Demagoguery in Aragua: another day of economy wrecking for Chavez

Chavez needs to show that he is cured, that he is in charge.  What better than to go to next door state Aragua (short ride in copter) to expropriate a few farms and make job promises that cannot possibly held, not here, not in Brussels, not in D.C.

14.000 hectares (35.000 acres) of farmland expropriated, and Agroflora

Another day, another successful march, and a few fascist moments

Briefly. The democratic touch first.

The main campus of Venezuela decided to hold today a protest march today to protest the education cuts which probably might not even cover payroll. This in a climate where other cuts that coudl be well undertaken are not done. I think in particular about the military spending of which we have not heard any significant decrease, or the checks to the leeches of our country, namely Cuba, Nicaragua, Bolivia and Argentina. Not to mention that significant funds could be freed for education and health if Chavez were willing to sell gas at cost.

Considering that today was a week day and that as usual all sorts of threats took place, the march was a great success. BBC Mundo has a long report without qualifying the attendance but there is a telling picture.

The fascist touch now.

In an unusual move the corresponding minister, Luis Acuña, had agreed to receive the president of the Venezuelan major universities. However the march was directed to stop at X point and send a committee of 8 representatives. They accepted of course and sent such committee led by UCV president, Cecilia Garcia Arocha. UCV is the largest and oldest Venezuelan university. So far so good. But when these poor 8 souls reached the offices of Acuña they were met by a minister surrounded by a high number of chavista students allow to carry all sorts of boards insulting the march outside. Insulting boards quickly joined with insulting language.

Of course, the 8 guys quickly realized that they were wasting their time and walked out, with strong declarations against an education minister who allows himself to be a instrument of division, and ignorance I will add. Garcia Arocha had no qualm calling the meeting "a trap".

But in the deserted UCV campus there was activity. A group of hooded thugs did capture UCV buses, apparently had themselves taken to the UCV main square, started shooting and burning the buses, before they eventually withdrew, guns in open sight. Globovision has even a video amateur by some of the personnel left in campus.

The reactions? The Minister of interior, Tareck El Aissami, blamed it all on the UCV authorities. Yeah, right, he probably had not seen the video yet... Besides, one would like to see El Assaimi equally worried about the crime wave that we all suffer in Venezuela except people like him who get all sorts of bodyguards at tax payer expenses.

While all these were taking place Chavez grabbed 35 more oil industry supplier, in a move that is simple robbery, the type of robbery that an interior minister in Venezuela would be well advised to investigate.

But is it all worth it? I doubt it as today 107 students of a "bolivarian" school were intoxicated by the snack served them that morning.

As good fascists chavistas have become, their only care is to preserve their power. The rest of the country is to be mocked, to be put in jail, to be robbed or to be left alone to stare death from crime or food poisoning. The people do have a choice for their fate, don't they?

-The end-

Rice and banks no more: Chavez electoral trophies?

Although in a funk, waiting to decide what future blogging should be, I still need to cover the direct consequences of the February 15 vote. This past few days there were two apparently unrelated events which are in fact very related.

Rice processing plants "intervenidas"

Whenever Chavez "wins" an election, he sorts of need to show who is the boss. This primitive to primal reflex, that gorilla chest thumping of him was seen three weeks after his 2006 reelection when he decided to close RCTV. Now he did not even wait three weeks to administratively take over two rice processing plants with a clear threat of their final nationalization (well, he did also take over Stamford bank but that is another story: it failed as a Ponzi scheme and rumor has that most of its depositors were chavista nouveau riche).

The excuse was very simple: apparently part of the rice elaborated there circumvented regulation prices by adding a flavor to the presentation. Considering that producing rice is no good business in Venezuela, these plants used this scheme to make sure that at least they did not lose money overall. A far as we can tell that "flavored rice" did not represent even 10% of what was manufactured in the country, and thus f little social impact as that flavored rice is sold in upscale groceries to people than can afford it. But the propaganda impact is big as rice is a basic staple (pabellón anyone?)

The real problem here is that the government has been trying for years to find ways to control Polar, harass the company that is perceived as a threat. Why is the Polar groups such a threat? Because it is a demonstration that agribusiness can work efficiently in Venezuela and as such it is a constant reminder of the failures of chavismo to get off the ground their own counter agribusiness. See, chavista "entrepreneurs" did not fail because of Polar unfair competition: Polar has been harassed and controlled and kept in check for half a decade already. These "entrepreneurs" (socialists cooperatives, individuals who cast their lot with chavismo and all sort of hanger one) failed because simply they are inefficient and are in the business for the quick buck, courtesy of chavismo grants. Not for them the long term commitment of a traditional group like Polar which is important to note is not even at the stock market. All that Polar did was with its own self investment (and beer money, true, but not state money granted to the chavista "entrepreneurs").

