Russ Dallen, Managing Director of Caracas Capital Markets and Editor-in-Chief of the Latin American Herald Tribune, on the state of the Venezuelan economy

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Things are not going well for Venezuela.

The OPEC meeting on Thursday, 11/27/2014 did not give Venezuela the supply cuts or price support that it needed.  On Friday the 28th, the Venezuelan currency crashed through the symbolic mark of 150 bolivars to the dollar and sits at 153 as of this morning.

The Bolivar has fallen from the previous psychological barrier of 100 (passed on October 22) to today’s 153, falling 50 percent in less than five weeks.  The government is printing money and M2 is up 60 percent for the year, with most of the printing presses making the highest note—the 100 bolivar bill.

This means that Venezuela’s biggest bolivar bill—the one that the Central Bank has printed 16.8 billion of so far this year—is worth just 65 cents at the black market rate.

There are several things at play there, including the payment of Christmas bonuses and the fact that the government has not had a Sicad 1 (bolivar / dollar exchange) auction since October 14. The government had promised to distribute US$220 million in greenbacks every week via Sicad 1 back in February.

However the fall in oil revenue and the maturity bulge that forced Venezuela to pay out US$5.2 billion in October (the state paid US$1.5 billion Venezuela, while PDVSA paid $3 billion), worsened the dollar shortage and led the country to dig deep into its international reserves, sending the reserves to a low of US$19.4 billion.

To cover that fall, on November 18, President Maduro ordered the Central Bank to move the Chinese loans of US$4 billion into the reserves, helping them on paper recover to reserves of US$23.6 billion.  In one week since then, this figure has fallen US$1.4 billion and sits at US$22.24 billion as of November 27.

At the same time, bonds are collapsing today, with many down over 6 points since Wednesday’s close.  The highest point on the Venezuela curve remains the PDVSA 17 bonds, where yields are pushing toward 35 percent.

Two other things to add to the Venezuela worry column.  For one, the country just lost another expropriation case at the World Bank’s ICSID arbitration tribunal, this time for the Margarita Airport. More importantly, ConocoPhillips has filed papers in an attempt to block Citgo sales proceeds from leaving the jurisdiction. While it does not seem that they will block the Citgo sale, Venezuela will be blocked from repatriating any proceeds.

I believe that ExxonMobil—which just won US$1.6 billion at ICSID for the expropriation of its Venezuela investments—will also join the suit.  You can find the ConocoPhillips lawsuit (which surprisingly quotes me) against Citgo here.

Stay tuned…

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Russ Dallen is a financial expert and journalist. He is the Managing Director of Caracas Capital Markets and Editor-in-Chief of the Latin American Herald Tribune. To receive the Caracas Capital weekly report contact RMDallen@CaracasCapital.com.