Venezuela’s socialist government has hit on a new key sector – mining.
On 29 February Venezuela’s planning minister, Ricardo Menéndez, held a meeting in Beijing with the president and the vice-president of China’s National Development and Reform Commission, Xu Shaoshi and Ning Jizhe, respectively, to discuss the prospect of Chinese cooperation in various economic sectors as part of the Caracas government’s plans to revitalise domestic productive economic activity.
In an official statement, Menéndez said that he had discussed Chinese participation in sectors including pharmaceutical, industrial, petrochemical, hydrocarbons and mining. Menéndez said that attracting Chinese investment was part of the “government’s strategy for the country’s economic reconstruction”. He celebrated that China planned to “invest in the development of these sectors in Venezuela, which is highly important to consolidating the union between our countries, along with China’s direct participation in things like the Arco Minero and the Orinoco belt”. Venezuela later hosted a forum, on 2 March, under the banner of ‘The 14 engines of Productive Economy’, in which investment opportunities were presented to over 50 Chinese companies.
The Orinoco belt is the 55,314km2 area in northern Venezuela under which much of the country’s oil reserves – the world’s largest after Saudi Arabia – are located and where Chinese oil firms have a growing presence. The ‘Arco Minero’ (‘mining arch’), meanwhile, is an 111,000km2 area in central Venezuela that goes from the country’s border with Guyana in the east to its border with Colombia in the west. The Venezuelan government has long held that this region contains high quantities of gold, coltan, diamonds, bauxite, iron ore and other minerals, all of which the government is once again looking to exploit as part of an urgent bid to find new sources of growth (and foreign exchange earnings) after the country’s GDP contracted by 5.7% in 2015 on the back of the fall in international oil prices (see box below). The fact that mining prices too have come off their previous record highs does not seen to be an issue for the now severely cash-strapped Maduro administration, albeit it could be a disincentive for Chinese or other companies looking to invest large sums in Venezuela’s already-fragile and highly unpredictable domestic economic environment.
To this end, the Maduro administration recently signed a US$5bn settlement deal with the Canadian-US company, Gold Reserve Corporation, to end a seven-year expropriation dispute. As part of the deal, Gold Reserve will invest/loan US$2bn to revive and develop the Brisas mine (in Bolívar state) at the centre of the dispute, as well as the adjacent Cristinas gold-copper project, recovering a 40%-45% share in the overall project, with 55% to be held by the Venezuelan government. According to a 29 February company press release, once developed, the combined Brisas-Cristinas Project “is anticipated to be the largest gold mine in South America and one of the largest in the world”.
Camimpeg
There is also much speculation as to the purpose of a new state company that appears to increase the Venezuelan military’s involvement in both the oil and mining sectors. The 10 February daily gazette announced details of a new military company, Cia Anónima Militar de Industrías Mineras, Petrolíferas y de Gas (Camimpeg), authorised to take part in a variety of oil services and mining activities.
Camimpeg will report to the defence ministry, which will appoint the company’s board and president. Eulogio Del Pino, who doubles as Venezuela’s energy minister and president of the state oil company Petróleos de Venezuela (Pdvsa), said that Camimpeg would provide Pdvsa with various oil services, including the maintenance of wells and drilling rigs, transport and the commercialisation of chemicals and, apparently, provide support for security. “It will help Pdvsa in all the necessary areas. For instance in border areas, we’re going to increase our security, in operational issues where our soldiers are perfectly prepared,” he was quoted as saying by newswire Reuters.
However, commentators put forward various other theories. Aside from the continuing complaints about the creeping militarisation of the Venezuelan government under President Maduro, these include a suggestion that the new company could be used as a vehicle to shield Pdvsa assets from being seized in the event of a debt default. Russ Dallen, of a Miami-based consultancy, Latinvest, made the point to Bloomberg that “the state can take away the rights to the oil, gas and resources of Pdvsa at any time, leaving it largely worthless to creditors and protecting Venezuela’s ongoing cash generation from oil sales from Pdvsa creditors.” He added that the new company “could also help the government maintain operations if unpaid bills to joint-venture partners and oil service providers start to impact output”. And, in another scenario, “it could also be used as a bargaining chip in any deal with China”.
