January 16, 2009

Hey, what's one little Order of Magnitude between friends?

Quico says: Hat tip to Miguel for remembering that, at one point in 2006, the government was boasting that the "Bolívar Fuerte" would bring inflation down to 3% by 2008. In the event, they almost hit that target...it's just that they just got that pesky decimal point in the wrong spot, that's all.

In recent years, inflation forecasting has...erm, not been a government strong suit. For the record, back in 2004, they said inflation would come in at 26%, and then actually got it down to 19.2%. Good going! In 2005, the official inflation target was 15% - and again they came in just under that, at 14.4%.

But then, the wheels started to come off. In 2006 the target dropped to 10%, but the real number came in at 17%. Oh dear. In 2007 the inflation target nudged up to 12%, but the actual number came in at 22.5%. Last year, the official target (once they'd come off the quaaludes and ditched the 3% thing) was set at 11%, and they came in at...31%!

Are you noticing a pattern there?

Bringing down inflation is hard...but bringing down inflation targets? Dead easy...

Of course, it's easy to make fun of all this - and, needless to say, we will - but there's also a serious point here. The really terrifying thing isn't just that inflation is out of control. It isn't even that forecasts and results diverge more and more year by year, making the 2009 official target of 15% look, already, like an impossible chimera. What's really scary is that the government plainly has no idea why any of this is happening, or how the whole process even works, much less how to respond to it.

Finance Minister Alí Rodríguez, who for reasons that escape me is seen as some sort of chavista eminence grise on economic issues - así serán los demás! - recently blamed the whole thing on "speculators", adding that "only by making a huge effort in production and in cost reductions" can you fight inflation.

It's the kind of reasoning you might expect to overhear in a carrito por puesto: if prices are going up, that must be because people are putting up prices. There's a kind of raw intuitive appeal to that line of thought that, for a split second, almost manages to mask the circularity of the whole argument, its essential meaninglessness.

But remember, this isn't some guy on the bus talking. We're not dealing with your dear old Aunt Petunia, who "means well", even if she's evidently clueless. No. This is your Minister of People's Power for the Economy and Finance talking: one of the guys with primary responsibility for solving the problem. And he's pissing so tragically far away from the pot, you couldn't begin to establish a serious dialogue with him about what inflation even is, what causes it and what one might usefully do about it, because he simply lacks the conceptual tools you'd need to have a minimally reasoned debate about it.

Be very, very afraid.

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]

January 14, 2009

FIEM Fatale

Quico says: The thing that makes chavismo's unreadiness for the looming economic shitstorm (a.k.a. Hurricane Feces) genuinely unforgivable is that Venezuela had the institutional mechanism it needed to manage the kind of fiscal crisis we now face...until Chávez gutted it.

It was called FIEM, acronymese for the "Macroeconomic Stabilization and Investment Fund". Technically, it still exists, but it's been so systematically shortchanged it couldn't cover a single week's worth of public spending anymore.

It's important to grasp this: Chávez didn't need to come up with some fancy new framework to manage the risks inherent in being a commodity monoexporter, he just had to apply the risk management system he inherited. Instead, he moved all the stabilization action over to Fonden, a kind of bureaucratic black hole from which no light can emerge.

All of which got me thinking: what would the outlook for this year be like if Chávez had just followed the original FIEM rules?

First, a bit of background.

The idea behind FIEM was disarmingly simple. It was just a kitty where you could save some of the windfall when oil prices are high to guarantee yourself a fiscal cushion for when prices fall back down again. Simplicity was its strong suit: FIEM had a clear, unambiguous, and transparent set of rules for when you had to put money into the fund and when you could take money out, and those rules were simple enough for a keen fourth grader to grasp.

Here's how it worked: You're the finance minister. Each day, you calculate the average price of oil over the last five years. If, on any given day, the price of oil is higher than the average for the preceding five years, you save the difference in an account labeled FIEM. Alternatively, if the price of oil on the day comes in below the five-year average, you get to make up the shortfall - but no more than the shortfall - with money taken from FIEM.

Simple, no?

So how would the outlook for 2009 look if the government had just followed this common sense rule all along? To get a feel for it, lets look at oil prices alongside their retrospective 5-year rolling averages for the whole of the Chávez era:

Click to enlarge

As you can see, in 1998 and 1999, the price of oil was below the average for the 1993-1998 and 1994-1999 periods, respectively. That means FIEM wouldn't have gotten any deposits during those first two years.

Starting in 2000, however, those blue bars start getting taller than the yellow bars. In fact, current prices have remained above the five year rolling average in each of the last eight years. The culmination of that trend came in 2008, when the price of oil was some $30/barrel higher than the 2003-2008 average.

