Will More Loans From China Give Venezuela the Boost It Needs?

| Nov. 28, 2011 | Caracas, Venezuela

Published by Minyanville

The Chinese were in town this week, adding another $4 billion to their already substantial loans to Venezuela—again, in return for oil. China has now lent the Latin American nation more than any other in the region, a total of $32 billion.

The money comes on top of a recent $4 billion loan from Russia—set aside for weapons purchases and also to be repaid in oil—as well as bond offerings from the republic and state oil firm Petróleos de Venezuela (PDVSA) this year of more than $15 billion, more than the rest of Latin America combined.

Chinese and Venezuelan oil companies are also to join forces, hoping to produce 1.1 million barrels per day by 2014, up from the current figure of 112,000.

Benedict Mander, writing in the Financial Times, is not convinced. “If the rest of PDVSA’s frequently postponed production targets are anything to go by, this figure should be viewed with a healthy dollop of skepticism.”

The joint projects are worth some $30 billion. According to Oil Minister Rafael Ramírez, Venezuela sends China 410,000 barrels of oil a day—up nearly tenfold over the last six years.

There is a smattering of politics underlying this week’s events. With elections due in October 2012, Chávez will plough money into social projects, which he hopes will buy him votes against a strengthening opposition.

In this vein, one of Chávez's more elaborate PR stunts came to fruition late last week. In August, the maverick leader vowed to bring back Venezuela’s gold reserves, including 99 tons held in the Bank of England as well as another 112 tons held across the world’s safest vaults.

The announcement was laughed off by analysts, who scoffed that the huge insurance premiums necessary for the transport of such a valuable cargo made the whole thing unfeasible.  

The first shipment, however, arrived late Friday, to fanfare from the government and supporters of Chávez who watched pallets laden with gold ingots roll down a runway and onto armored cars headed for Caracas.

Some have suggested that Chávez wants to sell the gold in order to make a fast buck in time for next year’s elections. While the president laughed this off, it is certainly undeniable that Venezuelan authorities are doing everything they can to bring in extra cash.

One more option is to devalue the currency. The bolívar fuerte (BsF) has been devalued four times since 2003, as Chávez has attempted to reduce capital flight.

The currency remains overvalued, with a black market rate of just over 8 BsF to the US dollar—far above the official 4.3 BsF per greenback.

Devaluation would boost the value of exports—paid for in foreign, hard, currency – such as oil. Venezuela exports nearly 2.5 million barrels of crude every day.

Analysts, however, are not predicting a further devaluation before next year’s elections. This is because devaluation would also hit imports on which the country is heavily dependent.

"The cost of a devaluation is very high in terms of greater inflation and economic contraction," Boris Segura of Nomura told Reuters. "Next year's [budget] deficit will be significant, but the government has methods of financing without resorting to a devaluation."

It would also hit the wallets of Venezuelans hard, exacerbating one of the world’s highest rates of inflation, which runs at 26.9% in the 12 months to October. The government believes one fix may be a Law of Fair Prices, which went into effect last week, freezing prices on 18 bathroom and cleaning products including toothpaste, deodorant, and toilet paper.

“I’m buying everything that’s on the price control list that’s going to be regulated,” retired schoolteacher Elena Ramírez told Bloomberg in an interview at a supermarket in Caracas where she bought 48 rolls of toilet paper. “Everyone is in the same game. It’s madness.”

Chávez’s administration first began to fix prices in 2003. Few are expecting the move to help curb inflation. The bulk buying of goods is likely to lead to greater demand and so further inflation.

There was some good news, though. Venezuela’s economy grew 4.2% during the third quarter, compared to the same period last year. Most analysts agree with authorities’ forecasts of around 4% economic growth this year.

“The indicators tell us next year we will continue with this growth,” Finance Minister Jorge Giordani said. “The goal of 5% for 2012 is feasible. It is realistic.”