Friday, January 16, 2015

The fiscal problem in Venezuela

These days Maduro is flying around the world as a beheaded chicken.  Why? He has no cash, no economy, and his only hope for political survival is to have oil go back to 80 USD a barrel. Hat in hand, default threats in hand, he is a sorry sight.  But 80 is not going to happen; and even if it were to happen it would not be enough.

I may want to digress as much as I want on a productivity problem in Venezuela, but there is a fiscal problem that looms even larger. Readers of this blog must remember that it has been quite a while we have started to discuss that the crazed currency problem is not been addressed as it should. Devaluations come late, incomplete and without a plan to avoid a new one. Budget deficits kept happily expanding as the regime needed more and more cash to buy voters that asked more and more for their vote. And now that the oil prices have collapsed we are about to consider eating our pets. But there are some solutions that could go a long way to stabilize the country and allow it to negotiate better surrendering terms with the IMF, WB or China (1).

Interestingly, in spite of the coming financial cataclysm, the regime has finally taken two tiny measures that, let's be generous, may solve 2% of the problem (2). And then they sent Maduro to Russia and China and Qatar to ask for money. Of course, the cash he asks for is to run the electoral campaign next year. Donors have not been fooled apparently. China will invest "in the future", and sand ridden Qatar will make joint agricultural ventures with Venezuela, a diplomatic mockery if I ever so one.

Before reading further you need to make sure you understand the chaotic and out of reality way the regime proceeds. You also need to understand that what I propose below has no chance to be developed rationally by the regime and will only happen when it is cornered, in a bad way. Because, let's face it, any serious non-populist measure will be the death knell of the revolution as, among other things, chavismo would break up. Or does anyone think that Maduro can go to the IMF without political consequences?

The local deficit problem

I am going to divide the rest of this post in two parts: this first one about the government deficit in local currency.

This one must be solved fast because the regime cannot fire bureaucrats and misiones beneficiaries fast enough. Never mind  that cutting off 20% of its payroll in bureaucracy or welfare would push  us further into recession, with even less consumers, more social instability.

The regime is seriously considering increase taxes further which in today's context would be lethal for the economy as businesses still alive barely make it through. Reminder; if you have 60% inflation your business must have benefits of 61% or start losing its value. That is, if your business does not make more than inflation you erode your capital and you are better off closing up the shop. I can assure you that in Venezuela today no one makes 61% return today. We are heroes just by keeping payroll.

No, the ONLY way to at least solve in part the cash problem at home is to (drum roll) increase the price of gas. The good news here is that gas is so cheap and inflation so high that actually bringing the price of gas to at least its cost of production and distribution will not affect much companies costs. I am willing to bet that even transport companies have their gas cost below 1% of all of their other costs. Bringing up that cost item to 5 or even 10% will not force them to increase their prices much. Do the math.

Granted, you may not want to go from zero to actual cost in an instant but you could explain to the country that there will be gas price increases every month for a year until people start paying the true price of gas.

But this such a self inflicted political hot potato that even talk of gas hikes have disappeared! Reminder: Chavez said that as long as he was president gas will not increase. Perhaps the lone promise he kept, even if it wrecked the country.

Another easy measure that will cost nothing and that would go a long way is to return to previous owners a lot of the nationalized business. They are costing a fortune, they are producing less than what they did, if at all, they are a source of corruption. Since they have also been looted, give them back to the old owners for free and allow tax exemption for all the cash required to build back the business. Trust me, you will find takers- And the taxes the state fail to collect? Who cares! As long as business remains state owned there would be no taxes to collect anyway. But at least privatization would get you sales taxes again.

Just these two measures allow for the regime to maintain crucial welfare programs and the bulk of public payroll while the real necessary reforms can be designed and taken.

This morning I read a recent article from the Economist about energy subsidies versus education expenses. Dramatic picture on the right on how gas subsidies helped wreck Venezuela as a whole.

The foreign currency problem

With the price of oil down and a huge debt in USD, what can the country do? Very little, but there are things that it should try anyway.

