Minc(i)ed Facts


Quico says: A couple of readers have pointed me to this remarkable Information Ministry press release, which one of them surmises must be an implicit response to my two recent posts on Central Bank Reserves. As he puts it, “there’s no other reason I can think of for this note, which is unlike any I’ve seen before.”

There’s too much vacuous nonsense in it to translate the whole thing, but I feel honor bound to pick apart a couple of the more egregious instances of sheer gibberish.

Most irksomely, the press release parrots the meaningless concept of an “optimal level of foreign currency reserves”, which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves “optimal” is simply meaningless. It’s a bit like confidently declaring that 2 kg. is the “Optimal Level of Harina Pan reserves.”

Is 2 kg. the optimal level of Harina Pan reserves? Erm…that depends. For me it is: it takes me months to go through that much. How about for an arepera? Is 2 kg. the optimal level of Harina Pan reserves for an arepera?

The adequacy of any level of reserves depends entirely on how fast you go through them. Somehow, though, the government defines its optimal level of foreign currency reserves without any reference of the level of obligations those reserves have to cover. I mean, a claim like that can’t even rise to the level of being wrong. It just means nothing, like saying “my electricity bill likes pink sonatas.”

Shockingly, though, that isn’t even the worst of it. The worst of it is the third and fourth paragraphs, where Minci informs us that:

It is the difference between the price of the Venezuelan oil export basket and the target price established in the National budget that feeds Macroeconomic Stabilization Fund FEM, formerly known as FIEM.

Each quarter, BCV and PDVSA review the price, and if it is equal or greater than the last five years the funds are deposited in the aforementioned fund.

…without betraying any hint of understanding that those two savings rules are entirely different! Minci wants us to believe that FEM follows two distinct savings rules at the same time.

Now, it’s true that if the budget targets were set deliberately for that purpose, those two savings rules could match. But I checked, and they don’t.

Let me walk you through it. The 2009 budget was calculated with a target oil price of $60/barrel. According to the first rule, if that target is hit precisely, there would be no change to FEM’s balance this year. Except, if that target is hit precisely, the average price of Venezuelan oil over the 2004-2009 period will have been $63/barrel, which, according to the second rule, would trigger a withdrawal from FEM!

By contrast, in 2008 the budget’s target oil price was $35/barrel. If we’d hit that target, implying no change to FEM according to the first rule, that would have made the average price for 2003-2008 some $47, which would’ve triggered a deposit according to the second rule. In the event, Venezuelan oil exports averaged $88/barrel in 2008, which was $30 higher than the five year average, but was $53 higher than the budget target.

You get the picture. It’s one rule or the other, but not both…

In the event, though, it’s neither. Had they been followed, either of the two rules would have resulted in accumulated savings worth tens of billions of dollars by now. Rule #1 implies that FEM should’ve accumulated some $56 billion in 2008 alone. My back-of-the-envelope estimate for where FEM’s balance would be if they’d followed rule #2 since 1998 puts the total at well over $100 billion. But, as the very same Minci press release admits, the balance in FEM right now is just a tad lower than that: $828 million, to be precise.

Which must be some kind of record, even for Minci: in the space of just two sentences these guys managed to make two truth claims that are not only mutually incompatible but are both spectacularly disproved by a third claim contained in the same document!

Seriously, who writes this stuff?


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