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Tuesday, October 26, 2010

In Our Opinion...

PDVSA on Monday confirmed the sale of US 3 billion of new global 2017s. Considering the current price in the international markets is around 70, this renders an implied FX rate of USD/VEF of 6.15-6.25. This compares to the USD/VEF 5.3 rate that has been prevailing in the SITME market.
In our opinion, this might be the clearest signal yet from the Venezuelan Government that a devaluation of the Venezuelan Bolivar is imminent and that the SITME's days are numbered. Would the Chavez Administration allow PDVSA to participate by selling USD directly onto the SITME platform at an FX sufficiently high to potentially encourage some private supply of USD bonds into the system?

Wednesday, October 20, 2010

Digging Venezuela out of the mess Chavez has plunged it into...

Veneconomy: PDVSA is offering two new bond issues of US$3 billion each. The first is PetroBono 2013 offered in replacement of PDVSA Bond 2011. This issue comes with a coupon at 8% and matures on November 17, 2011.

The second is PetroBono 2017, the purpose of which is apparently to finance PDVSA's investment projects, including "the social and comprehensive development of the country." However, it is thought that the proceeds from this issue will end up being frittered away to cover the revolution's expenses.

This issue matures in 2015, 2016, and 2017 and comes with a coupon at 8.5%. The bond is denominated in dollars as it is being offered to investors for payment in bolivars at Bs.F 4.30/$.

It is commented that demand for the 2017 issue will be high, and for that reason it could be increased to $4.5 billion.

It is assumed that the vast majority of buyers will resell their bonds on the European market to obtain the foreign currency needed to cover companies' urgent needs, in particular for the purchase of raw materials, servicing debt, and honoring other liabilities.

Added to that there is the $1 billion that will be acquired by the Central Bank to be resold gradually via SITME (System for Foreign Currency Securities Transactions).

Analysts estimate that the 2017 issue could be traded at between 65% and 75% of its face value, which suggests an implicit swap rate of between Bs.F 6/$ and Bs.F 7/$.

Assuming that the bond will be traded at the higher price (75%), it could end up with a yield of 16.5% at maturity. This 16.5% would be the true cost of the issue for PDVSA and the country.

There is no other country in the world that is so badly managed and so broke that it has to pay 16.5% in order to obtain financing or gain access to credit.

This issue may be welcomed by many in the short term, given the tremendous demand for foreign currency in the country as a result of the inflexible exchange controls; but in the short term it will be highly prejudicial for the entire population as, once again, it will permit the government to put off implementing sound policies for digging Venezuela out of the mess Chavez has plunged it into.

Oliver L. Campbell // PDVSA: Financial results -- January/June 2010

Former Petroleos de Venezuela (PDVSA) Finance Coordinator Oliver L Campbell writes: PDVSA has just published its financial results for the first semester of 2010. In its report, the company follows accounting convention and compares the figures with the first semester of the preceding year. However, I have preferred below to make the comparison with the full year 2009 so the reader can follow the trend in the two consecutive periods. It is easy enough to multiply January/June by two and compare it with the previous year.

Notes:

1) These items reflect an increase of 25% in the average export price, a reduction of 3% reduction in oil production and of 9% in export sales in 2010.

2) Companies in the agricultural and food sector have been transferred to other government entities.

3) The cause of the reduction in 2010 is not shown but it may be arise from reduced costs incurred by CITGO, where product demand has fallen, and to the translation of bolivar costs at the new exchange rate..

4) The reason for the significant fall in these costs is not given but again the new exchange rate applicable to bolivar costs will have had an influence. .

5) 2009 includes a profit made on the sale of dollar denominated bonds in the swap market. The first semester 2010 benefits from an exchange gain when translating a net liability in bolivars into dollars at the new exchange rate.

6) The figure is not available but will be insignificant since CITGO at present is not making much, if any, profit.

7) The increase in gross income arising from higher oil prices has made it possible to increase these contributions.

8) The substantial increase arises because the new exchange rate of Bs 4.30 instead of Bs 2.15 to the dollar has inflated taxable income which is calculated on the bolivar figures.

9) Several authorities believe the true production figure is lower than that reported by PDVSA.

