Saturday, March 21, 2009

Stupidity and cowardice are a fatal combination 

Last Thursday Chavez announced that he would come out with his economic plan to face the abrupt drop in oil prices. I was pleasantly surprised by that announcement because I didn't really expect the government to make any changes this soon in the year given the large savings that they have (or claim to have).

Unfortunately, what was said tonight by Chavez leaves almost no room for optimism that things will turn out well.

Going into today's announcement I thought the most realistic changes were:

1) raising the value added tax (VAT or IVA in spanish)
2) reinstating the financial transaction tax
3) raising the price of gasoline
4) going to a dual exchange rate and at least devaluing for everything besides food and capital goods

The first three I was pretty sure would happen. After all, on Thursday he made comments critical of the cheap price of gasoline so it seemed reasonable to think he would take this opportunity to do something about it.

The devaluation I was much less optimistic about though I thought there was at least a chance of going to a dual rate.

Unfortunately for Venezuela what they got was much worse.

Just to outline what did happen:

1) the value added tax was raised by three percentage points from 9% to 12%.
2) all unnecessary or "luxury" spending is to be cut back on.
3) the government will take on about $10 billion more dollars in debt (it is domestic debt in Bolivares).
4) the price of gasoline is left unchanged.
5) the currency is still pegged at 2.15 BsF to the dollar.

Lets go point by point.

1) Increasing the VAT was expected and necessary. Sure its somewhat regressive but they didn't have a lot of options and even the best of economic packages would have had to include this. Unfortunately, they raised the VAT even though it does have evasion problems whereas they didn't reinstate the financial transaction tax even though it is much easier to collect. That is a mistake.

2) Cutting the salaries of high officials and unnecessary spending is all well and good, but how much can that possibly save them? Not much. These cuts are much more for symbolic reasons than true budget fixers. Chavez wants to show the public that the government fat cats will be the first to feel the pain. Will they, and will the public buy it? That remains to be seen but clearly this is a public relations act, not something that solves their problem.

3) The biggest single budget fixer they announced was taking on $10 billion more in debt. While not a huge amount neither is it a trivial amount. Further, while Venezuela's debt position is good (ie, they don't have a lot of debt) it isn't as good as some make it seem. They leave out PDVSA debt (which is in reality government debt given that it is a state company) of $16 billion and the debt to China (presumably because it is paid with oil rather than cash) of $8 billion. Further, PDVSA appears to be taking on a few billion dollars more in debt so just through March they have this $10 billion, $4 billion more to China, and PDVSA of about $3 billion in additional debt - that is $17 billion in new debt. On top of that they have nationalizations which they have yet to pay for (Exxon-Mobil, the cement factories, SIDOR, and Banco Venezuela) which are in effect debt and are not a small amount.

In sum debt is not YET a problem with YET being the operative word. If things keep up at this rate it will be a problem in a year or two.

4) The price of gasoline being left unchanged is simply insane. Its already a huge subsidy for the well off and a huge loss of revenue for the government. Now things will get still worse as inflation will be at least 20% meaning the price of gasoline will be 20% less this year in real terms.

To do what Chavez did yet again today - say that gasoline is absurdly cheap and a drain on the government but then do nothing about it is... very Chavez like. I guess the thinking is "why fix today what you can put off until tomorrow".

Just to add stupidity on top of insanity he also implored people stop being so wasteful with gasoline. Again, typical Chavez - imploring people to act in a certain way while giving them strong economic incentives to act the opposite way.

My guess on this is that it is nothing more than cowardice on Chavez's part but more on that in a minute.

5) As if letting the currency getting even more overvalued weren't bad enough (Venezuelan industry might as well drop the pants, bend over, and kiss its ass good-bye) Chavez made that overvaluation a bragging point. In saying the Bolivar would not be devalued he stated that "this government protects the value of the currency". That was a just plain stupid comment that shows his ignorance of these matters.

The government hasn't "protected" the value of the Bolivar. Given the inflation rate it has been losing about 25% or 30% of its value each year. That is what inflation means - the currency is losing value. Apparently his economic advisers have never pointed this out to him or they are clueless also.

In any event, the refusal to devalue the Bolivar only protects its value against one thing - the U.S. dollar. But unless you are lucky enough to get CADIVI dollars to make Internet purchases with or take vacations to Miami (which most Venezuelans aren't) it doesn't do you much good.

Now some may say I am being overly harsh on Chavez for calling him stupid and Chavez is only saying this to save having a long conversation explaining the real reason for not devaluing - not wanting to increase inflation or whatever. Sorry, but I am not giving him a free pass on this any more. If he had a more sophisticated reason for not wanting to devalue he should have said it so people could hear it, be educated maybe and have a deeper understanding of why the government is doing what it is doing. Instead he chose to just BS which will only serve to confuse people and make them angrier when things don't turn out well in the future.

There really isn't much of anything that you can feel good about in this announcement. The government is reducing its spending quite significantly and raising taxes which make negative growth (ie a recession) pretty much a certainty for this year. 

Further, they are already resorting to increasing debt which is making me nervous that maybe they don't have as much money saved up as they've been saying. 

And they did nothing, NOTHING, to reduce what by far are the biggest sources of waste in the government - a radically overvalued currency that both drains the treasury and throttles domestic industry and a hugely wasteful give away of gasoline.

Oh, and did I mention that all this only helps them with the government budget but does NOTHING to solve what looks to be at least a $30 billion hole in their balance of payments for this year?

There is just one final observation I can't resist making. Normally I don't like to get into psychology and trying to figure out what peoples motives are. After all, I am not in Chavez's head so there is no way I can really know what he thinks and why he does what he does. Still there is something very funny about how this happened.

First it was announced on Thursday that economic reforms would be made on Saturday. Ok, sounds big. Yet all the actual changes were quite small and hardly merited being made on national TV. You don't need a cadena to take on more debt or raise the IVA a bit.

Further, everything seemed very improvised and undecided right up to the last minute. First, we heard that they didn't put the finishing touches on this until last night. That sure is cutting it close. But then it got worse, as they postponed the announcement today by a few hours because they were still not completely ready. Lastly, please recall that last Thursday Chavez sure seemed to be laying the ground work for increasing the price of gasoline.

Soooooo, if I were to guess I would say that Chavez was indeed very strongly considering increasing the price of gasoline and probably decided at the last minute NOT to do that. That is, he chickened out.

So again, we really seem to be looking at a combination of stupidity and cowardice here. That combination is not likely to lead to a happy ending barring a miraculous rebound in oil prices.


The government is going into debt and increasing the VAT 

But will not touch the exchange rate and the price of gas? The percentage of foreign debt per GDP will also rise even without new debt as the nominal GDP inevitably will shrink due to the price of oil collapsing.

The way he is talking we might never devalue the currency under Chavez.

Minimum wage going up 10% in May and 10% in September, obviously a drop in real terms of more than 10%, but of course he will still claim victory because the dollar is pegged.


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