Why Venezuela Has Egypt-Like Forex Reserves

♠ Posted by Emmanuel in , at 8/13/2013 04:59:00 PM
Unlike many (left-leaning) colleagues, I remain profoundly unimpressed by the "post-capitalist" stylings of countries alike Argentina and Venezuela. When it comes to the geopolitics of the world economy, I am generally unconcerned about whether countries style themselves as "pro-American" or "anti-American" since it's largely beside the point. The point being, of course, that perceived friendliness to the world's largest economy has little to do with sound economic management.

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...

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.”
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.