What we have seen this week is the first direct assault of a series from chavismo against Polar. Now chavismo is in more of a hurry because as oil prices are not going to recover anytime soon it needs to secure food supplies to at least feed part of that 54%. The obligations of populism, you know. The other 46% will have to figure out ways to eat, that is not chavismo problem. And of course, Polar as the legendary golden egg goose will soon lose all productivity and we will starve as we will have no money left to import rice. But that is OK with Chavez, he will have gained another couple of years in power and surely he will come up with something else to take over and destroy, until nothing is left, Cuba style. Did a starving Zimbabwe stopped Mugabe from lavishly celebrating his birthday?

One banker less

The other event is that a well trained commando like kidnapped one of the main banker/stock exchange guys in Venezuela. German Garcia Velutini was abducted as he was driving on his own by a commando like operation. Two things here:

The government inaction and even complacency with such crimes has been emboldening such terror groups. Venezuela is becoming fast one of the worst countries in the world for these type of actions. And they are not reserved only to Caracas: my own poor rural state is, per capita, one of the three worst states of Venezuela for abduction statistics (and not all are reported, by far).

The second thing is that Garcia Velutini is the member of a family who has one of the main critics of Chavez economic policies in its ranks. Oscar Garcia Mendoza (a half brother I assume) is the president of the Banco Venezolano de Credito. As such he presides one of the safest banks in Venezuela in that it is probably the one with the least exposure to unreliable Venezuelan state bonds. It pays little interests to your accounts but at least it has an advantage, you are pretty sure that it will be the last one to go bankrupt in Venezuela so you will find back your money. People found out that under the Caldera bank crisis of the mid 90ies. Garcia Mendoza has thus two advantages: he knows what he is talking about when he discusses the Venezuelan financial situation, and he has the credibility to sustain his positions.

Thus one cannot help but wonder if the kidnapping of Garcia Velutini is just that, a kidnapping for money. Or if there something way more sinister behind it.

On the road to crash

The consequences of these apparently two unrelated events are in fact quite simple to perceive once you understand how they are linked: a Chavez who thinks that his 54% is once again a blank check to pursue his policies is announcing that he does not care at all about private enterprise to help him navigate the shoals ahead. Truly, who is going to come an invest big time in Venezuela when your business can be taken away by the government at will, or your top executives can be abducted at will?

To add insult to injury Chavez even said that if he expropriates the rice mills, he will pay them with "papers" and not with hard cash. Which, if you think of it, as a confession by the president himself that Venezuelan bonds are worthless.

The big mistake Chavez is doing is to misread completely the new world scenario. The crisis is not the end of capitalism, it is its reinvention as it has taken place before. Obama might succeed or fail, but even if he fails there will be another guy to come after and succeed anyway. After all, pushing it a little bit, it took WW2 to finally make the New Deal a permanent success that lasted until the late 70ies. If the efforts to come back from the current recession bear fruit, the capitalism that will emerge will be a conservative one, a capitalism where accounting and legality and seriousness will be core values. How do you expect a rogue regime like Chavez will fare with the new order when irremediably he comes hat in hand to ask for help?

Because by taking over rice mills and ignoring protection of bankers Chavez is only speeding up the time of his reckoning. You can trust me on that one.


-The end-

From my crystal ball on Venezuela

I think that the world crisis is now here to stay and thus it might be time to speculate a little bit on how it will affect Venezuela. But before the leftist peanut gallery cheers even though the lion has not been skinned or even killed, it is important to remember that capitalism has always managed to reinvent itself because, simply put, it is the system that best fit basic human nature: the wish to improve your lot and the lot of your family based on your work and your values. Socio-communism has always failed because it has always tried to impose values on people without allowing people to exert at least some of their own values on the side. Thus as a first conclusion to this post, no matter what Chavez is saying these days, history is against him. If you disagree with this paragraph then you are off the hook, stop here and go read other blogs.

The Venezuelan reality today

We import most of our food. We are in no position to develop food production fast for several reasons:
Many of the candidates that have the skills or the desire to develop food production in large scale are either out of the country or have nothing to do anymore with food production.
The countryside is in chaos, from crime to landless peasants, to peasants with land but nothing else, skills or finances or even a property certificate, not forgetting the wreck of our road system and the unaccountable delays of rail road building.
Any new development in the next two years will be tied to credit that has become this past month scarce and expensive.
As a consequence, even though food imports will lower some in the next months it will be due to lower consumption of the people more than any significant production increase of food stuff.

