Archive for the ‘economics’ Category

Would Peru go for Chavismo?

Monday, March 30th, 2015

Mary O’Grady writes about the reasons behind Peru’s recent economic success: A market model that allows for

  • a vibrant consumer class that is entrepreneurial and creative
  • openness to imports
  • structural reforms that included ending a punishing system of import tariffs and quotas
  • fiscally conservative governance.

However,

Still, the downturn in commodity prices is eating into growth and the slowdown that began last year continues. Market forecasts for GDP growth are in the 3% range for 2015. Peru’s economy is performing far better than most in the region, but lackluster is not what Peruvians have come to expect.

The obvious answer to this lethargy is more aggressive trade opening on key products like sugar and corn, more tax cutting and deregulation. But Mr. Humala’s popularity is sagging and he is unlikely to do anything bold. Meanwhile, opponents of economic freedom will turn slower growth into opportunity by linking stagnant incomes in the market economy and corruption.

As O’Grady points out, this means Peru Is Chavismo’s Next American Target
Corruption scandals give the left an opening in the 2016 presidential election.

On a seemingly unrelated topic,
The Obama administration insists on easing restrictions on Cuba’s merciless Communist dictatorship while Cuba’s dependence on Venezuelan oil goes bust. Once Cuba’s economy improves cosmetically (because you can bet those in power will not give up their acquisitiveness), the Cuban propaganda machine will use this as another tool in its propaganda arsenal against market economies.

No matter how ruinous Cuban-driven Chavismo is in real life; propaganda is the only thing Cuba’s regime is good at, and it is particularly effective in Latin America.

Face it: The fact that the article talks about Chavismo – instead of Castrocommunism – itself is a success for the Cuban propaganda machine; in reality, “The Venezuelan regime is a puppet controlled by the Cubans.”

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Related reading:
Hernando de Soto’s excellent book, The Other Path, available on Kindle for under $10, and Ian Bremmer’s The End of the Free Market: Who Wins the War Between States and Corporations?

Venezuela: Get ready for $10 oil?

Thursday, February 19th, 2015

Gary Shilling at Bloomberg is saying, Get ready for $10 oil It has to do with the marginal cost of production,

or the additional costs after the wells are drilled and the pipes are laid. Another way to think of it: It’s the price at which cash flow for an additional barrel falls to zero.

Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won’t be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.

Also consider the conundrum financially troubled countries such as Russia and Venezuela find themselves in: They desperately need the revenue from oil exports to service foreign debts and fund imports. Yet, the lower the price, the more oil they need to produce and export to earn the same number of dollars, the currency used to price and trade oil.

With the drop in prices,

Among the hardest hit are those nations that rely on oil for much of their government revenue and were in financial trouble before prices plunged. Venezuela along with its state-run oil company issued more debt than any developing country between 2007 and 2011. Venezuela has been downgraded to the bottom of the junk pile — CCC by Fitch — and credit-default swaps on Venezuelan debt recently indicated a 61 percent chance of default in the next year and 90 percent in the next five years. The nosedive in oil prices also is devastating African exporters Ghana, Angola and Nigeria, where oil finances 70 percent of the government’s budget.

How Bad Is Venezuela’s Economic Chaos? Bad enough that

Maduro has yet to fully account for how his government will meet its $10.3 billion debt obligations in 2015. A March 16 payment totally $1.1 billion is fast approaching and Venezuela’s economy is languishing.

I am not optimistic at all; even if Maduro goes, the country can remain under a dictatorship, just as Cuba has, for decades to follow.

And, by the way, even when the minimum monthly wage of 5,600 bolivars ($32 on a new exchange market created last week) is close to useless, the late dictator Hugo Chavez managed to sock away US$12 billion in his HSBC account.

So, all of you who preach that “Chavez immensely decreased inequality” in Venezuela can take that, spread it, and eat it on a cracker.

Argentina, Venezuela, chickens coming home to roost

Tuesday, January 6th, 2015

Russ Dallen looks at what’s ahead:
Hello 2015: Argentina and Venezuela – the emperor has no clothes

But in the second half of the year, what makes for a frightening Halloween/Guy Fawkes period for investors is that Venezuela and PDVSA must pay $3.4bn in bonds and $1.7bn in interest for a scary total of $5.8bn. If oil has not recovered by then (or worse still, continues to deteriorate) and Venezuela is still shut out of international capital markets (where its bonds are currently trading at yields of 50 per cent), it could be lights out for the Bolivarian Republic, which has already quietly and seemingly unnoticed defaulted on the bonds of steel company Sidetur, which it expropriated in 2012.

Read his post for what’s ahead on Argentina’s debt.

He is much more optimistic than I when it comes to elections, though.

Related:
Bank of America: If Maduro does not devalue [the currency], Venezuela could reach 1,000% inflation

Venezuela: Oil break-even price?

Tuesday, December 2nd, 2014

Tom Bemis looks at Breakevens for most major oil-producing countries (emphasis added)

A widely used measure of the impact of oil prices on major producers’ governments is the fiscal breakeven price. That’s “the average price at which the budget of an oil-exporting country is balanced in a given year,” according to Standard & Poor’s. Estimates of fiscal breakeven prices can vary considerably based on a variety of factors including actual budget expenditures, and differences in oil production forecasts.