The original FIEM rule called for the government to save the difference. How much would that have come to, exactly? Well, I did the maths - or, rather, I did a quick-and-dirty approximation of the maths based on yearly rather than daily oil prices - and my answer is: a lot.

As best as I can tell, if we'd stuck to the 1998 law, the balance in FIEM would've behaved like this:

Click to enlarge

This exercise is helpful because it gives us a benchmark for what an "appropriate" stabilization cushion might look like in the face of Hurricane Feces. If the government had just followed the law it inherited, it would be sitting on some $116 billion dollars now, ready for any eventuality.

And those would be hard savings, money the government actually has available to spend, which is fundamentally different from Central Bank foreign currency reserves, which represent dollars the government has already spent and so aren't really rainy-day funds at all, no matter what hard-headed chavistas say.

Unlike Fonden, Chávez's ranchificated replacement for FIEM, the original system would've allowed us to, um, actually know how prepared we were for all this. As it stands, chavismo is treating our fiscal cushion like a state secret. It's missed its legally mandated deadline for publishing Fonden's end-of-2009 balance sheet by two weeks (and counting) and it's looking more and more like they're just going to Tibisay the whole thing.

It's clear that Chávez would never accept the restraints on presidential whim that the original FIEM Law implied. You can feel the rage in his train of thought... ¡Que este papel, este pedazo de papel que yo puedo arrugar y volver trizas, tenga fuerza para obligarme a hacer lo que no me da la gana!

He needn't have worried. Even as FIEM accumulated these huge sums, Chávez would still have been able to increase public spending sharply every year throughout the thick of the oil boom:

Click to enlarge

In fact, applying FIEM would've done more than just shield us from Hurricane Feces. Raising public spending in a gradual, orderly way would've prevented the rampant overheating, inflation, and currency overvaluation that have marked Chávez's fiscal-management-cum-lottery-winner's-spending-spree strategy.

But that's gravy. The real point is that if we'd stuck by the original FIEM rules, we wouldn't even break a sweat in the face of a collapsing oil market: FIEM would've covered nearly all of this year's shortfall. 2009 could've been just another year, rather than the deeply traumatizing crash it could so easily turn into.

Note that even after taking out $25 billion to plug the 2009 spending gap, FIEM would still have held a balance of over $91 billion by the end of 2009, which would be a God-send if the global recession does what all the pundits are fearing and drags on for another several years.

That's the kind of resilience to external shocks a monoexporter desperately needs, but which you can't have in the absence of an appropriate risk-mitigation mechanism like FIEM.

As far as chavista fuck-ups go, having gutted FIEM one is not a particularly flashy one. But, in the long run, I'm convinced that it's the single most damaging decision Hugo Chávez has made in his ten years in power...at least in the economic front.

January 13, 2009

The opposition's Gaza non-strategy

Juan Cristobal says: Over the years, we've grown used to Chavez hurling insults at us for things real and imaginary. We've gone from adecos, to escualidos, to vendepatrias to pitiyanquis, and by now most of us have learned to just tune out the barrage. Sticks and stones may break our bones, but presidential addresses will never hurt us.

As of late, there's been one criticism that has stuck with me, and Chavez has a point.

Israel's Gaza offensive has drawn a lot of criticism from international public opinion, but governments have generally acted with restraint. Diplomats have put a lot of effort into finding a way to stop the fighting while bringing both sides to the negotiating table.

But Chavez will have none of that. From the moment the war began, he lined himself up with the Palestinians and with Hamas, reinforcing his image as a hero to the Arab world. He expelled Israel's ambassador to Venezuela (the only country that to do so as far as I know) and began calling Israel "the Empire's killing machine."

One thing he has been very vocal about is the opposition's silence regarding the Gaza situation. As I was thinking about it, I think he's right. Why shouldn't our side have an opinion on the Gaza conflict? Why do we keep quiet?

You might say that there are more pressing issues for the opposition than Gaza, that it is an unnecessary distraction. But our silence only lets him portray us as uncritical supporters of Israel and, hence, the United States. El que calla otorga...

The more important thing about our silence is how it lets Chavez portray us as incompetent. It's not that the opposition has made a conscious decision to not talk about the Gaza conflict. My fear is that the opposition simply doesn't have an opinion. Silence about Gaza doesn't make us pitiyanquis, but it does make us look amateurish.

Chavez has put a lot of time and effort into his international image. We've been baffled by his insistence on this issue given how unimportant it is to Venezuelan's daily life. However, ever so indirectly, Chavez's work on the international stage may have helped build his image as a strongman, a statesman and (gasp) an intellectual in the eyes of some. Venezuelans may not consciously think that a politician's stance on international affairs is important, but deep down, it may well be. Ultimately, talking about events in Gaza makes Chavez look like something he is not: smarter than us.