Clearly, a devaluation is long overdue. And it should be, on paper, at around 60 to one USD, Depreciating the currency by 90% in a swell swoop would mean that we all go bankrupt at once, that the country simple stops to function.We have been under currency control for soon a decade and a half and the system is so twisted that you just cannot get out of it like that. Still, you need to do it. A possible solution is not too complicated, and if applied may already bring indulgences from lenders.

Set a plan to go back to free convertibility over a year, two top.

We start with a devaluation of the 6.3 official to 15 and merge it to the 12 SICAD 1 rate that is basically useless (3). Today most business calculate their costs at 25 and plus if they can get away with it. So, bringing it up at 15 and letting is float up by, say, 25 cents of bolivar a week could begin a necessary correction without bringing a crushing inflation or total economic paralysis.

While this new official currency rate is set, strictly for food and medicine, keep the SICAD 2 and let it slide slowly but surely away from 51. Bring most items not covered at preferential 15 to SICAD 2.

And, MOST IMPORTANT allow for a fee legal exchange rate where people who have no access to official or SICAD 2 can buy USD at whichever rate their are crazy enough to buy. I, for one, think the current 175 is crazy, but if the regime does not make adjustments and keep printing money the 175 will be cheap in a matter of a few weeks. My guess is that if the black market were to be made legal within a few weeks, if the other reforms are undertaken, the free bolivar may be less than 140. At any rate, start pulling away from SICAD 2 items and let them go free, one by one.

The objective is to merge by January 2016 SICAD2 and free Bolivar at whatever value results. And then plan to bring in final free convertibility  by the first semester of 2016, or as soon as recession weakens.

Of course, I am not entering in what percentage of what goes to what exchange rate. I cannot. What I am writing above is the kind of currency scheme that could be tolerable for private business to weather the worst of the crisis and perhaps start growing already by the last quarter of 2015. Unfortunately this is not going to happen because 1) too many corrupt folks benefit too much from the 6.3/170 arbitration and 2) thus you would need to take currency control AWAY from political hands, like in a real independent central bank.

Never mind that this would require special loans from IMF and the like....

But there is another problem that could kill any attempt at restoration.

Private business has several thousand of millions of dollar in outstanding debts. These, the business have the bolivars to pay for it but the regime has not allowed for the USD to be transferred to providers. These providers have run out of patience and now refuse to send raw material unless paid IN ADVANCE, IN FOREIGN CURRENCY. Something that the regime, well, does not have anymore. Those billions have disappeared in thin air and yet they are owed, there is no way around. What to do?

Again there is a way. As I have written above most business already calculate their prices above 20 bolivares per USD (or more, depending on the area).  Thus we can ask them to take a hit and chip in financially to save the country and not go bankrupt outright as no one will sell them a grain of raw material to work.

Negotiate with the IMF a special loan strictly to pay well documented private debt. That loan, maybe 6 billion USD, will be used by an independent agency to pay the providers debt with, say, a 20% hit. What does the private business gets in exchange? Payment of their debt in a few weeks and the ability to start importing raw material again with loans but this time at a more real currency figure. Yes, it is not a great deal but it would allow for a lot of companies not to go bankrupt and maybe revive within a year or two. That loan of course would be paid by the state long term and since there is no asset its backing would be a political one signed by both opposition and chavismo. Again: its functions will be handled AWAY from government hands. Business that do not want to take that 20% hit can be left waiting for the regime to pay for them at 6.3 some imaginary day in the future.


There is a productivity and a financial problem in Venezuela. Both need to be addressed away from the chavista model. There is no way around. The revolution is dead, or must become a sanguinary dictatorship which is a death of its own anyway.

What I presented in these tow posts are partial measures that would allow for the private sector not to die and start a recovery, the only way Venezuela can retain some economical independence in the future. Many other structural reforms are needed to make Venezuela gain a viable state: decentralization, tax reform, judicial independence, true accountability, a nations' development guidelines, etc, etc...  But all of these take years and that is a luxury we do not have. Yet taking what I explained in these two entries would be more than a mere band-aid. And would allow for better negotiation terms with any lender, be it the IMF or a consortium of countries.