In most cases, the oil price necessary to balance the budgets of major oil producing countries is above $100 a barrel in 2015, according to data from Citi Research’s Edward Morse.

Venezuela, already facing serious fiscal woes and rampant inflation, needs oil at $151 a barrel next year to balance its budget, according to the data.

Iran, which has yet to agree to curb development of nuclear weapons and heavily subsidizes gasoline for its citizens, needs oil at $131 a barrel.

And Russia, whose seizure of Crimea and continuing aggression towards Ukraine has raised tensions throughout Europe and inspired western financial sanctions, needs oil at $107 for a chance of getting its finances in order.

Silvana Ordoñez:

Venezuela’s future? ‘Barbarity and people looting’One analyst at Nomura recently estimated that Venezuela may need oil prices to hit $200 a barrel to balance its budget. (The precise figure is difficult to determine, because Venezuela doesn’t disclose as much economic data as other countries do.)

Will The Minister Come Back Empty Handed From China?

It seems as if President Maduro really believed that OPEC would cut production after he sent Ramirez to visit a few countries, including Russia, who happens not to be a member of OPEC. But as most analysts expected, OPEC did not cut production and scheduled the next meeting for next June, bringing a lot of people back to reality, including Maduro. It was only after Ramirez reportedly left the meeting “red faced”, that it sunk in that maybe Plan A was not going to work. Thus, Maduro switched to Plans B and C. Plan B is to “hope” that oil prices bounce back and plan C was to send Minister of Finance Marco Torres to Beijing to see if he can get some money there. Plan D was to name a commission to cut salaries and luxurious expenses. Yeah, sure!

I have been arguing with a bunch of friends about the probability that Torres will come back with a significant loan, which I peg to be around 0.00001, but they seem to think it is somewhat higher. You see, they actually believe that Venezuela has something to offer the Chinese, like oil or oil fields. But the reality is that Venezuela has little to offer at this time and the Chinese know it, so that Minister Torres is very likely to come back empty handed.

Related:
María Corina, and a unified theory of rationed repression



Venezuela: Tweet of the day

Saturday, November 22nd, 2014

Bad news for Chile

Monday, November 3rd, 2014

Mary O’Grady reports on how Bachelet’s policies have repercussions:
The Chile ‘Miracle’ Goes in Reverse
Investment and growth are falling, and now the government targets private schools.

To understand why the outlook for the Chilean “miracle” is so grim and investment is plummeting, look no further than this government’s obsession with holding back those who would skate ahead of the pack.

Ms. Bachelet has increased tax rates on everything from capital to consumption. One objective is to soak the investor class, making it poorer so that income inequality goes down. But it is more likely that income disparities will go up since the rich have ways to shelter income while the poor depend on job creation from investment to earn their daily bread and build wealth.

Additionally, Bachelt will end school vouchers,

The new law, which passed the lower house last month and now goes to the senate, would prohibit students from using vouchers to attend for-profit schools and prohibit schools that receive public subsidies from charging parents a co-payment. What is more, schools will no longer be allowed to select students because, apparently, it is “unfair” for gifted children to learn at their own speed.

Vouchers make it harder to indoctrinate kids, too.

Chile had a good run.

So much for that.

Venezuela: last on property rights

Thursday, October 30th, 2014

Hugo Chavez, who expropriated millions of acres of farmland (along with private properties and businesses) left an enduring legacy:
Venezuela ranks last in Property Rights Index
Lorenzo Montanari, the executive director of the Property Rights Alliance (PRA), said the survey measured the “consistency of property rights in 97 countries” and assessed three aspects: political legal environment, physical property rights and intellectual property rights

The IPRI study, which you can read here, corroborates the fact that

there is a positive, strong, and significant relationship between the strength of property rights protections and a country’s economic performance as measured by GDP per capita.

Mike Birds writes that Venezuela’s Decision To Import Oil Is The Perfect Example Of Just How Screwed The Country Is

In other Venezuelan news, Leopoldo López refused to appear before a court hearing on Tuesday, demanding the government respond to a UN resolution calling for his release.

Judge Susana Barreiros scheduled the hearing while the court was not in session, having suspended proceedings indefinitely on October 14. López’s lawyers regarded the suspension as an attempt to delay the court’s response to the UN Working Group on Arbitrary Detentions, which requested López’s immediate release on October 8.

After Spanish Prime Minister Mariano Rajoy called on the Venezuelan government to free Lopez, Venezuela recalled its ambassador to Spain.

Lilian Tintori, the wife of opposition leader Leopoldo López, learned that he could be transferred from Ramo Verde military prison to another jail.



Brazil: Ibovespa volatility

Tuesday, October 28th, 2014

First Brazil’s stocks tanked,
Ibovespa Tumbles Toward Bear Market as Rousseff’s Win Sinks Real

Brazil’s benchmark equity index led global declines as President Dilma Rousseff’s re-election damped speculation for a change in policies that wiped out $553 billion of stock market value and left the economy in recession.