Others suggested that the new company is simply part of the government efforts to resurrect a mining sector in the country. Del Pino revealed in late January that Venezuela was moving to certify its precious metal resources and was interested in producing diamonds. A subsequent Pdvsa press release noted that Del Pino and the central bank president, Nelson Merentes, had met with Ahmed Bin Sulayem, chairman of the Kimberley Process, an organisation that monitors the sale of conflict diamonds, as part of its certification efforts.
Tumeremo massacre underlines operating risks in remote mining belt
In the midst of these efforts by the Maduro government to open up the mining sector, some two dozen informal miners in Bolívar state, which lies at the centre of the Arco Minero, were murdered and abducted in early March, with relatives accusing local security forces of involvement.
Relatives reported that an armed gang attacked the informal miners on 4 March in a bid to take control of the Atenas gold mine, located near the town of Tumeremo. They claimed that 28 miners had been captured. Initially, some local reports suggested that the victims had been killed and the bodies violently dismembered by a gang using chainsaws. Controversially, some of the relatives suggested the complicity of local military forces, arguing that corrupt local officers were seeking spoils from the mine. The long-serving governor of Bolívar state, Francisco Rangel, of the ruling Partido Socialista Unido de Venezuela (PSUV), initially denied that anything was amiss, and on Twitter accused the political opposition of making things up for political gain. The allegations of the families were “absolutely false”, he insisted. He was later obliged to backtrack.
The incident quickly prompted comparisons with Mexico’s infamous Iguala case, in which protesting students were kidnapped by a gang in cahoots with the local security forces. Moreover, local critics have alleged that this is not the first such incident to take place under Rangel’s watch in Bolívar (he has been governor since 2004). As the news made local and international headlines, the government scrambled the air force in search of the victims, with Defence Minister Vladimir Padrino López pledging that it would not rest until the victims were located.
The attorney general, Luisa Ortega Díaz, two weeks later confirmed that authorities had found the remains of 17 people in a common grave. Several of the corpses, which included two females, were identified as some of the missing. Officials said the people found in the common grave had been shot to death.
Ortega said the grave had been found in Nuevo Callao, “deep in the jungle” near the border with Guyana. She said authorities believed that 21 and not 28 miners had been taken, albeit the families of the missing continue to insist otherwise. Ortega announced an arrest warrant for the leader of a local criminal gang identified as Jamilton Andrés ‘El Topo’ Ulloa Suárez, reportedly an Ecuadorean native, and said that authorities had already arrested one of his close accomplices, Rosa Saida Gil Salazar.
The Venezuelan opposition has called for Rangel’s resignation over the case.
A grim picture
On 18 February, the central bank (BCV) released economic data to end 2015. According to the bank, the country registered an overall real annual GDP contraction of 5.7% in 2015 (following a contraction of 3.9% in 2014), with inflation of 181%.
The GDP figures are grim. Domestic demand contracted by 10.1% year-on-year, led by fixed investment (-17.6%), private consumption (-7.8%) and even government consumption (-2.4%). Import demand fell by 18.7%.
Local private economists immediately challenged the inflation figures in particular, suggesting that they were underestimated.
Even the Spanish telecoms giant Movistar was moved to comment, issuing a statement complaining that fixed-price services were out of sync with the reality of inflation in the country, adding that this made investment in Venezuela “unviable”. “An average monthly Movistar plan costs 476 bolivars. Much less than a kilo of ham,” it noted dryly.
Inevitably, the country posted a huge current account deficit of US$18.2bn, on preliminary figures, as oil exports (96% of the export basket) collapsed. More notably, imports fell by almost 19% last year, which explains the goods shortages in the heavily import-dependent country. Meanwhile, the government spent US$10.9bn last year on external debt servicing, the bank data revealed.
Meanwhile the opposition Mesa de la Unidad Democrática (MUD) has reacted angrily to President Maduro’s latest devaluation-led economic adjustment package. Noting that the measures (including devaluation and the first rise in local gasoline prices in almost two decades) would do nothing to resolve the structural economic problems on the ground, the moderate Henrique Capriles Radonski accused Maduro “of putting his hand in people’s pockets”. Under the new dual exchange rate system, which took effect as of 10 March, a new Divisa Protegida (Dipro), fixed at BF10/US$1, will be used for all essential imports, including food and medicines. A second Divisa Complementaria (Dicom) will float, starting at BF206/US$1, and thereafter should be determined by the market, according to Miguel Pérez Abad, the new economic policy czar.
