One of the mysteries this year is why the Government has been so stingy with the exchange control office CADIVI as well as its decision not to supply more foreign currency to any alternative market, despite higher oil prices.
That is why I was mesmerized by the following Barclays graph which was published this week. In this graph Barclays plots for each of the last six years, how much CADIVI gave out to importers, how much the parallel market traded and how much the Government issued in bonds.
The first surprise, because I had not looked at the totals for a while, was that the swap market was larger than CADIVI last year. What this means is simply that PDVSA preferred to change at the highers swap market rate than at the Bs. 2.15 per $ rate which prevailed last year. This is because in the end the Government via the Treasury, Fonden or whatever other mechanism was the main provider of foreign currency to the swap market. Thus, in the end it is the Government that provides both markets.
Thus, in some sense, it is better to look at the total CADIVI+SWAP market+Bonds and subtract the bonds to get an idea of what the last few years were like. I plot that in the next graph together with the price of Venezuela’s oil basket (sort of assuming production is constant, which it is not)
In the above graph, the green line is the average price for the Venezuelan oil basket for the year in US dollars, while the blue line is the total amount of US$ dollars (in billions) given to importers by CADIVI and/or purchased in the swap market plus bonds issued, which in the end measures the number of dollars to which the Government had access on any given year. The red line simply subtracts the issuance of bonds from that total, it is a measure of the deficit of foreign currency the Government had, which forced it to resort to issue bonds.
Let’s look at this graph historically. In 2004, the oil basket was US$ 31.85 and the Government “had” some US$ 25 billion of which it had to issue US$ 5 billion in bonds. The total amount for 2004,2005 and 2006, scaled reasonably with the oil price, in all three years the Government issued US$ 5 billion in bonds to complement its needs, “using” US$ 25 billion, 37 (up 50% from 2004) billion and US$ 40 billion (up 8% from 2005), as oil went from US$ 31.85, to US$ 48.36 (up 51.8% from 2004) and US$ 52.31 (up 8% from 2005) per barrel in the same years.Basically the increases were almost identical from year to year.
Then, in 2007, oil prices jumped by 64%, but the Government needed US$ 83 billion, a 107.5% increase in foreign currency in 2007 over the previous year, including US$ 19 billion in financing.
And here is where things get murky. In 2008, with oil dropping 62.5%, the Government used up US$ 75 billion, barely 9.6% below 2007, despite the dramatic drop in oil prices. How could this be?
Well, the only possibility is that the Government used funds from the development funds Fonden, taken from international reserves, and other savings in foreign currency to fund part of the needs for 2008.
And it did the same thing in 2009!
Thus, from 2007-2009, the Government “used” 75% more foreign currency than in 2006, but the average oil price in those three years was only up 29%.
And then we come to 2010, this year the average price of the oil basket is running roughly at the level of last year, in 2009 it was 67.7 dollars on average, so far this year it has been US$ 70.26, less than a 3% increase. Except that it is going to be quite difficult to issue new bonds, subtract US$ 11 billion from last year and there will not be as much in Fonden as there was in 2009. In fact, Fonden began 2009 with US$ 19 billion and this year at no point has it had more than US$ 9 or 10 billion. Thus, the “Total” in the graph for 2010 will have to be around US$ 50 billion, once you subtract no new issues, half the money (likely more) in Fonden.
Finally, PDVSA has higher cash flow needs, thus the number may be even smaller, as international reserves have been dropping, even with lower CADIVI outflows, which implies PDVSA is handing out less money to the Central Bank.
What this all means is that there will much less money for imports, which will only be complicated by the banning of the swap market, which used to provide an alternative to the official market for importers needing items to complete their manufacturing and/or buying spare parts.This will translate into shortages which I am surprised has not intensified as of yet. Most manufacturers/importers say that they typically have about six weeks of inventory. which means we should start seeing the impact of these foreign currency problems in less than a month.
(Note: Some of the money from the bond offerings flowed back into the swap market, thus I may be double counting somewhat, but this changes little the conclusions)