January 15, 2009

The $40 Billion Hole

Quico says: The perceptive among you will have noticed that I haven't been blogging about next month's Infinite Reelection Referendum. There's a reason for that: I don't think it'll turn out to matter.

It takes a lot for a confirmed election nerd like me to say that, but the more I think through the scale of the fiscal mess the government is in, the more I'm convinced that when we go to write our 2009: The Year in Review post 11 months from now, the Referendum will be a distant memory, a footnote drowned out by the increasingly unmanageable tide of street protests engulfing a government that can't pay its bills, wore out its welcome and is fighting for its life.

How bad is the fiscal outlook? Well, lets look at the oil sector in a bit more detail.

In my first two posts of the year, I provisionally accepted the government's own production numbers. But it's an open secret that those numbers are liberally twiddled. Even OPEC, an organization Venezuela founded and Chávez sees as a cornerstone of our foreign policy, isn't buying them.

So what happens if we try to adjust for PDVSA mendacity, revising production numbers down and internal consumption up, while also adding an estimates for the barrels PDVSA can't sell because Chávez is more or less giving them away to his allies?

We get something like this:

When you get real with the numbers, the first thing you notice is that we're likely to have less than half the oil available for export than the government claims.

But it gets worse, because PDVSA's production porky pies are compounded by the government's insane price forecasts for the year. If you subtract a conservative $7/barrel for production costs and then figure the net value of oil exports in 2009, you get:

That's a shortfall worth 18% of GDP or, to put it on a more human scale, about $1,500 for every man, woman and child in the country.

Of course, the government's 2009 Budget does not assume PDVSA will actually hand over the full $52.5 billion in oil exports to the government. Even the super-groovy revolutionary PDVSA can't hand over every last penny it makes from exports. Oil fields deplete, you have to invest to keep production steady over time, never mind to expand it.

Plus, as we know, chavismo always prefers to keep a rather large chunk of petrodollar spending off-budget - notably, spending it through PDVSA itself - to maximize presidential discretion, avoid bureaucratic hassles at the National Assembly, and sidestep the mandate to pay out situado transfers to state and local governments on its oil spending.

So the 2009 budget estimates that, out of net oil exports worth $52.5 billion, PDVSA will actually hand over just BsF.78 billion to the government, which works out to $36 billion at the official exchange rate.

Trouble is, $36 billion is still far more money than oil exports are likely to bring in this year. For oil exports to bring in the $36 billion the government put in the budget, oil prices would have to rise to an average of $90/barrel in 2009. And for oil exports to bring in the full $52 billion the government estimates they will, prices would have to average almost $125/barrel for all of 2009:

Alternatively, in a far-from-unimaginable scenario where prices drop to $30/barrel, exports would bring in less than $10 billion this year...ouch!

So barring a last minute stay of execution courtesy of the global energy market - a kind of deux ex excrementum diabolus - the government's budget problems will be extremely serious this year. All its options are bad.

The least bad - from the government's point of view - could well turn out to be the most damaging for the country: a sharp devaluation that generates more bolívars for any given level of oil exports. The problem is that, in a country that imports just about every consumption good it can transact, devaluation feeds directly into inflation, which is already out of control.

Even with a devaluation, public spending is still likely to fall sharply in real terms this year. Back in November, VenEconomy estimated a chilling 37% fall in real public spending for 2009. But it's public spending that's been propping up economic growth for the last four years...choke it off all of a sudden like that and what you're looking at is a shrinking economy at a time of out-of-control inflation.

In other words, stagflation, a musty word pulled out of some long forgotten economics glossary, redolent of bell-bottoms and AMC Gremlins, as if to underline just how far back into the past chavismo is taking us.

I could go on, but I think you get the picture. Hurricane Feces is a Category 5 storm. By the time this is all said and done, the thought that back in January we were worried about some referendum to amend the constitution will strikes us as laughable. No es por ahí que vienen los tiros...

In Venezuela, fiscal crises always morph into governability crises. That is the gun down whose barrel we're all staring.

[Correction: Due to a silly mistake in my sums, an earlier version of this post had the hole at $50 billion. Apologies]