Monday, January 30, 2012

The agricultural sinkhole of Venezuela: my banker may call me tomorrow before he gets expropriated

Let's face it, Chavez agricultural policy has failed.  So he finds nothing better but to accuse the main three private banks of Venezuela of not financing the agricultural sector and threatens to nationalize the three of them.  The news went around fast, in Spain where BBVA headquarters are, and elsewhere, such as a misleading BBC snippet that makes the casual reader think that Chavez policies are working.

Handshake before the check?
Reality is complicated.  As a businessman making his livelihood in the agricultural sector I have indeed benefited from the credit policy of Venezuela which demands that 24% of bank loans go to finance agricultural activities.  This is great for me and my colleagues because the interest rate is fixed at 13%, 2 to 5 points below the other markers.  With an official inflation at around 30% and a real one maybe getting close to 40, this means that by the time we have paid our loan, in real money we may have made as much as 10% instead of paying interest.  As a matter of fact, even agricultural business that do not need to borrow to grow still borrow, if anything to buy dollars outside of Venezuela, or to enjoy an easy bonus because you could lend that money at a higher rate than you borrowed it.

There is another perverse effect: banks court us.  That is, since agricultural activities are such a high risk activity in Venezuela, anyone that is known to pay back his loan, even late, even with trouble, is an AAA of sorts in the informal credit rating of the Venezuelan banking system.  Your banker will call you to ask you whether you need money.  You can demand conditions.  And when the loan is approved the banker comes to your office with all the paper work and the public notary to sign.

Approval is easy: take your banker to an outing on your farms and show him your property titles.  That is enough, you do not need even to do complicated financial statements (your banker knows how much money you make) or to draw proposals and what not: you have enough guarantees as far as the banker is concerned, considering the conditions of the country.

But this system only benefits well established agricultural farms and agribusiness concerns.  They cannot make much money these days because of the rigid policy of price control of the regime.  But thanks to the indirect earnings that the mandatory loans offer us, an earning that does not appear in any accounting book because it is courtesy of inflation and thus we pay no tax on that, we can develop, invest, grow.  I can assure you that at least 50% of any new investment in the agribusiness sector you may observe comes from these loans that the banks are forced to make.  In my own business all growth that may come for us is due to banks wanting us to borrow from them.

And the ultimate perversion is that if you are in an agricultural sector threatened with expropriation by the regime, then you have more reasons to borrow: the day you are expropriated the debt goes to Chavez whereas whatever you spent on you remains with you.

Of course banks are very reluctant to make loans to small farmers, in particular those that Chavez is allegedly creating with all the intensive land expropriation to allegedly create small farms with landless peasants.  The problem with Chavez ideological hare-brained schemes is that those who receive the land do not get any property title and thus have no asset to offer banks.  And no real prospect for success anyway as the government merely hands out money and land but provides no services, no consulting, nothing worthy or continuous over time.  After all we just learned this week that the per capita agricultural product went down 9% since 1998 in spite of all the money and laws and programs that Chavez has thrown at the sector.  Banks are not picky as you already read, but at least they require either an asset or a guarantee from the regime that it will put up if the worst comes.  A Chavez running out of money is certainly not going to oblige, even if he were inclined to do so.

But Chavez also knows what is going on with these credits, who really benefits from them.  So he gets furious and decides to punish the victim, that is the banks who make nothing out of these loans, by threatening to expropriate them  through what is nothing more than a crass extortion.  He even suggested that the banks should deposit their 24% money in a state fund that will decide who gets the loans!  You can kiss goodbye that money which is simply going to become grant distribution and vote buying in the country side at the bank expense, and the agricultural production expense which needs a large part of these loans for day to day routine as the investments must be done in full well before the crops are sold.  If the banks go bankrupt from losing 24% of their capital, who cares!? After reelection Chavez will nationalize them once and for all.

And yet there is a funny paradox: SUDEBAN, the state organization supposed to enforce bank regulations emitted a communique on January 23, a mere week ago, to the effect that the banks were fulfilling agricultural loans at 91.67%.  I am not saying it, it is reported in the state news agency!  In fact SUDEBAN self congratulates for the success!

So, who is a liar?  Chavez or Sudeban?  The more to believe that today's whole show was an excuse to take away a large chunk of private money in the banks to finance Chavez reelection.  And a true expropriation without compensation it will be, a plain highway robbery, "robar" as Maria Corina Machado so aptly put to Chavez on Janaury 13.  Well, he'll show her.

PS: welcome Powerline readers!

18 comments:

  1. why choose a leader just really difficult and expensive

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  2. Anonymous9:15 AM

    "Our" government isn't please with a 91%, it always does it's work with at least 125% results!!
    That is the reason for our "beloved" comandantepresidente to ask for the expropriations!
    Beside banks are making lots of money with the same scheme you reveled....