10) The Venezuelan basket of crude and products is at present $75 per barrel, If this price continues, and the export level does not slip, then the government take in 2010 could reach $40 billion.

11) This figure includes a reduction of $1,243 million arising from the translation at the new exchange rate of investments in subsidiaries whose functional currency is the bolivar..

12 The commercial receivables increased from $9,178 million to $13,836 million at the end of June 2010. No explanation has been given.

13)The long-term debt to equity ratio of 29% at the end of June is acceptable.

14) There are reductions in various items: royalties payable, accounts payable to contractors, and compensation payable for aquatic assets expropriated.

I disagree with the external auditors as regards the provision for litigation. The amount has been surprisingly reduced from $2,094 million at the end of 2009 to $1,494 at the end of June 2010 without any explanation. It takes an act of faith to believe what is stated in note 22, "although it is not possible to predict the outcome of these matters, management, based in part on advice of its legal counsel, does not believe that it is probable that losses associated with the proceedings discussed above, that exceed amounts already recognized, will be incurred in amounts that would be material to the Company's financial position or results of operations."

I do not know what management consider "material" but it is quite probable the compensation payable to ConocoPhillips, ExxonMobil and other claimants will exceed $10 billion.

On June 30, 2010, PDVSA transferred its agricultural and food companies to other government bodies. Although " the Company will continue to provide financial support to the activities of PDVAL throughout 2010," it is hoped PDVSA can now concentrate on increasing crude oil production potential rather than on food purchase and distribution which is best left to companies specialized in that area.

Monday, October 18, 2010

VenEconomy // The costs of Venezuela'a Castro-communist Revolution

Venezuela is paying a high price for the imposition of the Castro-communist project.

In the interests of the revolution, the regime has been legislating grotesquely outside the bounds of the Constitution and, resorting to farcical illegality, wiping out private property by dint of "expropriations," which, in fact, is no more than pillage by those who abuse their power in the belief that it is eternal.

These mass "expropriations" of private companies are costing the country dear, not only because this practice has meant the destruction of the domestic productive apparatus, but also because of investments that have not been made. In the first quarter of 2010, direct investment was -US$1.8 billion.

It is proving equally costly in terms of jobs lost, shrinking domestic production, shortages, and inflation caused by the overwhelming and patent managerial incapacity and laxness of the government officials with whom Chavez surrounds himself.

Today not a single erstwhile productive and efficient private company confiscated by the government is the shadow of its former self.

Siderúrgica del Orinoco (SIDOR), just 18 months after being taken over by the State, set its liquid steel production goal for 2010 at 1.6 million mt, 59% less than the 3.9 million mt it produced in 2008. Even the state-owned companies are today are mere relics of what they were 12 years ago.

At PDVSA this deterioration has been more than obvious. Just over a decade ago, the state-owned oil company met with international standards in terms of good management, efficiency, and productivity, comparable with world class companies such as Shell or Exxon. Today, PDVSA only produces 2.9 million b/d (according to official figures), and not the 5 million plus barrels a day it should be producing according to the development plan it had at the start of the century.

Equally serious is the situation of the basic industry companies in Guayana, in particular that of Aluminios del Caroni (Alcasa). According to Alcasa's in-house news sheet, Hoja de Aluminio, the company has an accumulated debt as at July this year of nearly Bs.F.1.40 billion, and its budget for 2011 already has a deficit of Bs.F 1.75 billion, not counting its debt to date, according to an article posted on the web page of the journalist Damian Pratt.

On August 8 this year, Pratt wrote a lapidary open letter to Hugo Chavez on the occasion of his visit to Guayana.

Among other things, he tells Chavez that the instructions he gave in early 2005 to "turn the basic companies into socialist companies" and to "abandon criteria of profitability and productivity" have been followed to the letter, achieving the "feat" of leaving them bankrupt, despite the fact that it was precisely during that period (2005-2008) that aluminum prices reached an all-time high! And, stresses Pratt, "it was savage, vicious statism disguised as socialism that bankrupted them."

The question Pratt (and the entire country) asks Chavez is, "Aren't you and your government going to answer for this disaster?"

