Caracas Chronicles

It was one of the most befuddling developments in the runup to 6D. Just five days before the opposition won its 112 seats in the National Assembly, the lame-duck PSUV-dominated A.N. passed the 2016 Budget, a fantasy document that, in keeping with recent practice, comically underestimated both income and expenditures.

Approving budgets that clearly weren’t meant to last the whole year made some sense when chavismo controlled every branch of government. After all, you could always count on a rubber-stamp assembly to Ok the créditos adicionales needed to keep spending.

Why chavismo decided to approve a budget like this just days ahead of 6D, though, stands as a dark mystery. Every poll was pointing to at least a simple majority for MUD. How could they fail to see that approving a catastrophically underestimated budget would leave them in the position of supplicants to the MUD majority within a few months? And to wield power over public spending, MUD does not require a two-thirds majority.

For 2016, the sums allocated for public sector salaries will come short by at least 30%, and that’s if there are no salary increases during 2016. With inflation expected to hit triple digits again, it’s clear the budget is meant as a kind of opening bid, with the bulk of spending to come from “créditos adicionales”.

Two options crossed my mind: either they were very confident they wouldn’t lose their AN majority (massive election fraud?), or they had already decided to ignore or bypass the AN.

The first one was wrong; the second is still in play. (Of course, there’s a third possibility: plain incompetence and inertia.)

Spending public money without parliamentary authorization is one of those things that’s strictly forbidden by the Constitution, except when it’s not. Article 314 says, in essence: “No out-of-budget spending! Unless there’s enough money, and the AN says yes. If that’s the case, go crazy”.

By understating oil revenues in the budget, the government made sure that there were always surplus funds in the Treasury to go crazy. They minimized the sums they’d need to transfer to governors and mayors under the guise of the situado constitucional. And they gave themselves extra discretionality to spend in ways nobody can track, like in FONDEN and PDVSA.

The créditos adicionales were a key part of this strategy. They provided the government with a lot of flexibility. Poll numbers seem low? Increase salaries, and pay for it with a crédito adicional. We destroyed another industry? Import overpriced goods with a crédito adicional. Bankrupted a state-owned company? Cover the hole with créditos. A heavy rain season reminded people we’ve done nothing in the housing sector? Gran Misión Vivienda. Chávez just thought of a factory he wants to “build”? Crédito adi… You get the gist of it.

The FONDEN –sold as a fund to invest excess oil profits– it’s the blackest of all black holes, with zero transparency or oversight. With their law-bending ways, the government could have used the FONDEN to pay for everything over the budget and ignore the AN.

For some reason, they decided to keep asking for créditos, especially to pay for current expenses such as salaries and pensions. My guess is that these expenses have little or undetectable corruption, so legislative oversight is low risk. Large projects, with the meaty commissions and shady arrangements, were left to the shadowy FONDEN or the zero-oversight PDVSA.

But, guess what, FONDEN is toast. After burning over USD 100 billion, it’s close to being a non-factor today. It was funded with revenues from high oil prices –which are now very low– and by the Central Bank –which is running on fumes. In September, before the elections and the large October debt payments, it had around USD 2 billion. And even if oil prices shoot up to USD 100 tomorrow, the AN can change the rules of FONDEN and deprive it of funds.

Of course they still have PDVSA, which has long been used to pay directly for some of their programs, keeping them out of the budget. But the company is not exactly in great financial shape, and we all know what’s happened to oil prices.

So all there’s left to pay for stuff are the good-old créditos adicionales, and MUD is now standing in the way. This makes the government’s aggressions towards the new majority even more baffling: the government and the MUD will have to talk, and talk about money. And it’s a lot of money.

The budget approved for 2015, of VEF 741 billion, will end up covering less than 35% of actual spending, which to this date is at least VEF 2.1 trillion. The difference between one and the other is made of créditos adicionales. Under the reasonable assumption the economy will remain just as bad, and that the budget is just as short as 2015’s, MUD holds the key to over 60% of the government’s spending.

But not all of that will be subject to negotiation. We can assume that MUD will not commit political suicide by withholding funds to pay for salaries, or by telling the government to fire public employees. Salaries accounted for around 50% of actual spending in 2015. That leaves around 20% of total spending needing approval of the AN.

The government left many important items out of the budget, with many others severely underfunded. Many of those are precisely the ones that make chavismo, chavismo: the misiones (freaking Misión Vivienda was only allocated 17% of its 2015 total!), the state-owned industries, public services and military purchases. How are they going to plug the usual holes left by the usual corruption?

That’s just one piece of the puzzle. Negotiations will not only be about approving this or that, but also about how to pay for the créditos. The budget assumes an oil price of USD 40 per barrel. As long as it remains below that, there won’t be any surplus money available for créditos from oil revenues. Some money will surely come from an unavoidable devaluation, but it will not be enough.

The government is running a monster deficit, probably close to 20% of GDP. The options available to Venezuela to finance it are limited. The government has already sold its most liquid assets and pawned others. It can’t issue new foreign debt. It has also reduced spending in real terms, and will have to cut more. A devaluation is surely coming, but unless it’s absurdly large, it won’t close the gap. That leaves raising taxes and printing money. Maduro used his waning Enabling Law powers to do some of the former, but from tomorrow the AN will have a say in all this.

With the enabling law expired, new or higher taxes require AN approval. Will the AN want to do that? Cutting spending and increasing taxes, while good for the deficit, would only deepen the recession in an economy which already crashed. A gasoline price hike is also an option.

When it comes to printing money, we’ll get to see if MUD is willing to walk the walk. For years, the Central Bank has ignored Article 320 of the Constitution, which bans it from financing public sector deficits. It has created VEF 918 billion out of thin air, to then loaned it to PDVSA. The company can then give more money to the government, while fueling inflation. It’s a nifty trick, as well as massive: the loans currently account for 62% of the monetary base (cash, plus bank reserves). The government can’t sustain its current spending without it.

MUD has said they will restore the independence of the Central Bank, and replace members of its Board of Directors. The Constitution allows the AN to appoint half of the directors, and to set the rules for approving the other half appointed by the President. The logical expectation is that the MUD-AN would seek to stop the unconstitutional financing. But without the Central Bank’s magic wand, how will the government pay for salaries and pensions?

Will MUD allow the Central Bank’s money presses to keep churning out the Monopoly money? If the presses stop, it would force the government into a larger devaluation, and higher taxes.

Of course, chavismo being chavismo, they could ignore the AN and spend the Treasury’s money without any kind of legal basis. But it won’t be easy to get it done. It’s the type of overtly illegal maneuvering that could find resistance in the mid-level bureaucracy needed to run a government, even among the most chavista of them. With a day of reckoning fast approaching, they’ll not want to have their name associated with such a blatant crime, because it would make them perfect candidates for prosecution. It has all the makings of a Ceaușescu moment.

More importantly, this would be the ultimate “I Just Don’t Care” move by the government, subverting principles of constitutional government that go back to the 13th century. Bedrock stuff, stuff not even Louix XVI could mess with.

So…pretty likely then.