The crucial importance of Venezuela to the Cuban economy is widely known. Previous posts in this Blog evaluate the impact of a break-up of the close alliance between Venezuela and Cuba.[1] Such an outcome would constitute a severe shock for the economy of the island. The break-up could result from a change of government in Venezuela, and the bleak economic situation suggests that such a change is possible. Even absent regime change, observers such as Rolando Castañeda[2] argue that the assistance of Venezuela is not economically sustainable given present policies. At some point “aid fatigue” may also set up. For the time being the external liquidity and balance of payments crisis in Venezuela is already having an adverse impact on the Island’s economy.
The most widely used gauge of Venezuela’s international liquidity is the level of international reserves released daily by the Central Bank of Venezuela (please see Table 1). As of 15 September 2004 reserves were $20.9 billion, less than half the end 2008 level and an amount equivalent to less than 1/3 of annual imports. Just as importantly, reserves barely cover debt maturing within 12 months. One must also consider that gold is a large proportion of reserves, mostly kept in Caracas and therefore not easily available for sale or for use as collateral when deposited at a central bank or major international bank. The precarious level of reserves implies that balance of payments receipts are insufficient to meet import and debt service requirements reflected in appreciable shortages of consumer and intermediate goods. This in turn is leading to a predicted GDP contraction in 2014.
Another measure of international liquidity is the net position (assets less liabilities) of Venezuelan banks, including the central bank, at banks reporting to the Bank for International Settlements. This comprises assets in 43 countries and offshore centers including all developed and major emerging countries except China. These deposits are available to the central government, PDVSA and state-owned banks for trade and financial transactions. On this measure Venezuela has net funds of $35.6 billion as of 15 September 2014 comprised of $48.4 billion of assets and $12.8 billion in loans and other liabilities. This suggests that while the net BIS position has also weakened considerably in recent years (please see Table 2) Venezuela can fudge around by delaying payments to suppliers and on corporate payments and transfers. Note that some BIS bank assets correspond to payments arrears to suppliers and others, hence financed by involuntary credit. So the net operationally liquid BIS position of Venezuela is considerably overstated. Venezuela as of March 2014 had roughly the same level of credit lines from BIS banks as at the end of 2011. This is the result of providing collateral by way of bank deposits or by borrowing against oil shipments. The same is surely not true of supplier credits which have dried up, curtailing many essential imports (pharmaceuticals, parts, industrial material) and services (airlines, shipping, insurance).
HOW IS THE VENEZUELAN LIQUIDITY CRUNCH AFFECTING CUBA?
Venezuela continues to supply Cuba the bulk of its fuel requirements. According to PDVSA’s annual report, shipments in 2013 closely matched the daily level of 98,000 barrels of crude oil and refined products targeted in the Convenio Integral de Cooperacion Cuba-Venezuela (CIC).[3] Exports in 2013 averaged 99,300 bpd. These shipments are essentially a barter arrangement with a quarterly settlement against Cuban medical services provided to Venezuela.[4] There is no mention of any residual settlement. Neither Venezuelan nor Cuban official data report outstanding obligations between the two nations. So far Venezuela’s balance of payments crisis has not affected the supply of crude oil. The question arises as to whether or not Venezuela may alter the terms of its agreement with Cuba under pressure from the deteriorating financial and economic situation. Surely the petroleum barter aspect of the relationship is the core economic element for Cuba.
Nonetheless, Venezuela’s difficult financial position is having an impact on (1) the execution of existing projects in Cuba and (2) the evident downgrading of financial payments and transfers from Venezuela. Three refinery projects in Cienfuegos, Matanzas and Santiago de Cuba are at an early stage with PDVSA reporting a 100% advance in their phase of “definition” for Cienfuegos and the same for the other two regarding “conceptualization”.[5] There are no reports of substantial progress in the physical implementation of these important projects from PDVSA. This may be expected as financing for these projects is provided by PDVSA cash flow currently under severe strain. The limited access to financial markets by PDVSA or the Bolivarian Republic precludes tapping market sources. The benchmark Venezuelan bond due 2027 yields 14.6% over the corresponding US Treasury bond on September 17, 2014 after credit rating agency S&P lowered Venezuela’s score to CCC+.
There is only indirect data regarding financial flows between Venezuela and Cuba. However, the rise of $3 billion in Cuban net assets at BIS banks between the end of 2008 and of 2009 (please see table 2) can only be easily explained as part of financial flows between the two countries.[6] It is perhaps pure coincidence that the sudden hefty rise in Cuban BIS international assets was matched by a roughly equivalent decline in Venezuelan BIS assets. It is also interesting that a decline in Cuban international liquidity is accompanying the dwindling of Venezuelan international assets in the last six years.
Payments for Cuban services in Venezuela, apart from the crude oil component, are not transparent. Calculations by the author on the basis of data from the Cuban national statistics office and statements by officials, indicate a substantial trade and services surplus accruing to Cuba. This surplus was as high as $6.5 billion for 2012. On this basis Venezuela ought to be providing a partial or full settlement of which there is scant evidence. Alternatively Venezuela is theoretically building up payments arrears to its closest partner.
As long as the barter trade of Cuban services for oil continues, the liquidity crisis in Venezuela may have serious but not yet catastrophic impact.
[1] Ernesto Hernández-Catá,”Cuba, the Soviet Union, and Venezuela: A Tale of Dependence and Shock.” Cuba In Transition, Volume 23, 2013 and Luis R. Luis, “Simulation of a Venezuela-Cuba Breakup.” ASCEBLOG, June 2014.
[2] Rolando Castaneda, “The Significant Venezuelan Assistance to Cuba: How Long Will It Last?” ASCEBLOG, April 2013.
[3] PDVSA, Informe de Gestión Annual 2013, p.155.
[4] “A partir de 2008, el esquema de venta fue modificado facturándose sólo a corto plazo, cuyos montos son objeto de compensación trimestral con los servicios médicos prestados a través de Barrio Adentro “ PDVSA, Informe de Gestión Annual 2013, p.154.
[5] PDVSA, op. cit, p. 149.
[6] Luis R. Luis, “Cuba: External Cash Flow, Barter Trade and Potential Shocks,” in Ernesto Hernandez-Cata, (ed), The Cuban Economy Under a Magnifying Glass.” Pp. 109-127, ASCE, 2014.