Friday, October 15, 2010

Morgan Stanley warns about foreign exchange crunch in Venezuela

PDVSA to announce on Monday prospectus for US$3 billion bond sale

El Universal: Venezuela keeps borrowing as a mechanism to ease foreign exchange crunch in the domestic economy, and to find new funds that will help the country to improve the profile of liquid assets.

State-run oil company Petróleos de Venezuela (PDVSA) announced on Tuesday the issuance of $3 billion in bonds in a press release. The issue will have a semi-annual coupon and mature in 2015, 2016 and 2017, with equal repayment. Bonds may be purchased in the primary market, at the official exchange rate of Bs.F 4.30 per US$.

Despite the issuance, the foreign currency crunch in the Venezuelan economy is worrisome. According to a report prepared by investment bank Morgan Stanley, based on limited data and transparency about the supply and demand of foreign currency in Venezuelan economy, the fact that "Venezuela is expanding debts rather than foreign exchange reserves suggests that the government could be facing a foreign exchange crunch."

Morgan Stanley warned that Venezuela may face a demand of $61.8 billion in 2010, and $65.9 billion in 2011. The investment bank stressed that in an economy that gets 95% of its foreign currency from the sale of oil and byproducts, there is great uncertainty regarding the volume of PDVSA's oil production and exports, and doubts about the price of such negotiations or whether they are paid in foreign currency.

The report added that as a result of oil exports to countries in Asia, the Caribbean, Central and South America, which represent about 40% of total exports (2.7 million bpd), Venezuelan oil revenues could total $50.8 billion in 2010 and $55.1 billion in 2011, which would result in a $17 billion deficit. Morgan Stanley said that there is evidence that Venezuela would be facing a "foreign exchange crisis."

Implicit exchange rate

The Transaction System for Foreign Currency Denominated Securities (Sitme) approves $40 million per day, an amount that does not meet market expectations. This is the reason why the Venezuelan productive sector has been waiting for PDVSA bond issue to meet their currency needs.

Economist Angel Garcia Banchs said that the implicit exchange rate of the issue would be about Bs.F 6 per dollar, and it would adjust later to Bs.F 5.3 per US$, after the market absorbs the "punishment" that would affect the bond when the government starts to pay in foreign currency.

The economist warned that "the issue is likely to be bought by the Central Bank of Venezuela and private and state-run banks to feed the Sitme and only a small part of the $3 billion would be sold to natural persons and companies."

Just how bad is Venezuela's dollar crunch?

Financial Times (Benedict Mander): One has to wonder whether Hugo Chavez ever read that part of the book of Genesis where Joseph interprets the Pharaoh's dreams, predicting seven years of plenty followed by seven more of famine -- and hence the importance of saving during the years of plenty.

If a recent analysis by Morgan Stanley is correct, not only did Chavez fail to save during the years of plenty (read: the oil boom that ended in 2008), but now that years of plenty are back again (that is, oil prices have recovered to relatively comfortable levels in 2010), Venezuela's financial indicators seem to suggest behaviour more akin to leaner years.

The $3 billion debt issue by PDVSA this week reinforces Morgan Stanley's theory that the government is facing a dollar crunch. This is based on their observation that in past years during elevated oil prices Venezuela has accumulated international reserves; now, the OPEC country is instead amassing an ever-growing debt load (which, to make matters worse, is probably considerably larger than official figures suggest).

Even so, PDVSA's debt issue was no surprise, and approved in the national budget. Less predictable is what has been going on with PDVSA's refineries of late. The sale to Russia of PDVSA's German refineries announced by Chavez today may have as much to do with strategic considerations as the cash squeeze many analysts suspect PDVSA is suffering.

But the "virtual exclusion" of PDVSA, according to the Brazilian press, from partaking in a project with Petrobras to build the Abreu e Lima refinery in Pernambuco state is perhaps more revealing. Petrobras is apparently considering shutting PDVSA out because Venezuela's state oil company has failed to cough up even "a cent" since the partnership agreement was signed in 2005, says Brazilian newspaper O Estado de São Paulo.

The extent of Venezuela's dollar crunch is anyone's guess. Dubious statistics make it very hard to make an accurate prediction. But although Morgan Stanley calculates that "a projection of Venezuela's dollar balance can range from a cumulative $24 billion surplus to a $53 billion deficit over this year and next, in practice we see evidence that suggests the authorities are facing a dollar crunch."