We import most of our manufactured items. Comparable situation as in agriculture. We have the workers, we have the managers, but we do not have the finances nor the will to produce. Today the industrial park of Venezuela is roughly half of what it was in 1999. Even if many were willing to reopen they need to retool, they need credit, they need a decent work environment with less harassment from the state. And forget about foreign investors interested in Venezuela for the time being: they are either out of cash or scared of Chavez, or both.
As a consequence Venezuela imports will continue as long as consumption levels and income persist. But they will go down and will not recover as long as other economic equilibrium does not return, in particular as long as Venezuela does not produce at least 80% of the food it eats. We can expect even a decrease of local production before production starts again. The commerce and financial sectors which have driven the growth these past few years upon their ability to import whatever will be now unable to sustain themselves as they cannot rely on internal production to pick up where imports drop.

The government has spending out of control. Chavismo has spend liberally on social programs, some good but with too many dead ends financed for electoral purposes. In addition for political reasons sustained by Chavez ego Venezuela supports Cuba and props Bolivia, Nicaragua and helps a few other people. And I will not discuss the cost of corruption, mismanagement and inefficiency.
At 80 USD a barrel it is clear that this level of spending cannot be sustained over time. The current crisis has accelerated the decrease of oil prices and today the 80 USD level has been reached, which implies an even lower price for Venezuelan crude. If to this you add that all reports point out to a stalled oil production in Venezuela and a lack of financial muscle to expand production, it is clear that the government is facing a very serious crisis, no matter how many denials we are hearing these recent days. Obviously nobody has told Chavez the truth yet.

What Venezuela has

In face of the coming crisis we still do have some advantages, no matter what lack of reserves we might have.

The follies of Chavez have somewhat isolated us from world markets. In a way that is good as we are not as affected as the major financial places, but is is also bad because at a time when we will need financing to overcome the errors of these past 10 years there will be no fresh capital available to us, except perhaps for oil production, and with lots of strings attached.

We do have oil. Even at 80 USD a barrel and even with lower production we will have a steady source of income that can help us weather with reasonable sacrifices a world recession.

We have many budgetary options to improve our financial balances. For example an increase in the price of gas at the level of production cost in Venezuela, an increase in the price of electricity at the level of cost will free enough funds for the government to improve quickly public transportation and electrical services, and thus productivity of the population and business. There might be even enough funds released to offset some of the social cuts that are unavoidable. And of course we can call off all of these expensive weapons purchases since with a world recession and oil below 80 USD it is unlikely that anyone will be in any position to invade us for the next 3-4 years.

In other words with a medium quality management of the country we could avoid a deep recession and get a more solid economy in 2 to 5 years. But we will not avoid some rough waters ahead.

What will happen

First we must agree on a likely outcome to the present world crisis. Personally I think that a global depression will be avoided. However a recession is now unavoidable. How strong and how long it will be it is any one's guess. However we can assume that unless there is major Middle East blow up or a nuclear conflict in India/Pakistan, the price of oil will not go back to 100 for at least a couple of years. I do not think it will go much lower than 80. As low as 60 perhaps at the end of the Northern winter 2009 if this one is mild. But oil is disappearing and the general tendency is for up, up and up until alternative energies becomes wide spread.

On a practical level for Venezuela this means 2 years of oil at 70-80 average, and little access to credit. International credit will be more difficult to get now as investors will be much more conservative and less credit will be available. An economy like Venezuela with its corruption, unpredictability and mismanagement is an awful credit candidate in the new financial world. At least whatever oil we produce we will be able to sell, which is not the case of the trinkets produced by China or India.

What will be the possible scenarios?

Chavez gets told and decides to take care of Venezuela. The November result is 10 states for the opposition while his budget plans sink with the crisis. Chavez decides to 1) cut 70% of his foreign aid, 2) start an increase in gas prices, 3) cut spending to about half of his misiones, retaining only those on health, subsidized food for the poor and some educational program 4) devalue the currency from 2.15 to 3 VB to 1 USD, 5) start a protectionist program to reboot Venezuelan production. Inflation will by hard for a few months but social programs targeted to the very poor only will mitigate the shock some and by the end of 2009 we might be looking toward much lower inflation and more industrial production. That the opposition directs 10 states will force enough political compromise and social peace for such a transition plan. For 2010 a recovery of oil prices, an improved agricultural production and a controlled spending restart general economic growth in Venezuela.

