Archive for the ‘economics’ Category

Ecuador: Hasta la vista, dollars!

Tuesday, June 2nd, 2015

Dollarization brought great benefits to the Ecuadorian people, as Steve Hanke (who 14 years ago was the chief intellectual architect of Ecuador’s switch to the dollar) points out,

Ecuadorians know that dollarization has allowed them to import a vital element of the rule of law — one that protects them from the grabbing hand of the State. That’s why recent polling results show that dollarization is embraced by 85% of the population.

Prof. Hanke also knows that going off the dollar will have dire consequences for Ecuador’s economy:

“If you go off, the fiscal deficit gets bigger, the level of debt gets bigger, inflation goes up and economic growth goes down. All the economic indicators just go south.”

So pres. Rafael Correa is attempting to de-dollarize, but not blatantly. How so?

Ecuador Mandates Bank Participation in National E-Money Initiative

Ecuador’s e-money initiative, which kicked off earlier this year after the country outlawed bitcoin, is about to see wider institutional involvement following a government directive.

The country’s banks were ordered late last month to adopt the payment system within the next year, according to a report by Pan-Am Post’s Belén Marty. The pace at which the banks are required to add support for the initiative, which is a digital representation of the US dollar – Ecuador’s official currency – depends on their size.

So it’s not even bit-coin, but it’s compulsory:

The nation’s central bank has given them 360 days to get on board, with a mandate inResolution 064-2015-M, released on May 25 in the official register.
. . .
The resolution gives a sweeping and vague definition of “macroagents” for adoption: “companies, organizations, and public or private institutions; financial institutions of the popular and cooperative system; that maintain a network of establishments available for clients and are capable of acquiring mobile money, distributing it, or converting it into varieties of money.”

Additionally, the Central Bank of Ecuador (BCE)’s crypto-currency transactions carry no privacy.

The dollar is taken out of the picture, and protection from “the grabbing hand of the State” is erased. Hasta la vista, baby!

Is Venezuela dollarizing?

Thursday, May 28th, 2015

Officially, they won’t, but in practice, yes:

Venezuela Embraces the Dollar—Reluctantly
Increasing dollarization reflects doubt in President Maduro’s ability to boost a sclerotic economy and halt a plummeting currency

From real estate to cars to even some cheaper goods like health-care products, an increasing number of vendors demand dollars—or its black market equivalent in bolivars, now about 350, several times the official rate. That prices out most Venezuelans, who can’t get greenbacks because of complex currency controls the government uses to prevent capital flight.

Those controls have helped exacerbate class divisions between those who hold only bolivars and those with access to dollars, undermining Mr. Chávez’s so-called Bolivarian Revolution, the social movement embraced by his successor, President Nicolás Maduro, which aims to equitably distribute wealth.

Steve Hanke saw it coming.

Worthless bolivar, replaced by hard currency, ought to not surprise anyone, or, as Capt. Louie said, “I’m shocked, shocked, there’s gambling going on in here.”

I wonder what became of my former friend, the liberal, who told me that Chávez had improved the economy. She’ll blame Maduro for not getting Communism straight, unlike Hugo.

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Additionally, just because you have dollars doesn’t mean you can get necessities.

For example, buying car tires: A contrast between a command economy, and a consumer-oriented economy.

At the command economy: Where gasoline is almost free, but two months go by and you can’t get tires for your car.

Gustavo Hernandez Acevedo describes Chavismo on wheels,

In early April, a close relative of mine was looking everywhere for new tires. He hasn’t found anything yet.

. . .

The root of the problem is (as expected) the fall in domestic production and the lack of currency to either reactivate local factories or bring enough imports to satisfy demand. Representatives of three major tire brands have met with government representatives, but they didn’t get any specifics about when they will get the resources to keep working.

But another factor is affecting the vehicle tire market: Proveeduria (Procurement)

What’s that?

It’s a state-led initiative thought up the central government back in 2013 to directly provide spare parts and tires to public and cargo transportation drivers, under the control of the Transportation Ministry. At the beginning, those State procurement stores got their tires from illegal units that were seized by the authorities.

But in March of this year, Land Transportation Minister Haiman El Troudi published an administrative order in which tiremakers are forced to sell 20% of production to proveedurias in order to keep public transportation up and running.