If they're right, that could spell a whole series of problems for the government.

Not least its ability to pay for imports on which it relies so heavily, and the knock-on effects that could have on shortages and inflation -- and Chavez' popularity ahead of presidential elections in 2012.

Wednesday, October 13, 2010

Venezuela loses over US$33 billion in 2008 alone ... consequences of corruption hurt the poor more than any other sector of society...

By Michael Murphy: Hugo Chavez again took to his Twitter account, expressing his support for Ecuadorian President Rafael Correa in the midst of an uprising by disgruntled police officers. While a firm fan of new social media, Mr. Chavez tends to take a dim view of the more traditional sort. Since his election to the presidency in 1998, he has sought to muffle opposition, with state dominance of the media at the heart of his 'Bolivarian Revolution.'

Invariably a government seeking to control the media is a government with plenty to hide, and the Chavez regime is sadly no exception. Booming oil exports and a lack of government accountability and transparency have combined to foster a culture of rent-seeking. The effects of this have percolated through the economy with the ultimate burden of the effects of corruption falling heaviest upon Venezuela's poorest.

Transparency International recently ranked Venezuela as one of the most corrupt countries on earth, alongside the Democratic Republic of Congo. Meanwhile, inflation has soared -- increasing over 30% from 2007 to 2008 according to World Bank figures -- as has violent crime in the country's capital, Caracas.

Inflation and violent crime disproportionally impact the poor, yet the policies which the regime has pursued to remedy these problems have been superficial. This year, the Chavez administration opened a series of 'revolutionary cafes' where ordinary Venezuelans can enjoy a brief respite from rising prices in the form of a state-subsidized coffee.

Meanwhile, another black liquid continues to fuel corruption and distort the domestic economy. Key sectors, such as agriculture, have been allowed to wither while Mr. Chavez tweets. A former government minister recently compared the 'socialist' Chavez regime to a colonial power, criticizing the 'rentier capitalism' that has come to prize oil revenues above all else. This was pungently illustrated by the recent discovery that a subsidiary of the state oil company had allowed 80,000 tonnes of food imports to rot in the docks.

While the regime struggles to get food into the country, it has allowed wealth to flow out. According to estimates from an upcoming Global Financial Integrity report, over US$33 billion of illicit capital left Venezuela in 2008 alone. This means that almost 10% of Venezuela's entire gross domestic product -- all the goods and services produced by Venezuelans that year -- left the country unaccounted for.

There is a weight of academic literature demonstrating that the consequences of corruption hurt the poor more than any other sector of society.

Lack of transparency and disregard for the rule of law have characterized Mr. Chavez' regime to date and continue to hurt those whose interests he claims to represent.

Rather than seeking to stifle dissent, perhaps Mr. Chavez would do well to heed the words of his hero, Simón Bolívar: 'Out of the most secure things, the most secure is to doubt.'

Note: The 2008 estimates may be amended following revision of the underlying Balance of Payments (BoP-IMF) and External Debt (World Bank) data. Later this year, Global Financial Integrity (GFI) will release a new report by GFI Lead Economist Dev Kar measuring illicit financial flows out of developing countries. The report builds upon GFI's ground-breaking 2008 report, titled "Illicit Financial Flows from Developing Countries: 2002-2006."

Monday, October 11, 2010

Chavez Nationalizes Plant Partly Owned by US

Published: Monday, 11 Oct 2010

By: Reuters

Venezuela's President Hugo Chavez nationalized a large U.S. and Italian-owned fertilizer factory on Sunday, just days after vowing to radicalize his state-led revolution in the aftermath of elections last month.

The government will take over Fertinitro, one of the world's main producers of nitrogen fertilizer and part-owned by private U.S. company Koch and Saipem, a subsidiary of Italy's Eni, Chavez said.

During 12 years in power, the 56-year-old former soldier has put large swathes of the OPEC member country's economy into state hands.

On Sunday, he also announced the nationalization of Venezuelan motor lubricants company Venoco. "Expropriate it." Chavez said in a live TV broadcast from a farm the government bought two years ago.

