Friday, November 14, 2008

If you look really, really, really, really hard you can just make it out... 

The Venezuelan Central Bank came out with its third quarter GDP numbers yesterday. Sadly, they are nothing to cheer about. Overall growth was a decidedly mediocre 4.6%.

What is so bad about 4.6% when the rest of the world seems to be in an outright meltdown these days you ask?

To see what is so bad about it lets back up a bit. The prime mover of the Venezuelan economy is oil. And this year Venezuelan oil has averaged about $95 per barrel versus $66 last year - this in spite of the recent dramatic drop in prices. That means the prime mover of the Venezuelan economy has jumped by a spectacular 50%.

Given that, the Venezuelan economy should be really cooking. Growth rates of around 9 or 10 percent would be what I would expect to see.

Why isn't that happening? Part of it is intentional policy on the part of the Venezuelan government. Recall that earlier this year the Venezuelan government got it in its head that inflation was public enemy number one. This led them to adopt a number of policies such as slowing government spending, raising interest rates, and raising banks capital requirements (boy don't some other governments now wish they had done this!!) among other things. They knew this would slow growth but thought it would also tamp down inflation.

As it turns out they were right about the former but horribly off the mark on the latter. Inflation continues unabated. But they did get the economy's growth rate to drop quite a bit!! Given what dimwits the people in charge of Venezuela's economy are they probably view this as a success.

However, the worst is yet to come. Sadly the BCV seems to have allowed its presentations to have become politicized with the intent of hiding information. We therefore note that in their press release they give growth rates for various economic sectors such as commerce, communications and construction. But they don't give the overall growth rate for manufacturing. Instead they give it for sub-segments of manufacturing some of which do have higher growth rates.

This led me to guess they were trying to hide something as the the growth rate of manufacturing, which for obvious reasons is a key number, had always been given before. Sadly, when I looked at the detailed numbers on the BCV site I saw that manufacturing growth was a paltry/pathetic/abysmal .3%. No wonder they wanted to hide it.

And be sure to read carefully, there is a decimal point there. It is not 3%; it is .3%.

That is, there was growth in manufacturing but such slow growth it was barely perceptible. So small is it that it is well below the population growth rate and there is simply no way Venezuela is going to develop this way.

Why is Venezuelan manufacturing flat lining?

There are almost certainly two reasons for this:

a) a highly distorted exchange rate makes manufacturing uncompetative with imports.


b) under investment in manufacturing.

Of course, we don't have exact numbers on all of the above. Venezuela for some reason doesn't see fit to publish investment numbers (in and of itself that is a bad sign). But under investment and a distorted exchange rate will lead to declining growth rates. And in fact that is what we are seeing - WELL BEFORE THE DECLINE IN OIL PRICES.

As the saying goes, the proof of the pudding is in the eating. Anyone who is willing to take an honest look at this should be able to see what the eating is like in this case.


Wednesday, November 12, 2008

Florida real estate isn't the only thing under water. 

The new year is only a month and a half away and unless something changes really soon Venezuela's budget for next year is already in big trouble.

The main reason being tanking oil prices and OPEC production cuts.

Venezuela's budget for next year assumed Venezuelan oil production would be 3.7 million barrels per day and the price would be $60 per barrel. As of today, neither one of those assumptions is holding up.

First off, while the budget called for 3.7 MBPD of production Venezuela currently only produces about 3.1 MBPD which is in line with OPEC quotas. Why they made a budget that assumes MORE oil production than OPEC quotas even come close to allowing them to produce is completely beyond me. It has to make you wonder if the whole government isn't starting to lose their collective marbles.

Anyways, they are at least 600k short on daily production of what the budget calls for AND OPEC is already talking about another round of cuts. So I think it is a safe assumption that they will be underproducing relative to the budget by 600,000 barrels per day.

Doing the math (600,000 barrels x $60 per barrel x 365 days) gives a shorfall of over $13.1 billion dollars! No small change there.

That however is only one piece of the puzzle. The next part is that Venezuelan oil is now selling for $50 per barrel while the bdugeted price is $60 - or in other words if we assume the price neither goes up or down next year (probably the fairest assumption we can make though I think it is more likely to continue going down than to go back up) they are losing $10 on every barrel.

Given that they have net exports of about 2.4 million barrels per day when we do the math (2.4 million x $10 x 365)we get another $8.7 billion dollar shortfall.

Add them together and we can say that using the most realistic assumptions the Venezuelan budget for next year already has an almost $22 BILLION dollar whole in it. That is, if nothing else changes, they will have a $22 billion deficit next year.

Of course, they are probably good for the money, given what they have saved up. Still, covering this out of savings means that things that were originally meant for investments in infrastructure or industry would now be used just to support ongoing government expenditures. There is no way that is good.

Further, this is just one years deficit. What will 2010 be like? Maybe, assuming the worlds economy recovers, prices may go up a bit. But it is very doubtfull given what OPEC quotas are likely to be that Venezuela will be able to produce anywheres near the 3.7 MBPD the budget calls for, even in 2010. So their budget for that year will likely have a big hole in it too.

Any prudent government would already be starting to toss a lot of unnecessary expenditures overboard and take other steps such as instituting a dual exchange rate for items deamed non essential. But so far this government isn't. And unless they do it soon after the elections (say by January at the latest) it can be assumed they are sticking with the policy of letting the imbalances grow until everything blows up. Given that I spent all of 2007 waiting for them to take sensible pro-active measure which they never did I am not going to be holding my breath this time.

On a final note, just to rub salt into a wound, another oil exporting country was clever enough to hedge all their oil prices for next year. That is, Mexico spent $1.5 billion dollars on hedges guarenteeing them the price of $70 per barrel no matter what the actual price is. And they did this for ALL their oil!!

If prices stay as low as they are now some poor sucker is going to wind up losing a lot of money paying Mexico for the price difference while Mexico won't have a gaping hole in its budget like Venezuela does.

Obviously Chavez isn't nearly as clever as he likes to think he is. If he was, he could have hedged Venezuela's oil exports, his budget would be just fine (well, except for the absurd production number) and he would actually be kicking the capitalists in New York while they were down by making them lose tonns of money subsidizing Venezuela's oil.


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