Yet, this probably mean that Chavez will accept an expiration date of 2012 and will work on improving things enough to have his chosen successor elected.
ODDS: less than 5%

Chavez tries to escape reality but still does take some measures. No matter what the November results are, Chavez decides to continue supporting Cuba and Bolivia even if it is at lower levels. And he does not renounce his lifelong reelection scheme. He needs money for that. Understanding that in Venezuela increasing further taxes means the end of private sector he settles for postponing weapons purchases, a devaluation and an increase in gas prices, betting that oil prices will recover faster than they will. If inflation reaches 50% he might even think he can survive that with a few devaluated cash grants. And if oil prices return to 90 by spring 2009 he might apparently succeed. But none of the basic problems of the Venezuelan economy are solved and the crisis is just postponed making this one probably worse when it finally comes. In addition this allows for a mercurial Chavez that can go anytime against his already meager crisis control plan, undoing any good he might have done with a single speech or program.
Basically it will be a dangerous game between what the opposition gains, how the crisis develops, how Chavez popularity with the poor survives, what legal expedient he can manage to get his constitution changes. The consequence is a systematic instability as we have had these past ten years with unpredictable outcomes. Life at the edge but even more so.
ODDS: maybe 25%?

Chavez speaks loudly, blaming others, but changes nothing to his ways.
The reality is that Chavez will not stop from supporting Cuba which will ask even more money from Venezuela as it suffers from the world crisis: less tourists, you know....
The reality is that in ten years Chavez has made a new promise every Sunday and now he simply cannot stop making promises.
The reality is that he only cares about him retaining power forever; the rest is immaterial.
As such he will decide to believe that he can fudge his way out of the tight spot and that he can manage somehow to rush oil back to 100 a barrel. Sure, he might still devaluate some, he might suspend the purchase of some weapons, he might cut off Ecuador and the tiny Caribbean islands. But that will not solve the problem at all. Two possible outcomes:

Chavez rushes forward and radicalizes the country. Taxes go up, the private sector is further nationalized in an orgy of Venezuelan companies takeover without the compensations accorded to foreign companies. Workers are sent to occupy industries, not to take them over but to have them forget for a while about the other problems of the country. A referendum to "address the crisis" is quickly called pretending that by more centralization, the repartition of private sector and the participation of workers in state companies the crisis is solved. In that referendum of course he tries to get his reelection ad infinitum. It can all end in some "fujimorazo" on any lame excuse.

Chavez waits to react to the crisis and keeps his current radicalization pace. The crisis hits us anyway and is felt no matter what isolated measures are undertaken. Social unrest grows. Two things can then happen: 1) fearful chavistas decide to remove Chavez from office before things reach a no-return point or 2) Chavez decides to radicalize faster, as above, but the momentum is lost, people now associate the crisis to Chavez and major civil unrest results. In such conditions if he is tempted by a "fujimorazo" it will be a bloodshed.
ODDS for each one: 30-40% each, but probably more for the first option

So there you have, Venezuela News and Views Crystal Ball. The answers in less than a year.

-The end-

Chavez cannot get good help: the Centro Internacional Miranda

One of the dramas of regimes that range between autocratic to totalitarian is that the big leaders have a hard time in getting good help. I mean, they can easily attract through power, money, or both, people capable of doing all the nasty things required for the beloved Supremo to remain in office. But that is all. Professional people, experienced people, people aware of their own value, have a hard time putting up with the tantrums and bad manners of the leaders of such regimes and prefer to exile themselves or to stick to some low management job and spend their lives in discretion, waiting for better days. In general the result is countries that on the surface seem to work well enough but who are in fact very fragile and with time simply start crumbling. Nobody cares enough for things to be done as they should be, or worse, nobody in charge has an idea what to do. When that last situation occurs, these deficient bureaucrats manage to survive by doing the only thing that really matters: praise and suck up to the beloved Father so it really does not matter much whether trains run on time or not.

Saturday morning factoid of the week

There was a sense of relief last week as during an elaborate ceremony we were treated to the Venezuelan government agreeing to pay the US owners of AES for their majority stake in the Venezuelan utility la Electricidad de Caracas. I suppose that considering that Chavez could have just ordered to take it over and kick them yanquis out, we should feel pleased that they will get their investment back. Or will they?

Fortunately Veneconomy gives an editorial to clear away all the B.S. that has been held around this totally unnecessary nationalization. Below the editorial within which I will include some comments to enlighten the reader about what the XXI socialism promises us to be.