He then said the government will take control of almost 200,000 hectares (494,000 acres) of land owned by British meat company Vestey Foods Group on October 20. The government has been in talks for months to buy the Vestey cattle ranches.

"It's a friendly agreement, I am very thankful to the owners of the English company, which has been here for more than 100 years," Chavez said, on the six-hour TV show. In 2005, the government nationalized four Vestey cattle ranches, turning the land over to hundreds of peasant farmers who grow mainly vegetables, maize and beans.

The president also said he was sending a bill to parliament that will allow the government to expropriate unused urban land and stalled construction projects, in a bid to speed up new home builds.

A shortage of quality housing is a serious problem that Chavez has struggled to tackle, with many of the country's more than 28 million people living in precarious city slums prone to collapse in the rainy season.

The housing deficit is exacerbated by a fast-growing population. Chavez has stepped up nationalizations since his Socialist Party won a reduced majority in a legislative election in September.

Last week the government took over agricultural supplies firm Agroislena.

When the new parliament is formed in January, the Socialist Party will not have the two-thirds majority needed to pass some major legislation, such as the urban land bill, which will likely be passed before then.

Venezuela's state petrochemicals firm Pequiven holds 35 percent of Fertinitro, a Koch Industries subsidiary holds 35 percent and Saipem holds 20 percent. Another 10 percent is owned by Venezuela brewer and food firm Polar.

The affected companies did not immediately respond to requests for comment.

Last month, Fitch Ratings maintained Fertinitro Finance's $250 million 2020 bonds at 'CCC' on rating watch negative.

"Fertinitro, located in the Jose Petrochemical Complex in Venezuela, ranks as one of the world's largest nitrogen-based fertilizer plants, with nameplate daily production capacity of 3,600 tonnes of ammonia and 4,400 tonnes of urea," the Fitch report said.

Wednesday, October 6, 2010

Vargas Llosa: "What do we want: another Chavez or getting rid of Chavez?"

Merco Press Agency: President Hugo Chavez defeat in the recent legislative elections is "more significant than what numbers indicate," but the Venezuelan opposition must not hail victory or feel satisfied with such an excellent result, according to Mario Vargas Llosa.

The legislative election results in the last Sunday of September show the increasing unpopularity of Chavez and his regime and expose "the grotesque manipulation of the popular vote," writes the renowned Peruvian author in a Sunday column of Spain's main daily, El Pais.

Vargas Llosa points out that with the 65 seats obtained in the national Assembly, having won 52% of the vote, the opposition will have the necessary strength to stop the constitutional reforms that President Chavez is drafting. "The advance of the regime towards a Cuban model, of an integral Marxist-Leninist dictatorship will have many more obstacles to face before it materialize," says Vargas Llosa who nevertheless calls on the opposition not to "hail victory," nor again commit the mistakes of 2005. "By abstaining from an electoral process they delivered to Chavez parcel in hand the gift of an automatic rubber stamp National Assembly which during all these years has been a docile servant of the constitutional excesses of the Comandante."

Therefore, "it is essential" that the unity of parties, movements and simple citizens from the opposition under the umbrella of a Democratic Union forum "remains and strengthens" to continue advancing and integrating Venezuelans "that overwhelmed or fearful of the regime reprisals, abstained from participating in the dispute."

"To many of these sceptical abstentionists the electoral victory or resistance must have shook them and shown that there are still reasons for hope" says Vargas Llosa who disagrees with those who criticize the opposition for allegedly "not having leaders."

The big question is: "what do we want: another Chavez or getting rid of Chavez?"

The Peruvian writer anticipates that the coming months and years "won't be easy" for Venezuela because "the regime has advanced too much in the construction of dictatorial structures" and it's not clear if Chavez is willing to step down if the ballot so indicates.

"The greatest danger is that following the peaceful beating he received, a challenging Chavez through ukases and repressive bullying can achieve what he was unable through the democratic ballot."

Nevertheless Vargas Llosa believes it won't be "that easy" since he has lost that condition of messianic leader which he enjoyed for so long and now not only him but also "the Venezuelan people know that he is fallible and vulnerable."

The Peruvian writer ends forecasting "tense periods ahead, in which, once again, as two centuries ago, the future of freedom will be decided for the whole of Latin America on Venezuelan soil."