Changes to the cryptocurrency “El Petro”

In an attempt to keep the poorly received cryptocurrency “El Petro” alive, superintendent of Cryptoactives and Related Activities Joselít Ramírez announced on October 1 that the cryptocurrency would be the new commercial currency of Venezuela both nationally and internationally and would displace the use of the dollar as a means of payment for goods and services with allied countries. All oil purchases with Venezuela are to be transacted using the Petro.

A new white paper on the Petro further explains its operation and attributes. Its price will be calculated by using the sale price of oil (50%), gold (20%), iron (20%), and diamond (10%), although the authorities claim that it will remain anchored to the value of the Venezuelan oil basket. The document also states that the Petro may be purchased through the virtual exchange houses and the website of the Cryptoactive Treasury of Venezuela (TCV). It will have a discount of 3% for the first three issues and that the liquidation value of the Petro in any international currency will have an administrative rate of 5%. In addition, its usability is guaranteed for the the purchase of goods and services for private use, both nationally and internationally, the payment of taxes and public services, and sending remittances, among other uses.

The Petro, even with its modifications, will continue to be dematerialized, and digitized money will be another fiduciary currency parallel to the bolivar and rather than a digital asset tradable with other cryptocurrencies or commodities.(1) Determination of the value of the Petro will be difficult, as the commodity basket is complicated and production of the included commodities production has declined significantly in recent years.

Debt payment pressures

The authorities’ interest in reviving the Petro may be motivated by a desire to convince or force Venezuelans to use the cryptocurrency in their international and even domestic transactions, given the government’s significant need for foreign currency to meet its obligations. A payment of $229 million for sovereign debt was due in September. Further debt service payments of $1,598 million for sovereign and PDVSA debt, interest, and amortization were scheduled in October. Venezuela made a $949 million interest payment on a PDVSA 2020 bond in late October. Guaranteed by 50.1% of shares in the parent company of Citgo, the bond is the only type on which Venezuela has continued to make payments, which has allowed it to stave off a loss of control of Citgo and therefore potentially the total collapse of oil production for Venezuela.

New economic announcements and the fate of PDVSA fate: More improvisation in an uncertain outlook

On October 16, the Sectoral Vice President of Economy Tareck El Aissami, announced that Venezuela will use the euro as the reference currency to carry out exchange transactions in the local market with an initial offer of 2 billion euros, in addition to allowing the participation of public and private banks in this auction system. The vice-president himself assured that the measure was implemented to counteract the effects of international sanctions that prevent transactions in US dollars of Venezuela with the rest of the world. The DICOM system has allocated about $107.38 million through late October 2018, representing a decline of 72.5% compared to 2017. This is another indication of the significant cash constraint the government is facing.

The Venezuelan government has not shown signs of a credible opening of the exchange market. This is manifested in the continuous depreciation of the parallel exchange rate, which has already reached the Bs. S 200 barrier from an initial value of 60 Bs. S at the beginning of the economic plan last August. Nor has it presented an economic plan to combat hyperinflation, which according to the International Monetary Fund could close the year 2018 at 2,500,000%, a figure without precedent in the economic history of Venezuela. This reflects the significant use of the inflationary tax to finance the fiscal deficit (at least its domestic part), which is expected to continue given the lack of significant access to international markets.

In the same announcements by the sectoral vice-president, it was decided by decree to increase the legal reserve of the banking system from 31% to 40%. In addition, greater price controls and sanctions are placed on entrepreneurs and traders who practice “speculation.” These measures fuel the poor credibility of the current policies, since they reflect the lack of corrective macroeconomic measures, such as limiting monetization of the fiscal deficit or fiscal policy measures, that are compatible with their objective of “zero fiscal deficit” as announced in August.

The government also has not been able to articulate, together with fiscal and monetary policies, a set of policies in industrial, agricultural and commercial matters such as tax incentives, reforms in the legal framework and personal security to reactivate the economic activity that could close this year with a decrease of 18%.

Looking to China

In mid-September, Venezuelan President Nicolás Maduro travelled to the People’s Republic of China. The Chinese government granted a loan of $5,000 million, which according to unofficial sources will be used to finance projects by Chinese companies established in Venezuela. This new commitment represents a figure less than the amount of interest and amortization due in 2018, which amounts to $6,400 million.

In late October, the Venezuelan government invited experts China to a conversation about economic policies to reactivate a depressed internal productive apparatus. The Minister of Agriculture and Lands, Wilmar Castro Soteldo, consulted the Chinese experts on the control mechanisms that the government of China exert on its economy. To the surprise of the Venezuelan minister, the invited expert responded on national television that in his country almost all of the companies that operate are private, and that the government is responsible for implementing incentives like subsidies, a more flexible legal framework and adequate infrastructure to make these companies are more productive and competitive, and not imposing controls on prices, salaries, salaries, profit margins, among others.(2)

New fate for a broken PDVSA?

Given the insolvency situation, cash flow crisis, and corruption scandals of the state oil company PDVSA, the National Constituent Assembly is considering the possibility of liquidating PDVSA to into a corporation, together with the electricity sector, called the Venezuelan Energy Corporation (CVE, its Spanish acronyms). This new entity, in addition to absorbing all the administrative, operational and physical assets (including the Citgo refinery) of the state company, would be authorized to develop export-oriented energy projects on its own and through joint ventures with foreign partners. This new corporation could represent a government strategy to reduce the impact of a possible Citgo collapse and to divide liabilities.

Some analysts warn that this action could generate a series of lawsuits and lawsuits against the state oil company and the Venezuelan government, since its dissolution is intended to transfer all of PDVSA’s assets to the new corporation and eliminate its financial unpaid liabilities (which amount to $2,374 million as of October 12). This would further hurt the credit reputation of the country and may lead to new financial sanctions.

Budget for 2019: When opacity is the law

On October 23, the budget bill for fiscal year 2019 was presented to the National Constituent Assembly for an amount of Bs. S 1,529,780 million. This represents an increase of 323.74% with respect to the budget allocated for fiscal year 2018, which was Bs. S 361,021 million. On this occasion, no further details were given about the total amount of the Venezuelan budget, the price of the oil barrel of reference to estimate the income from hydrocarbons, the classification of fiscal revenues (oil and non-oil), nor other sources of income, destination of the same, or sources of internal and foreign financing. As in other recent years, an explanatory memorandum of the bill was also not presented. The explanatory memorandum typically contains economic data, growth targets and limits on indebtedness. This pattern increases the opacity and lack of credibility in the Venezuelan government.

(1) This implies a violation of Article 318 of the Venezuelan Constitution, which states that the only legal tender is the bolivar.