At the consumer-oriented economy: Tires replaced, car serviced, in less than three hours.

The other day I needed tires. I drove to the local service station, talked to the gentleman at the desk, and dropped off my car.
About an hour later, they called me back, we discussed price and what was needed.
Two hours later, the car was ready, I went, paid, and happily drove off.

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According to this official website of the Venezuelan government (link in Spanish), the Tower of David has been evacuated and its squatters placed in government housing. The structure will be used as an Emergency Coordination Center – hopefully after a great deal of refurbishing.

Previous reports mentioned that the Bank of China would be using “La Torre de David” as its South American HQ.

What works

Friday, May 1st, 2015

Readers of this blog are familiar with my nagging asserting repeatedly that Communism doesn’t work. John Mauldin and Stephen Moore have come up with A Six-Point Plan To Restore Economic Growth And Prosperity. In brief, the 6 are:

  1. Streamline the federal bureaucracy.
  2. Simplify and flatten the income tax.
  3. Replace the payroll tax with a business transfer tax of 15%, which will give lower-income workers a big raise.
  4. Provide certainty by keeping tax rates low through a tax-limitation constitutional amendment that would require future tax increases to be passed by 60% of the Congress, in combination with a balanced-budget amendment.
  5. Roll back the regulatory state.
  6. Drill for America’s domestic energy and use the royalties on federal lands to retire the debt and/or fund needed infrastructure repair instead of raising taxes.

While these are specific to America, countries in our hemisphere would benefit from similar incentive structure measures, if their institutions would also ensure a framework of rule of law and true commitment to ending corruption.

Mauldin and Moore address the real source of economic progress: the incentive structure. Read their full article here.

Latin America: Why there’s no light at the end of the tunnel

Tuesday, April 28th, 2015

Vast natural resources, great human capital, and yet, LatAm wallows in corruption and crime. This is not likely to change for the foreseeable future.

Why?

Belen Marty writes about one reason why:
LatAm’s Socialist Countries Rival World’s Worst in Institutional Quality
Zimbabwe, Libya Outrank Venezuela in Dismal Scoresheet for Bolivarian Republics

Latin-American countries with governments that claim to be pursuing a “socialist” agenda come out the worst in the latest Institutional Quality Index published by Argentina’s Freedom and Progress Foundation, with several regional nations ranking alongside countries such as South Sudan, Zimbabwe, Eritrea, and Gabon.

Argentina, governed between 2003 and 2007 by the late former President Néstor Kirchner, and by his spouse President Cristina Kirchner since 2007, has fallen the most in the rankings over the last 10 years, dropping 50 places to occupy position 137 out of 193 surveyed nations. In 2014 alone, Argentina fell several places to be rated worse than China, Uganda, and Lebanon.

Hugo Chavez’s legacy lives on,

Taking the same long-term view, the index shows how other regional countries have slid dramatically in the quality of their public institutions. Bolivia is down 99 places, Argentina by 33, Ecuador by 81, Venezuela by 75, and Paraguay fell by 61 positions, all since 1996.

Communism doesn’t work: Cuba takes the cake at 192, one notch above bottom-ranked North Korea, even after US$300million and 3 million tourists last year alone. Let’s pause for a Capt. Louis Renault moment.

The report, authored by academic Martín Krause, takes an average of eight indicators used by recognized international organizations. Among them are the Index of Economic Freedom (Compiled by the Fraser Institute and the Heritage Foundation), Doing Business, the Rule of Law (the World Bank), and Corruption Perceptions (Transparency International).

The report, which you can read here in Spanish, concludes,

En definitiva, aquellos países que tienen una buena calidad institucional o aquellos que la han mejorado, en particular en relación a las instituciones de mercado, y dentro de ellas aquellas que protegen la inversión y la actividad emprendedora, muestran un mejor desempeño económico y, con ello, ofrecen más oportunidades de progreso a sus habitantes.

[My translation:]
Definitely, the countries with good institutional quality or those which have improved it, especially in regards to market institutions, and within those, the ones that protect investment and enterprise, show better economic performance, and, along with it, offer their citizens more opportunities for progress.

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.