Veneconomy, 9/02/2007

One month ago, President Hugo Chavez announced that the government would be taking control of the electric power companies. This Thursday the Venezuelan State became the majority shareholder of Electricidad de Caracas when it agreed to buy 82.14% of the equity capital from the U.S. company AES. The price agreed upon by the parties was $739.2 million. In addition, AES is entitled to receive a dividend of $98.6 million, bringing the total value of the package up to $837.8 million, or $0.31 per share a figure that, at the official exchange rate, is equal to Bs.666.12 per share.

So far so good. It must just be remembered that La Electricidad de Caracas was always a private company, founded by the Zuloagas many, many decades ago. It was always one of the best run companies of Venezuela, and certainly the best running utility company in Venezuela, by far, very far.

The deal can be considered fair. First of all because the price is close to the price of the Elecar shares being traded on the Caracas Stock Exchange in late December and early January. Secondly, because the government is recognizing AES’ legitimate right to repatriate its capital at the official exchange rate. And, thirdly, because the authorities have told the minority shareholders that they can sell their holdings under the same terms and for the same price as the AES sale. (Although this is not actually a gracious concession by the government, since the Capital Market Law requires that anyone acquiring control of a company offer all stockholders the same terms and price as were offered to the majority stockholder).

But you know, chavismo has got into that mood of "granting" even what they cannot grant...

This, however, does not mean that the government has not run roughshod over AES, all Elecar shareholders and the Venezuelan people in general.

For the past three years Elecar has not been allowed to adjust its rates, a fact that was reflected in the low price at which the company’s shares were being traded on the Caracas Stock Exchange. If Elecar had been allowed to charge fair rates, it shares would have been trading for at least twice as much and, therefore, AES would have been making a profit, not losing money, on the sale.

Ah! Indeed! The only thing that matches the governmental obsession to control prices is its abject failure at even reaching the single digit rate of inflation. Blocking energy prices for three years (or more according to the item) is leading us today of a possible speeding up of the inflation rate above 20%, on of the highest in the world.

Note also that the government can regulate quite well the price of electricity. So, why nationalize it? There is ABSOLUTLEY no reason, no rationale behind this nationalization, the more so that chavismo had allowed the Zuloagas to sell to AES a few years ago. Now the Zuloagas have their money safely away and are laughing at Chavez and AES. The only reason behind this economic nonsense is because Chavez said so, because in his primitive mind and understanding, there cannot be socialism without a few nationalizations. Since the food giant Polar is too complex and the government is failing its food distribution with Mercal, what other notorious company was left for the government to nationalize but AES and CANTV? That is the only reason behind it, a whim of Chavez, a spoiled brat tantrum.

Moreover, neither does this mean that the government is being fair to Venezuelan investors as, with this forced sale, plus the upcoming sale of CANTV, trading on the Caracas Stock Exchange will become virtually insignificant and the small investor will have fewer options for placing his savings.

There will be no major company left in the Caracas stock exchange (Polar, for example, is privately owned, not on the stock market). Then again, Chavez probably would like nothing better but to close the Caracas stock and come back to colonial times mercantilism.

The consumer, too, will be losing out. First of all because, up to now, Elecar has been an efficient and well-run company that gives its customers an excellent service. So much so, that Caracas is the only city in the country where hotels don’t have to make sure they put candles in the guests’ rooms.

I remember once that some guy in Caracas refused to sell me a certain type of AC for San Felipe because he said that the controls were delicate and he had too much trouble with the AC he sold for the provinces: the only ones that worked fine were those he sold in Caracas. As you can see, this is a lot more than just about candles.

Now, however, under the umbrella of PDVSA, it is a sure thing that the new Elecar will become an inefficient company providing bad service. Secondly, because the government is spending $900 million to buy out an efficient company, instead of spending the money where it is really needed, i.e. on Cadafe so as to improve its service and benefit the 20 million Venezuelans who do not live in Caracas and who, therefore, put up with –and will have to continue putting up with—the consequences of a faulty power utility and the resulting blackouts.

Hear! Hear! For those of us who must deal with the regular shortages in the provinces, if Caracas Elecar goes down, if the government keeps postponing once again the urgent investments needed for energy services for us, we might as well start planning to buy our own electric generator. Already it is common practice in livestock operations to set up electric generators, as folks are tired to have electricity go away at any time, provoking substantial losses.

The loser in all these 21st Century negotiations is definitely Venezuela.

And the losses are only starting. By the time we are though with chavismo it would be like merging from a war but without the bombs. Well, I hope without the bombs as further social divisions could lead us who knows where...