Caracas Chronicles

As an economically hideous 2016 unfolds, opositores are chomping at the bit to get Maduro out of office before gaitas begin to play next December. You know things have come to a head when even Henrique Capriles starts saying the time has come.

I think this is a mistake. Bad as things are, what’s coming is way worse. Way worse. The opposition hasn’t really digested the scale of the external shock we’re going through. Wanting to take power this year is a clear sign that we haven’t truly grasped what it would mean to find ourselves at the helm when the worst of what’s coming hits.

We’ve gotten used to the idea that the basic problem Venezuela faces is misaligned prices – especially the price of foreign currency – and that we could solve all or most of our problems just by getting real: devaluing the exchange rate and lifting price controls. That was the conventional wisdom back when oil was at $80 a barrel, and it made some sense in that context.

Today, that view is dangerously outdated. The external price shock is mammoth. “Getting prices right” won’t be nearly enough.

Consider:

1. The liquidity crisis is way worse than anyone anticipated

We know what’s happened to oil prices over the past 18 months. But have we really thought through what it would mean to take control of a completely bankrupt state?

The math is grim. As of the third week of January 2016, the Venezuelan basket was trading at $21. This means that, assuming production of 2.7 million b/d, and given 750,000 b/d goes to domestic consumption, 300,000 b/d go to Chinese Fund repayments and 150,000 b/d of Petrocaribe+Cuba’s allowances, we end up with 1.5 million cash-generating barrels a day. At current prices, gross income from oil would be around $1 per person per day.

That’s gross income, people, gross: before PDVSA costs.

Net? Not a million miles from zero.

The signals we’re getting suggest hard currency income is being prioritized to pay external debt obligations, and the official exchange rate hasn’t been adjusted. Barclays estimations point to a $30 Bn cash flow deficit for this year’s budget; BofA stressed that for oil bellow $30, financing gap could reach $40 Bn.

Probably the hardest financial blow Venezuela has taken since the 1980s, when the price of oil collapsed and the newly nationalized industry lost 1.5 MMb/d to Perez Alfonso’s conservation policy. Back then, the consequences included: Black Friday’s devaluation, the seizure of PDVSA’s and IVSS’ pension funds and, down the road, the death of Puntofijismo. Also, it is worth mentioning that according to BCV research, poverty rose from 12% in 1980 to 63% in 1989.

At current oil prices, Venezuela’s fiscal math is a tsunami of red ink. And it just so happens that…

2. Oil prices ain’t coming up

Last week, BP CEO, Bob Dudley, moaned at the World Economic Forum that we now face an “even lower for even longer” scenario. Dudley warned oil prices may drop into the teens in the first half of the year. The news came at the same time than the International Energy Agency (IEA) wrote in its Monthly Oil Report than the world could be “drowning in oil” if no one cuts production.

In the meantime, OPEC’s President, Abdalla El-Badri, warned that experienced players in the industry should be aware oil price cycles, and therefore be prepared to confront them. The cherry on top: Saudi Arabia said that, although they find 30-dollar-oil to be “irrational”, they have rightfully earned their position in today’s marketplace, and that less efficient producers are the ones who should be shutting down wells. Therefore, Venezuela should kiss goodbye its “lets cut production and get this over with” expectations.

Bottom-line, all the big players in the oil market are trapped in a situation where no one wants to give in. Everyone is trying to find out what’s the price that will start pushing the oversupply out of the market.

Because this is most people’s base scenario, Barclays went full-panic-mode-on with Venezuelan debt, saying the country had “passed the point of no return”, and that default is now hard to avoid.

3. In a caudillista  society, the President is either devil or saint

With real income dropping to pre-Chavez era levels, and a “credit event” on the horizon, recovery will remain elusive, even if the government manages to pay its debts. Chances are that Venezuelan GDP may contract another 8% this year, according to IMF estimates, accompanied by a spectacular 720% inflation rate.  If debt maturities are met and the oil market stabilizes, Venezuela’s economy could start recovering by mid-2017.

In a caudillista society like ours, whomever holds office will take the blame for the most coñuemadre crisis that Venezuela has faced since statistics began to be kept.

Letting the government pay the political price of adjustment remains the best option, because bondholders and general public prefer institutional stability to social chaos.

4. Austerity is a reality

In its own unorthodox and uncoordinated way, the government is showing it gets it that there’s no money anymore and painful decisions can no longer be delayed. Caracas Chronicles readers know you can see that in everything from delays in paying Pastor Maldonado’s F1 sponsorship money and even Pablo Montoya’s $100,000 Premio Romulo Gallegos to delays in paying Uruguayan agro-exporters and even Venezuela’s UN dues.

Those things make headlines, but here’s what could really make a difference:

Oil Czar Eulogio Del Pino pushed forward for the second time that PDVSA may restructure its debt, meaning that bondholders should agree not to be paid in due time, but latter on and with different returns -a.k.a. a technical default. President Maduro announced time has come to raise the price of domestic fuels. CITGO said it would be issuing fresh debt. Hovensa, a PDVSA-Hess Corp joint venture, got the permission from US Virgin Islands’ government to be sold. PDVSA requested its private partners to pay for imported naphtha to use as dillutant so it can export extra-heavy Faja crudes. PDVSA’s Pension Fund, Banco de Venezuela and BCV have allegedly repurchased important sums of sovereign bonds. Income tax will be raised to 40% for “big contributors” – a category still to be precisely defined.

None of these decisions are comfortable. But they pale in comparison with the kinds of decisions whomever is in power in the second half of 2016 will have to make, and into the first half of 2017. Worse, whomever’s holding the bag then will be making decisions on the brink of hyperinflation, and after October 16th likely also after a messy PDVSA bond default that could lead to PDVSA asset seizures abroad and deep disruption in the company’s ability to even transact business abroad.

All of that is already baked into the political landscape today.

Some may consider that things don’t have to go this way. That, if only more reasonable people were in charge different decisions could be made, and they would allow us to avoid at least some of the hardships that lay ahead of us. And that’s true, to some extent. Better leadership never hurts. Major policy blunders could be corrected sooner rather than later.

But we shouldn’t kid ourselves: the bulk of the still-to-come economic contraction is already baked into the fiscal math in a way that won’t magically change because you put an opposition figure in power.

MUD’s Choice

MUD has to think strategically here. On the one hand, it could decide to accelerate Maduro’s ousting and proceed to hold presidential elections it is likely to win. And that road is poised to be an El Gran Viraje episode all over again. People who will vote for a change won’t be doing it to “regain economic sanity” within a liberal market model, but rather expressing their blind fury that the petro-goodie bowl’s been taken away.

On the other hand, the MUD can bide its time in the Assembly and let the PSUV-led executive take the blow. With its AN majority, it can pass important reforms to reduce the power of the executive branch, something that any incumbent would find hard to do. Some of these measures, particularly the ones regarding parafiscal resource management, can force the government to do all the unspeakable things they always preached against.

Some may find it morally reprehensible to willingly let the country hit the hardest of rock bottoms for political advantage. But we must not forget that, as bad as the economy is, the government still got 40%+ of the vote on 6D. The government is now clearly in the minority, but it’s far from routed. In the long term, though, what Venezuela needs most is to bury chavismo’s credibility as a governing philosophy for the next three generations. Waiting is much more likely to achieve that than moving early.

It’s a tough pill to swallow, but now’s the time for cool-headed strategizing, not for letting the “new majority” propaganda get to our heads.