Going around like Maduro does pathetically will not work.


1) I must remind readers that I am no economist but I am writing from ground zero, about the obvious, but an obvious that apparently chavismo is unable to perceive even in broad daylight. Thus what follows is not a discussion of macro economic packages that could be taken, but rather simple measures that the regime could already do that would lower the pressure and maybe, besides proving its good intentions, allow to get better deals from prospective lenders.

2) The first measure are to start a devolution of some functions to the states, functions that had been centralized by Chavez when all knew that it would never work. They start reestablishing tolls on highways and let the proceeds go to regional authorities to at least clean the roads and patch the worst potholes. Besides being the first major rebuke to Chavez policies, we must note that unless tolls are adequate there is little the regions will be able to do. Let's not look forward for safer roads any time soon.

The other measure is the novel concept that people should actually save to be able to afford overseas travel, that the government has no business subsidizing vacation travel. As such, what should have been done two years ago has started: travel expenses will now be payed for at SICAD2, which is the worst exchange rate at 51 for a USD. Note that the black market is at 171 but I digress.  Let's focus on the positive: you have lost your "right" to go shopping to Miami. Now you need to save for a few years to be able to go, like everyone else does around the world. Innovation bolivarian style!

3) Reminder, the country has today 4, FOUR exchange rates. An official one at 6.3 that almost no one has access to it. A SICAD 1 at around 12 that is all but imaginary. A SICAD 2 floating between 50 and 60 which is basically the lone one with some meaning. And the black market one at 170!!!!!! I let you imagine how graft is encouraged through that crazy scheme.


  1. You assume that the government wants to help the private sector. What if the goal has been all along to kill the private sector? You must agree that the government is doing a pretty good job if the goal is to kill the private sector.

    1. I assume that there is no food and that the regime knows that the end has arrived. This is not about helping the private sector, this is about trying to see if the private sector can used for power preservation. Or something like that.

      At any rate, through these two posts I have said at least once in each that my proposals ain't going to happen. It is just a proposal of the very least the regime could do to avoid falling into an outright repressive tyranny,

      Then again some inside are willing to go for it.

  2. Anonymous9:56 AM

    Ridiculous to babble about Venezuela's precious sovereignty as some sort of great accomplishment (getting rid of the gringos?) and then get the country in hock for the next 100 years to China. The Chinese aren't foreigners? The Cubans aren't foreigners? The private sector is finished and the smart entrepreneurs have fled to other countries at this point. At any rate, Chavismo will never admit to any failures of their own making. The smartest thing for Maduro to do would be to seize all the hidden assets of the rich chavistas. It is stolen money anyway and probably amounts to $100 billion by now.

  3. The Bolivarian Revolution is forever committed to Chavez-thought. It's imperative to keep the price of gasoline as it is, and the Misiones budget is sacred. This means the best solution is for Maduro to keep flying around trying to organize a new oil producers cartel. Meanwhile Compañero Cabello should keep organizing the remaining PSUV cadres to participate in the fall elections, and Vice President Arreaza can give occasional speeches reminding the population that everything is fine. They can print money and hand it out to the military, and cut venezuelan diplomats' salaries. That should take care of things until Maduro returns and gives himself a triumphant parade.


  4. Ahora que el gobierno ha reconocido su existencia: Para salir de la crisis (N. Evans)

    1. Charly2:57 PM

      Sure, and Nicmer Evan is still a hardcore chavista, i.e one who thinks wisdom is shinning through Chavez's sphincter, forgetting he is the One who created that mess to start with. The current incumbent is just but a "pagapeos".

  5. Anonymous3:19 PM

    The government spent the last 12 years systematically destroying the private sector to create the complete dependence on government handouts for control. Only real holdout left standing has been Polar, because they are needed to both stock the shelves and also take the blame for shortages. I am not sure the government would reverse course and allow the private sector (enemy) to save the day. Even if they did, it would be risky to invest in the amount needed to restore damages knowing that "this" government will only take or break them again at first opportunity.