Which brings me back to the opposition. There is absolutely nothing to lose from having a shadow Canciller talking about these issues and taking a stance. Condemning Israel for its disproportionate response could begin to turn the tide on this false idea that we are either pitiyanquis or rookies.

And besides, it would be the right thing to do.

January 12, 2009

This whole damn government is like one big 404 error

Quico says: So, um...happy 2009, everyone! (Well, here's hopin', anyway...)

A lot has happened in the four weeks we've been off, but probably none of it will turn out to matter as much as the Central Bank's year end national accounts numbers.

The figures lay bare the scale of the vertigo-inducing oil boom we had last year. Probably, there's no easier way to get that across than with a simple chart:

Click to enlarge - source: BCV

Pretty much tells the story right there, doesn't it?

The first thing to note is that humongous spike in oil revenues last year. Turns out that 23% of the petrodollars the country has taken in over the last ten years came in 2008 alone! The reality is that Chávez has never had to deal with a substantial year-on-year decline in oil revenues, not even in the year of the oil strike (2002-2003).

Note also the way Dutch Disease continues to kick our asses: in the four years since the current oil boom started, non-oil exports have barely budged at all, even as the overall economy experiences very strong overall growth. With the government determined to increase the overvaluation of the bolívar, non-oil exports don't stand a chance. Oil now accounts for 93% of the country's export earnings.

What's scariest about the chart, though, is obviously that final bar: oil revenues could well collapse precipitiously this year. Of course, oil prices are inherently unpredictable. (Show me a man who confidently forecasts the oil market and I, sir, shall show you a charlatan...or a commodity trader - same difference.) But assuming prices stay about where they are right now ($32/barrel), Venezuela would get just about $32 billion this year - a third of last year's bonanza.

Actually, one neat features of this data I hadn't noticed before is that to get a rough-and-ready estimate of how much money oil will bring in over a year at a given price, you just have to tack nine zeroes on to the end of the barrel price. That works because, on BCV's say-so, Venezuela has been exporting just over a billion barrels of oil a year, give-or-take - which works out to 2.74 million barrels per day.

But, of course, that assumes that production and export numbers aren't dramatically cooked to begin with - something that Miguel Octavio, for one, doesn't believe for a second - noting, sensibly enough, that for BCV's numbers to work Venezuela would have to be exporting more oil than OPEC says we produce.

But lets not get bogged down in the measurement thing. Going out on a limb and assuming that BCV isn't plain old making numbers up, Chávez's first decade in power (from 1999 to 2008) would have seen Venezuela export some 10.3 billion barrels of oil, at an average price over the decade of $39.25/barrel. All in, BCV reports that oil sales have brought $404.8 billion into the country in the last 10 years - almost a quarter of it last year alone!

Looked at historically, though, we really haven't been getting that much Bang for our Petro-buck. The Chávez era has seen oil prices multiply by eight, but real per capita GDP is up just 10% from where it was on the year Chávez tried to overthrow Carlos Andrés Pérez by force - 1992, when we were on 105.4% of the 1987 level.

Click to enlarge - sources: IMF, VenEconomy and PDVSA

But I digress.

The point here is that the scale of the economic shitstorm that's about to hit Venezuela is something we haven't really processed yet. What's really scary is that Hurracaine Feces will be slamming into our shores at a time when the economy is already overheated, with inflation out of control and eating away fast at earlier purchasing power gains.

The insane tsunami of petrodollars that hit Venezuela in 2008 was unable to sustain the pace of economic growth that rising public spending had been buying us in 2004-2007, with growth falling from 8.4% in 2007 to 4.8% last year.

If 4.8 points is all the growth that 93 billion petrodollars bought us last year, how much growth do you think 32 billion petrodollars will buy us this year?

Grim stuff. Our Last Best Hope in the face of all of this is the government's much ballyhooed rainy-day funds, most of which (we're told) are stashed away in the National Development Fund, better known as Fonden.

Come to think of it, the end of the year was also supposed to be the time when we got our hands on the eagerly anticipated, only-comes-around-twice-a-year Fonden balance sheet. Dang, that's something to look forward to: arguably the single most important indicator of the Chávez government's preparedness to ride out Hurracaine Feces...

Except when you go to Fonden's downloads page, guess what you get? A friggin' 404 error! Jesus! This whole damn government is like one big 404 error...

Actually, Fonden's entire website's been taken down, and its old URL now redirects here, to something called the Oficina Nacional de Contabilidad Publica (National Public Accounting Office.) Their website is like a spoof of itself: brimming with high-minded language about transparency and accountability, but containing virtually no actual information on public finances and nothing at all about Fonden.

So, here we are: far, far up a creek, but...do we have a paddle?

Dunno. The government won't tell us.