    ReplyDelete
    Replies
    1. I would not be so harsh on banks: with 40% inflation and 13% interest I doubt very much that they are making real money... this ain't Wall Street!

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  3. "by the time we have paid our loan, in real money we may have made as much as 10% instead of paying interest"

    You know something is truly wrong when, with two businesses with all things being equal, such as expenditures and income, the more profitable one is the one that borrowed MORE.

    And your point about expropriation truly is perverse. If you borrow heavily, you end up with very little risk in that case. It's like gambling, in a way, but the system is set up by an idiot, so the house always loses. The only question is how much.

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  4. Island Canuck11:20 AM

    And yet if you are an individual trying to get a car loan or just some money to pay off bills it's almost impossible. You need someone to cosign the loan & provide mountains of documents even if you've been a steady client of the bank for 25 years.

    As a comparison I was able to borrow in my Canadian bank in 20 minutes 10s of thousands of dollars even though I've lived here in Venezuela for 25 years.
    The difference in attitude is incredible.

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  5. As usual an important part of European mainstream media ( the BBC), subtly to some, but obviously to others makes Chavez look good.

    Read the below incredible quote from this BBC article that makes it look like Chavez is preforming a successful and fair agricultural reform and the main critics are the rich and powerful large land owners.

    "The process of agricultural reform has given many of Venezuela's rural poor the chance to farm for themselves for the first time.

    But critics - including large ranchers and farmers who have lost their land - say production has suffered as a result, putting pressure on food supplies and prices."

    Anybody who thinks that Chavez has lost the international support is living in a fantasy world.

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  6. Anonymous1:08 PM

    firepigette,
    The same people (BBC et al.) who now say that Chavez is doing great, will start saying that he deserved what he got the moment he is out of the way. This is what happened with Mubarak, Ceaușescu, Gaddafi, etc. It is my hope that the Castros will soon join this selected group. Nobody in Europe really cares about Venezuela: newspapers just print what the average European wants to read to entertain themselvesw. On the positive side, newspapers here will probably sympathise with the opposition when Chavez loses the next election. Nobody likes losers.
    Pete

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  7. Obviously when Chavez nationalizes agricultural loans, production will fall another 10% if not more.

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  8. Anonymous3:54 PM

    'The problem with Chavez's ideological hare-brained schemes is that those who receive the land do not get any property titles and thus have no assets to offer banks.'

    I guess Chavez's Cuban advisors forgot to inform him that this scheme doesn't work in Cuba either?????

    To bad the BBC can't inform their readers of the true problems in Venezuela.

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    Replies
    1. good one... "misinformed cubans", the mind reels with the possibilities....

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  9. Cuban advisors were in Angola during the month of instruction on "Employing increased efficiencies and fair practices in agricultural land ownership".

    ReplyDelete
  10. Anonymous2:48 AM

    Great post. You don't get enough recognition...

    ReplyDelete
  11. Just curious: how much better was the Agricultural sector in Vzla before Chavez? I know we used to export coffee, but that’s about it, no? Maybe some sorgo, and a few more cows.

    If memory serves, we’ve been importing a large % of our food even before Perez Jimenez. And, especially after the oil boom in the early70′s, we’ve relied on a somewhat perverse, inadvertent “oil for food” program of sorts.

    All I’m saying is don’t expect miracle cures after we get rid of Thugo, the Terminator.

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    Replies
    1. I guess I meant "sector agropecuario" since I threw a few cows in there :=))

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  12. Pete,

    I get your point and it is precisely that BBC support would only come after it is not needed that actually worries me.I think the power of media to shape opinion through kowtowing to the lowest common denominator( populism) is underestimated.The leftist base needs more counter voices within any publicly funded media, otherwise it becomes more than a bit undemocratic.
    If they want to tow a line... fine, but not with the power of public funds.....

    ReplyDelete
  13. Anonymous12:15 PM

    "The more to believe that today's whole show was an excuse to take away a large chunk of private money in the banks to finance Chavez reelection. And a true expropriation without compensation it will be, a plain highway robbery, "robar" as Maria Corina Machado so aptly put to Chavez on Janaury 13."
    Daniel -this is I believe the REAL STORY.
    (And, exactly what I was thinking when reading the #378 Alo Presidente -Chavez's shows his arse again show.
    Everywhere he looks and sees he thinks "Mine, all mine for the exploitation for me...

    ReplyDelete
  14. Anonymous9:35 PM

    Daniel, I loved the beautiful speech by Capriles today in your hometown:
    http://www.lapatilla.com/site/2012/02/01/capriles-radonski-aseguro-que-tras-ganar-las-presidenciales-acabara-con-las-expropiaciones/

    First part about agriculture is fantastic.
    This was a very pofound speech!!

    ReplyDelete
  15. Juan Cristóbal9:54 AM

    Great post, Daniel.

    ReplyDelete

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