    The price of crude is simply supply and demand. The supply currently exceeds the demand, and the only way to increase prices again would be for someone to cut production, which is not going to happen any time soon as Saudi is content at as low as $30/bl. Everyone else capable of cutting would cut their own throat by reducing output. Good luck with maduro getting any sympathy or support. The sad fact is that pdvsa can't squeeze out another drop to offset, or improve the qualities of their crude to sell at a higher price on the market due to the lack of investment in the fields and facilities, corruption and politically sided incompetence within the company/country. The lower market priced synthetic crudes yield even less when they are off spec, and that has been the case for years.

    With the three year crude forcasts settling in around the $50's and Venezuela's falling into the mid $30's for the duration, along with the international climate and lack of sympathy for this government, it's days are truly numbered. The question is how long do you want to drag it out?

    If maduro and this failed cuban modeled government experiment were removed, investment would return and Venezuela could pull out of this regardless of the crude market due to the unlimited opportunities for other production. Easier said than done, but nothing good comes easy.


  6. That graph says so much. As for Chavistas hoping oil will go back up, the Saudis say never again at $100. And analysts predict at least a year for below $50. They will have to go to the IMF or face collapse.

    1. The Saudis won't have the production capacity to stop oil prices from rising above $100 per barrel in the future. We know prices will be increasing by year end to around $65 WTI. But that's going to be too late for venezuela to avoid taking a monster hit.

  7. Charles Lemos10:13 PM

    Venezuelan oil closed at under $40 a barrel today.

    I had to laugh when I heard some Venezuelan Vice President last night on the news here in Colombia say that fall in oil prices was part of US fracking conspiracy. Laughable. Here's the reality, fracking is only profitable when the price of oil is above $50. Ninety percent of the fracking industry is losing money at the money.

    One quibble, the IMF is not going to come to Venezuela's rescue. No one in the West is until there is a regime change. You're stuck with China, Russia & Iran.

    The revolution is morbid but not dead. Venezuela, however, is dead. It is on its way to becoming the North Korea of Latin America. Seriously, when does the regime announce it needs nuclear weapons? They will do anything to stay in power. I put nothing past them.

    You have my sincere condolences.

  8. Anonymous10:54 PM

    just a thought, is the real reason that maduro took his family with him was not for vacation but to pick out where they want to live?

  9. Anonymous11:20 PM

    You talk about capital in Venezuela like it can grow. Capital goes to Venezuela to do one thing and one thing only. DIE.

    The bird brain president of Venezuela and his bird brain ministers do not have the mental capacity to build an economy. The outside world wants absolutely nothing to do with Venezuela.

    Nothing can be done, especially as long as these idiotic chavistas are around. They are too stupid and too corrupt.

    1. Anonymous11:30 PM

      And I will add to this.

      The government wants to do one thing and only one thing. Destroy anything that is private and put more money in the pockets of their gentlemens club. They don't care about the private sector. How many times has Maduro (or some other clown) referred to the private sector as bourgeoisie scum.

      Think about this, the government has intentionally destroyed the airline industry making it difficult to leave the country. They have also eliminated the amount of Cadivi to Florida where the majority of Venezuelans who visit the US travel.

      The government is good at doing one thing and one thing only. Destroying the private sector and filling the pockets of those who are part of the corrupt club. They will fight to the death as long as they have food on their own tables.

      The only HOPE is that what is taking place now starts hitting the families of military personel hard enough that the few good neurons they have remaining in their chavista brains have them question the idiotic organization they support.

      End rant!

  10. Anonymous9:08 AM

    I feel only sorrow. The Venezuela I remember (about 25 years ago) was a vibrant place with a great economy. How do you manage to screw up something this bad?

  11. Anonymous3:03 PM

    It just proves once again that communists can ruin anything if given total control and enough time. Cuba, Zimbabwe, and now Venezuela. Who's next? Ecuador? Argentina?

    1. Like one american diplomat said:

      "Brasil is becoming Argentina, Argentina is turning into Venezuela and Venezuela is the new Zimbabwe"


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