Crucially, Pdvsa will be able to sell dollars at the Dicom rate, which will help boost its parlous financial position, and perhaps settle the nerves of investors wondering about a potential Pdvsa ‘credit event’ in the fourth quarter. Addressing this fear, Abad stressed that Venezuela did not have a solvency problem but a cash-flow problem.
In the absence of official data, private sector economists put the fiscal deficit at upwards of 25% of GDP. While devaluation will help that position, the politically-sensitive rise in fuel prices on the position of Pdvsa may ultimately be negligible, as according to President Maduro the revenues from the fuel price increase are to be put into yet another new off-budget fund controlled directly (and unaccountably) by the executive – the Fondo Nacional de Misiones (the national missions fund).
Reaction to the new FX system has been muted to date, as the sharp difference between the upper and lower rates, and the continued dollar scarcity, means continued distortions. The illegal black market rate was still trading at over BF1,200/US$1 on 21 March.
Like Venezuela, Ecuador is also struggling
On 25 February Ecuador’s President Rafael Correa said that the government had reduced its 2016 budget oil price assumption to US$25 per barrel (/b), a US$10 cut on the original price.
With Ecuadorean crude oil prices hovering just north of US$30/b, an adjustment by the left-wing Correa government to its US$29.8bn 2016 ‘austerity budget’, built on an oil-price forecast of US$35/b, was inevitable. While Ecuador is only a small producer, its oil earnings typically have accounted for over 50% of export earnings, 30% of fiscal revenues, and 15% of GDP. As such, after Venezuela it is the most badly affected country in Latin America by the oil-price shock.
President Correa admitted that the loss in oil revenues last year cost the country about 7% of GDP (so in excess of US$7bn). And with the domestic economy stagnant, the treasury’s US$15.5bn in tax revenue projections for 2016 looked over-optimistic from the outset. In January alone, on preliminary figures, tax revenues fell by 20% year-on-year, while oil income was down 12% year-on-year. Ecuador’s position as an (increasingly uncompetitive) dollarised country doesn’t help matters, making its liquidity crisis all the more acute.
The US$10 cut oil-price forecast could translate into a 15% cut in the budget, private economists suggest. Patricio Rivera, the coordinating minister for economic policy, stressed that a bigger effort needed to be made “to look for margins of priority”. He emphasised an aim to ring-fence public sector jobs. The rate of urban unemployment was reported at 5.65% in December 2015 but this masks a rise in underemployment and part-time employment, which has prompted new labour reform efforts by the government, to effectively relax temporarily the country’s strict labour laws in an effort to help companies keep people in work.
Correa said the cuts would be “surgical”, and would not affect the general population. This throws the onus of any adjustment onto capital expenditure, potentially including planned investments by the state-owned oil company, Petroamazonas, or even the divestment/privatisation of state assets. The government has already reworked legal frameworks to try to attract more private sector investment into the oil sector, as well as into the nascent mining sector; additional efforts to build bridges with private investors may be forthcoming.
The central bank (BCE) has now cut its real annual GDP growth forecast for 2016 to just 0.4%, from 1% previously, albeit the BCE president, Diego Martínez, was at pains to stress that this still constituted positive growth. Ecuador registered a similar result in 2015.
With still no sign of a global agreement on an oil production freeze, Ecuador’s level of international reserves is something to be watched, as a key indicator of its liquidity position. According to the BCE, international reserves stood at just U$2.8bn on 18 March.
Taxation for Inclusive Growth
The Executive Secretary of the United Nations (UN) Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, and the Executive Director of Oxfam International, Winnie Byanyima, in February presented a new report on the high levels of inequality in Latin America, entitled ‘Time to Tax for Inclusive Growth’. Despite a 10% decrease in inequality between 2003 and 2013 in the subcontinent, from 54.2 to 48.6 on the Gini Index (0 representing perfect equality and 100 perfect inequality), the report highlighted that it is the “most unequal region in the world”; the wealthiest 10% of the population own a substantial 71% the wealth.
Bárcena and Byanyima stressed the urgent need for reform of “poorly designed tax systems” and the prevention of tax avoidance and evasion, which costs Latin America “billions of dollars” that should be invested in confronting inequalities in the distribution of the region’s economic growth. Tax evasion cost Latin America US$190bn in 2014 alone.