speculators" fist-in-the-air. I'm not joking, either and here's Critica on the whole charade. Apparently the fools think that the strange thing called 'the market' shouldn't be used to bet against the state.

My four year old daughter has a better concept of finances than the leader of Argentina (and his wife). What would Occam and his razor say to 1) Argentina announces it is nationalizing its pensions system and then 2) its currency suddenly loses 10% against the greenback? If I'm ever required to explain what's going on with the Argentine economy to los Kirchner I'd better remember to extract all words above two syllables. No wonder Martin Redrado is at the end of his tether with these clowns; explaining financial realities to the Ks must be like herding cats.

Now accepting bets

Feeling lucky punk?

My U$100 bill says that Venezuela will not devalue its currency from the official VEF 2.15 to the US dollar in 2008. The bet is at even money (i.e. you match my U$100 with your U$100) and can be settled by bank transfer, PayPal or Western Union wire on the first working day of 2009.

Any takers?

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Venezuela Bolivar Sinks to 10-Month Low on Devaluation Concerns

Oct. 23 (Bloomberg) -- Venezuela's bolivar fell to a 10- month low in the parallel, unregulated market as a collapse in oil, the country's biggest export, fueled speculation the government will devalue the currency yada yada continues here

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Meanwhile, here's a message for (at least) seven readers I know that live in Venezuela and are fortunate enough to get their salaries in US dollars; tomorrow's the day, people....get yourself some of those cheap VEFs.