The Boom Is Over

 We’ll start this week’s Venezuela : Down The Rabbit Hole segment tomorrow. For today it’s all current news so lets get to it…Reuters had the headline “The Boom Is Over”. After six quarters of positive economic growth in late 2021 and 2022 it appears that the business climate in Venezuela is returning to the norm, or what is normal for Chavismo under the Maduro regime and 21st Century Bolivarian Socialism. That would be eight consecutive years of recession (The greatest economic collapse in the history of the Western Hemisphere).

 After the brief recovery due to de facto dollarization, businesses are once again closing falling victim to high inflation, lagging salaries, decreasing purchasing (consumers can’t buy much with a minimum wage under $5 A MONTH), and lower productivity, according to business owners and analysts.

 They also face limited credit (Venezuela has the world’s highest banking reserve requirements so banks simply don’t lend money), higher taxes, rising utility bills, and a depreciating local currency.

 Maduro hailed last year’s economic growth of 15% (That’s Maduro’s number, most analysts put the growth between 8% – 10% although it’s difficult to verify as the government hasn’t released data on a regular basis since 2018), as a victory for “The Revolution”.

 For the first half of 2023, economic activity decreased 7% and inflation, year on year, was 398% in July, according to VOF (Venezuela Observatory Of Finance). Industrial production was down 7.6%, according to manufacturing guild, Coindustria, and commercial sales dropped 9%, according to analytical firm Ecoanalytica. Restaurants are charging half of what they charged for meals at the start of this year while input costs have quadrupled.

 We’ve been telling you since last year that Venezuela’s economic rebound couldn’t last long, and for good reason(s), maybe the easiest call ever, Nicolas Maduro and 21st Century Bolivarian Socialism.

 For Nicolas Maduro and the Chavistas ideology always trumps economic reality/prosperity. Instead of just allowing the de facto dollarization to continue Nico got greedy and initiated a new tax on foreign currency/ cryptocurrency transactions. He also raised taxes on businesses and individuals.

 This is where the socialist/ Marxist, big government/ central planning types always get it wrong and why socialism always fails. The facts are irrefutable. When you tax something you get less of it… Period! Money goes where it’s treated best.

 Taxing those “greedy capitalists” always sounds good to socialists which is why they always come up with ideas like a “Millionaire Tax”. The reality is that millionaires will avoid the taxes utilizing accountants and lawyers or if that’s not possible they just leave. The end result is the same, tax revenues go down, not up.

 It’s the same principle with taxing for foreign currency/ cryptocurrency transactions. If it costs more to use foreign currency/ cryptocurrency in Venezuela people will spend that money elsewhere. We are seeing this play out in Venezuela as businesses close and individuals leave.

 Then we have Finance Magnates reporting that cryptocurrency exchange Binance has dropped BDV (Banco de Venezuela) from it’s P to P (peer to peer) trading platform citing regulatory compliance issues.

 Binance has recently come under heightened regulatory scrutiny and last week dropped several Russian banks as well. There are still some Venezuelan banks on the Binance P to P platform but they are privately held, unlike BDV which is owned by the Venezuela government.

 And we have Rio Times reporting that Diosdado Cabello, head of PSUV, the Chavista political party (and some think the most powerful man in Venezuela),said on Venezuela state TV that the US fails to honor commitments and always lies.

 OK, no real surprise here but it is timely. The US should honor it’s commitment to free and fair elections and the restoration of democracy in Venezuela and stop Chevron’s deal to import Venezuela oil to the US and “snap back” all previously eased sanctions, per the terms of the sanctions-easing license, immediately!

 Then we have BNN Bloomberg reporting that PDVSA (Venezuela government-owned oil company) 2020 bonds have rallied 160% so far this year. Those are the bonds that have Citgo, owned by PDVSA, as collateral.

 We did a piece a while ago on several funds that have been buying these bonds and offering customers shares in their respective funds that hold these bonds. The investment officers of these funds are all saying that these bonds should sell from 0.80 to par (that’s 80 cents on the dollar or dollar for dollar) and will be made whole either through the auction process of Citgo shares or the sale of it’s assets.

 Investors in these funds that have seen the underlying bonds rise in value by 160% are probably feeling pretty good. Here’s the problem, as we’ve warned before. The judge overseeing the auction process has already registered a list of companies that have legal claims and arbitration awards worth billions of dollars and the total amount is rapidly approaching the NAV (Net Asset Value) of Citgo, estimated at approximately $10 billion. These claims and arbitration awards will be paid first and then the bond vultures will fight over the bones.

 So…if the total NAV of Citgo is paid to the companies with prior judgements, what’s left for the bondholders? That would be nothing or, to put it in their terms, 0.00 cents on the dollar. Caveat Emptor…Let the buyer beware.

 That will do it for today. We’ll get started Down The Rabbit Hole tomorrow….

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