Wednesday, November 19, 2008

Bottome: Venezuela's Government Numbers Are Pure Hot Air

Veneconomy's Robert Bottome looks over Venezuela's debt and asset numbers and asks "Where's the money?"


The Chávez administration boasts that it has billions of dollars in reserve to cope with the crisis. But this seems to be pure hot air.
If the government really has so much in reserves, why has it borrowed
nearly $10 billion so far this year alone?

If the government really has so much in reserves, why hasn’t it negotiated
and paid the more than $10 billion it owes for the numerous forced purchases it
has been making?

For example, by now it should have concluded negotiations with the Santander Group and paid it $1.2 billion for Banco Venezuela. It should also have paid the Mexicans $1.2 billion for Cemex or paid ExxonMobil and ConocoPhillips more than $7 billion for the upgraders it seized from them.

It could possibly be argued that the government is punishing these companies for having been unwilling to fall in with its plans. But the fact is that it has not even paid those companies with which it has reached an agreement on friendly terms. Among the latter are Lafarge, which is owed $267 million, and Holcim, which is still waiting payment of its $552 million.

Not only that, if the government is swimming in reserves, why doesn’t it release the dollars for the telecommunications sector’s imports? Or why doesn’t it approve the dollars for the auto parts and automotive sector?

The answer, it would seem, is that those reserves do not exist or are far less plentiful than the government claims. But, as is customary in the Chávez administration, it is unlikely that the true state of affairs will ever be known. Neither Fonden, Bandes (Development Bank), Banco del Tesoro nor any other bank publishes audited balances, and those that sometimes do make a show of bravado and publish their statements, the credibility of their figures is somewhat questionable. Analysts are also doubtful as to the quality of the alleged reserves of the Republic.

This week, after the Government of Ecuador announced the possibility of not paying the $30.6 million in interest on its Global 2012 Bonds this month, a minor detail that could well indicate the poor quality of Venezuela’s reserves came to light.

Incredible as it may seem, Venezuela has some of these Ecuadorian bonds converted into structured notes by Barclays Capital. And it so happens that one of the conditions is that, if Ecuador does not service the debt, Venezuela will receive said bonds from any third party holding these structured notes and assume them as its own.

Unfortunately, it is impossible to gauge the risk that this poses for the nation’s patrimony, as it is not known how many structured notes are held by the country’s different agencies and state-owned companies, which would be under the obligation to absorb the debt, nor how many third parties would now become Venezuela’s creditors. However, it seems that the crisis will not break for the time being. Most likely, Venezuela will end up paying the $30.6 million in interest that Ecuador owes to avoid any complications today and put off dealing with the situation for another year.

But one thing has been made clear: the poor quality and little value of some of the reserves. This will end up being a drain on the nation’s patrimony and absorbing resources that the country could use to provide well-being for its citizens.

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