Archive for December 8th, 2011

A Back of the Envelope Calculation of The Finances of a New Venezuelan Government

December 8, 2011

(To my friend: Yes, we can!)

Everyone worries about how a new Government would function financially  if there was to be a political transition in 2012. Personally, I think this is the least of our worries. Things like dealing with unions and personnel in PDVSA and nationalized companies will be orders or magnitude more difficult than dealing with “money”.

Here is why:

We are paying about US$ 6.5 billion for 30,000 Cuban doctors. Divide those two and you get about US$ 216,000 per doctor per year. Renegotiate this to Venezuelan doctor salaries and you have saved US$ 6 billion a year, about half of what the country and PDVSA issue in debt every year.

Then, there is Petrocaribe, sending oil to “country’s in need” and giving them easy credit conditions, like pay 50% now, two years grace period a less than 5% a year for the next like 25 years. The math is hard, there is barrels sent to Cuba, barrels sent to Petrocaribe and so on. But there is an easy way to quantify this: Last year, according to the Venezuelan Central Bank, accounts receivable with “friendly countries” reached US$ 23.088 billion. As of September 2011, this number had reached US$ 32.7 billion, a difference of, give and tale half a billion of US$ 9 billion in nine month or US$ 1 billion per month.

Yeap! This is the crazy revolution, borrow at 12% abroad and lend at 2-3% per year to your buddies, while your country goes hungry, enjoys shortages, malnutrition and the like. It is indeed a strange revolution.

But add the US$ 12 billion from these “friendly countries” and you are already up to US$ 18.5 billion a year in “savings”

Few countries in the world can find money so easily to balance the budget.

The Chavez Government has refused to do anything about gas prices. Gas is basically free today in Venezuela. We are talking about 700,000 barrels of oil a day given away (literally). At US$ 100 per barrel (it is more for the refined products we use) this is 700,000 x 365 x 100, some US$ 25.5 billion A YEAR in this subsidy. It is actually more, because producing this oil/gas is not free. Let’s say you decide to cover PDVSA’s cost, nothing more. That’s about (back of the envelope) about US$ 30 per barrel or US$ 7.65 billion a year. Say US$ 7 billion.

We are up to about to US$ 25.5 billion in “savings”

Now, the new President call him Leopoldo or Maria Corina, can call the IMF, the World Bank and/or CAF and from all of them extract without conditions, say US% 15 billion. With conditions you may get this up to US$ 30 billion, but politically, the conditions will be tough. So, we take the cheaper route.

We are up to US$ 40 billion, give or take half a billion. Nice war chest to remove exchange controls, no?

You could go bolder. Tell the Chinese you are sorry, but the law says you can’t pledge oil for loans and this will have to be renegotiated. Some US$ 10 billion in savings, as you will pay it slowly, let’s say at half the rate, 200,000 barrels a day, not 400,000.

We are up to US$ 50 billion.

Remove exchange controls. Buy back debt. Say you will not issue new debt. Change debt at 12% for multilateral debt at 5%.

Money will flow back into the country and you have yet to say you will privatize all those Government owned enterprises which are in intensive care.

Crazy?

Do the math, it is as simple as 1+1, the hard part will be dealing with real people…

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