The Ibovespa (IBOV) dropped 2.8 percent to 50,503.66 at the close of trading, the most among the 20 biggest indexes globally. After tumbling as much as 6.2 percent earlier, approaching the threshold for a bear market, the gauge pared losses as education companies and pulp exporters rallied. The real posted the world’s biggest loss as it sank 1.9 percent to a nine-year low.

After years of weak growth, high inflation and intervention, Dilma’s re-election tanked the currency, too,

The real’s plunge to 2.5224 per dollar put it at the weakest level on a closing basis since April 2005. One-month implied volatility on options for the real, reflecting projected shifts in the currency, was the world’s highest. The currency sank 12 percent in the past three months.

Then why did things rise up again?

“To some extent, markets were already pricing in her victory last week, and that may explain why the reaction to the election results wasn’t as negative as I expected,” Alvaro Marangoni, a partner at Quadrante Investimentos Ltda., said by phone from Sao Paulo. “We’re all waiting to see if policies are adjusted so the economy can recover.”

That’s an optimist, indeed.

The states that opposed Dilma out in the grasslands, soybean farms, cattle ranches and productive and innovative industrial centers down south, went for her free-market opponent. The states with 25% of the population dependent on welfare went for Dilma,

The takers have become politically stronger than the makers

As Monica Showalter of IBD said,

Now Brazil can look forward to not just low growth, but also high protectionist trade walls, more taxes, more corruption, more intrusive government and an increasingly arrogant state.

I was optimistic on Brazil years ago, but no more.

Argentina: Creeping to the edge

Thursday, October 23rd, 2014

Chris Noon interviews Prof. Steve Hanke on Argentina creeping closer to the edge. You must read the interview in full,

Argentina’s bleak fiscal situation could deteriorate further over the next year, with a prominent economist telling Interfax on Monday the Latin American country’s foreign reserves could shrink to “near $10 billion” by October 2015. It would leave Buenos Aires struggling to meet payments for dollar-denominated LNG imports, which are essential to the country’s energy matrix.

“To get there [$10 billion], we would see monthly declines in reserves that were roughly similar to those of Q1 2014. It could come about through macroeconomic factors, such as the combination of a strong US dollar, weak commodity prices, and decreasing oil prices. The Saudis are squeezing their competition – especially Canadian tar sands producers – as they push for more market share. This may push down Brent crude further to $60-70 per barrel,” said Hanke.
“It’s difficult to say what will be the ‘straw to break the camel’s back’, but if you keep piling up economic problems, you create a ‘tipping-point’ situation. There’s just too much weight on everything and it gives way,” said the economist.

Trying to put a band-aid on a gashing wound, the government is trying to bring dollars into the country by forcing farmers to export soybeans held in storage even when the price of soybeans has plummeted by around 30% since April, and

Buenos Aires has resorted to making deals with friendly foreign lenders to replenish its coffers. A multibillion-dollar currency swap between Argentina and China will be launched in November, the Latin American country’s central bank chief was quoted as saying in a local paper on Sunday.

That will probably help remedy Argentina’s deeply-ingrained structural problems as well as Venezuela’s oil deals with China have in solving that country’s problems, which is to say, not at all.

Venezuela: Mileposts on the highway to hell

Thursday, October 23rd, 2014

Reading news about Venezuela brings to mind AC/DC lyrics,

Dont stop me!

I’m on the highway to hell
On the highway to hell!
Highway to hell!
I’m on the highway to hell

And I’m going down..all the way
I’m on the highway to hell

Fingerprints for food


Venezuela Readies 2015 Budget
Venezuela’s finance minister assured lawmakers that the country was poised to handle sliding oil prices and wouldn’t default on its debt, while proposing a 35% increase in the 2015 budget.

Venezuela, which depends on oil for 96% of its export revenue, has seen the price for its crude slide to $77.65 a barrel, the lowest since late 2010 and a drop of $15 since late September.

A scarcity of dollars has spurred shortages of basic goods in the import-dependent country and made investors increasingly nervous. Oil rich but cash strapped, Venezuela carries a total of $67.4 billion in debt issued by the government and state oil company, Petróleos de Venezuela, also known as PdVSA.

The country’s budget deficit registers at 16.9% of gross domestic product, government figures show, above the mark of countries like Greece and Spain during the eurozone debt crisis. Venezuela’s foreign reserves fell below $20 billion earlier this month for the first time since 2003.

Despite Riches, Venezuela Starts Food Rationing
Government Rolls Out Fingerprint Scanners to Limit Purchases of Basic Goods; ‘How Is it Possible We’ve Gotten to This Extreme’

At the blogs:
Venezuela: Is Default Truly A Four Letter Word?

The pain from the China loans

The situation is quite simple. Because of the loans we signed with China – them paying in advance for future shipments in oil – the drop in oil prices means Venezuela doesn’t just sell each barrel for less money, it also has fewer barrels available to sell to the market. Venezuela’s downturn is therefore made all the worse by the ridiculous conditions the geniuses at PDVSA signed on to.

In other words, a bad situation is made worse, and the hit in our fiscal income is all the larger.

Sing it, guys!