Today we have an excellent case in point: How the heck can Latin America's second largest oil exporter after Brazil have Egypt-like foreign exchange reserves? With sustained high oil prices for years and years, it's hard to imagine but it's true in the case of [surprise!] Venezuela. Nor did it help that Hugo Chavez stashed a lot of foreign exchange in state-owned enterprises, which are now likely to be recalled to help repay the debts of this financial basket case:
Venezuela can more than double its reported reserves, which fell to a nine-year low of $22.9 billion on Aug. 5, if it chooses to take control of all the dollars held by state enterprises as of March 31. Increasing its foreign-currency holdings would bolster Venezuela’s ability to repay $40.5 billion in obligations at a time when its borrowing costs, at 11.59 percent [!!!-such confidence in this socialist paradise], are almost double the developing-nation average, according to Bank of America Corp. in New York.Alike many gold bugs, Venezuela (wrongly) bet on ever-rising prices of gold, in which it has kept much of its forex reserves. So, when gold prices headed south, you know what happened to its reserves:
Venezuela’s liquid cash reserves fell 31 percent in the first half of the year to $3.1 billion, the central bank said yesterday. The bank had 11.8 million troy ounces of gold as of June 30, which it valued at $18 billion, down from $20 billion as of Dec. 31...In other words, Venezuela has precious little cold, hard cash. ($3.1 billion? What's that, 1.25 seconds' worth of US deficits?) Moreover, there is some doubt as to whether much dollars--currency of el diablo--are actually stashed away in SOEs. At any rate, I am still gobsmacked at the level of financial mismanagement here. You must be radically incompetent to turn Latin America's second largest oil exporter into a holder of Egypt-like forex reserves. Hoarding gold? Puhleeze.
The 23 percent decline in reserves this year is mostly due to a 43 percent plunge in the price of gold, which accounts for 72 percent of holdings [my emphasis], Rodriguez said. Because the central bank values its gold holdings using a six-month moving average, reported reserves may fall by $1.1 billion more if gold remains at current prices, Rodriguez said in an Aug. 8 report.
“The fact that Maduro has given control of these funds to the central bank is definitely a credit positive move,” Bianca Taylor, senior sovereign analyst at Loomis Sayles & Co. in Boston, said yesterday in an e-mailed response to questions. “However, it is not a panacea. Venezuela’s problems are deeply structural.”